What’s Approach D? Maybe the Answer to CRE’s Lease Accounting Concerns

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WASHINGTON, DC-A key concern of commercial real estate companies is looming changes to how they account for leases. The International Accounting Standards Board and the US Financial Standards Board have worked—or rather, struggled—to converge their two respective lease accounting standards, and so far the proposals have been less than pleasing to the CRE industry.

Now, a new proposal has emerged that could be satisfactory to real estate and other business users, Bill Bosco, a consultant for the Washington, DC-based Equipment Leasing and Finance Association and principal of Leasing 101, tells GlobeSt.com.

There are still some hurdles, namely IASB is reportedly not yet on board, he says. “But this is the proposal we think most of the stakeholders would agree is an acceptable method,” he states. “Certainly real estate owners, concerned about what their lease costs will look like, will accept this one as the best of all proposed methods.” He estimates that 75 to 80% of the dollar volume of operating leases are real estate leases.

This new proposal is called whole contract. It accrues the average rent as the reported lease cost--much the same as current GAAP--and adjusts the lease liability on each balance sheet date to be the present value of the remaining lease payments. “It does not change the P&L or the cash flow presentation for what used to be the operating lease,” Bosco says.

Whole contract, or Approach D as it is also called, was added as a fourth possibility after FASB and IASB could not come to an agreement this February on the lessee cost pattern issue. This is deemed to be the most significant unresolved issue that is holding up the issuance of a new exposure draft for converged lease accounting project.

When the boards were unable to agree on any of the three lessee accounting approaches presented at their meetings, their staff was directed to conduct industry outreach to get preparer and user feedback. Approach D is up for consideration to be included in the second exposure draft.