Lease Accounting May Go Back to Business As Usual. Sort Of.

WASHINGTON, DC-The US Financial Accounting Standards Board and the International Accounting Standards Board have resolved a key sticking point as they work to establish a converged standard for lease accounting: how to account for lease expenses. The boards have opted for a two-method strategy depending on the type of lease—whether, that is, the lease involves the transfer of ownership rights or the transfer of right-of-use.

In the right-of-use approach, which is now called Approach 1, explains Bill Bosco, a consultant for the Washington, DC-based Equipment Leasing and Finance Association, the lease is capitalized and the asset is amortized straight line and interest is imputed on the liability. The result is a front-ended expense pattern. A lease in which ownership is transferred, typically an equipment lease, will use the Whole Contract, or Approach 2, methodology. In that scenario, the asset and liability are capitalized then adjusted each month to equal the present value of the remaining payments.

The irony is, observers say, that this duel approach is much like the current GAAP method. “All that is likely to change is that real estate lessees will capitalize the former operating leases,” Bosco, who is also principle of Leasing 101, tells GlobeSt.com. “It’s great news for the commercial real estate industry.”

FASB and IASB have decided to stay with an approach for lessees and lessors that recognizes that not all leases are the same, he explains. It is a far better outcome, at least for the CRE industry, than earlier proposals in which the boards wanted to have all leases use capital lease accounting for lessees, no matter what their use.

“It’s ironic that after six years of work there will be only minor changes to existing GAAP beyond putting lease obligations on lessees’ balance sheets,” Bosco says, adding that it was a close call for the industry. “It took a tremendous amount of pressure to get them to change their approach.”

There are some differences between the current and proposed approaches. Not all real estate leases will automatically qualify for Approach 1. If a tenant is a single tenant in a stand-alone property and has signed a long-term lease, the accounting regs could conceivable categorize that as a Whole Contract lease.

“It’s important to remember that this isn’t over yet,” Mindy Berman, managing director with Jones Lang LaSalle tells GlobeSt.com. Indeed, all the boards did was overcome a long-standing sticking point with this decision. They still must write the rule and re-expose the draft. “We don’t know what the end result will be yet,” she says.

That said, Berman concludes, “this is great news for the commercial real estate industry, providing the boards continue along these lines.”