Details of New Lease Guidance Complicate Implementation Efforts
At first blush, FASB’s new lease accounting standard sounds simple enough: companies must tally everything they rent and put them on their balance sheets so investors can get a clearer picture of their financial obligations. In practice, however, it is not that simple. “On the surface, we said, ‘We’re going to put these obligations on the balance sheet and we’ll be done.’ But the devil really is in the details,” said the general manager of corporate accounting at one multinational corporation that adopted FASB’s new standard more than a year before it was required to. For starters, the standard redefines a lease as a contract or part of a contract that conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. “Control” is a key piece of the definition and will mean new assessments about, for example, whether the lease of space in a corporate office park that includes a shuttle bus between the buildings has a second lease for the bus service embedded in the overall real estate lease. Some transactions that businesses used to consider services could also now meet the definition of a lease. Overall, many have said that the standard requires more effort than they anticipated, and public companies should not delay on getting efforts underway to meet the 2019 compliance deadline for the new rules.
Former Board Member Lawrence Smith Laments Rise of ‘De facto GAAP’
As businesses implement FASB’s major new accounting standards, many are looking beyond the Accounting Standards Codification (ASC) for guidance. Former FASB member Lawrence Smith sees the search beyond the ASC as a problem. “Previously, the FASB, if they had implementation issues, they would discuss them at meetings and decide, ‘OK, do we put it on the agenda and have an agenda project, or not put it on the agenda?’” said Smith, who served from 2007 to 2017. “You’d get a new ASU, and the Codification would be modified.” Now, FASB has webpages for each of its recently published major standards that contain implementation guidance. For the revenue and credit loss standards, special advisory panels, called Transition Resource Groups (TRG), have been set up to aid companies with the more difficult questions. The summaries of the groups’ discussions “will probably become de facto GAAP,” Smith said, adding that he believed the SEC will review these discussions to determine whether businesses were in compliance with the accounting rules. “Basically, at the end of day, the Codification—and I consider this unfortunate, from my standpoint because I was involved in the creation of the Codification—is not the only answer to all the implementation issues that come up,” Smith said.
Board to Consider Revision to Implementation Guidance for Lease Standard
At its May 22–23 meeting, the IASB discussed an area of potential confusion about its new lease accounting standard. The core requirements of IFRS 16, Leases, are not at issue; instead, some financial reporting professionals are confused about an illustrative example for assessing lease incentives in the standard’s implementation guidance. The IASB’s research staff is recommending that the board revise the example as part of its cycle of annual improvements to IFRS. “Although, strictly speaking, an amendment to [the example] may not be required, we see benefit in removing the potential for confusion that has been highlighted to us,” according to the meeting’s agenda papers. “Any amendment … would not change the authoritative requirements in IFRS 16 and, thus, the potential for disruption to implementation would be expected to be low.” The IASB said it learned of the issue from the Accounting Standards Board of Canada.