On May 16, the Financial Accounting Standards Board (FASB)
and the International Accounting Standards Board (IASB), issued
a revised proposal regarding the accounting treatment and reporting for leases. The proposal is the latest step in a long effort by the
two Boards to revamp the accounting rules on leases. An overhaul
has been in the works since 2005, when a Securities and Exchange
Commission report identified lease accounting as an area that rule
makers should address. The stated objective of both Boards is to
increase transparency for companies that lease assets by requiring that assets and liabilities related to lease transactions be recognized in the financial statement, rather than as notations under
The Boards are proposing a bifurcated approach to lease accounting under which the costs of leasing real estate would be recognized
evenly over the term of the lease, while the costs of leasing other
items would be more front-loaded—higher in the early years of a
lease and lower in the later years. Under their proposal, most equipment leases will be classified as Type A leases, and most real estate
leases will be classified as Type B leases.
For most real estate leases, lessors and lessees will both report
rental income on a straight-line basis. While the revenue and
expense recognition patterns for these two types of leases will vary
markedly, both types will require the lessee to recognize a liability for the present value of rents paid under the terms of the lease.
This dual-tracked approach is considered controversial by many,
but, nonetheless, represents a clear improvement over the original
proposal for real estate. Despite this shift to straight-line basis for
real estate, however, NAR remains concerned about the impact this
new requirement for lessees could have on tenant behavior.
This version follows the first exposure draft, released in 2010,
which was met with widespread dismay and criticism. The vote
to move forward with this exposure draft was quite contentious.
FASB Chairwoman Leslie Seidman cast the deciding vote in a 4–3
decision. Board members Tom Linsmeier, Marc Siegel, and R.
Harold Schroeder dissented. In this meeting, FASB’s staff asked
board members to address the effects the proposal would have on
financial reporting complexity. Mr. Linsmeier said the proposal
introduces significant complexity for users because it divulges lease
information in multiple places in the financial statements without
bringing it all together in one footnote. The boards pulled back and
reconsidered the proposal--this latest version purports to address
those critics. “If [users] are trying to bring all that information
that’s spread throughout the financial statements together to under-
stand what the rights and obligations are under a lease, and what
the related income statement and cash flows effects are, we did not
provide them sufficient information to do so,” Mr. Linsmeier said.
Working with our Lease Accounting Coalition, NAR helped
organize a letter from 13 members of Congress to the FASB prior to
the release of lease accounting exposure draft. Copies went to the
IASB and SEC as well. In the letter, the members raise concerns
that the Board has failed to provide a cost-benefit analysis of the
lease accounting proposal. The letter states that a failure to provide such an analysis may cause unintended consequences harming businesses, real estate and the investors who provide them with
The future of the proposed standard, including keeping the current
converged accounting solution, remains ambiguous and has the
potential to unravel. Three of FASB’s seven board members have
dissented on the proposal and given alternative views. With the
departure of Chairwoman Seidman this past June, it is unclear if
FASB’s vote will shift to a majority dissenting with the arrival of a
new board member.
The Boards held a webcast May 20 to discuss the proposal
and plan to conduct joint field work during the 120-day comment
period. Their goal is to enact a final standard in 2014, but this will
depend on the result of comments submitted by affected parties.
NAR continues to raise concerns about the potentially negative economic impact that these changes could have for real estate.
Comments are due to the Boards no later than September 13,
2013. NAR will be working on a comment letter and welcome your
input. Please be kind enough to provide us with your feedback at
Lease Accounting Rule Change Re-exposed
Vijay Yadlapati, NATIONAL ASSOCIATION OF REALTORS® Associate
Commercial Policy Representative
As NAR’s Commercial Policy Representative, Vijay monitors and analyzes federal legislative and
regulatory developments in order to shape the direction of today’s policies. Additionally, Vijay lobbies
the U.S. Congress and federal regulatory agencies to ensure that the interests of the commercial real
estate industry are addressed.