Spring 2011 issue of Horizons

General Topics

Proposed

Uncertainty Lease Accounting Rules Rouse By Fred Kostecki, CPA

Late last summer, the Financial Accounting Standards Board (FASB) published an exposure draft of proposed accounting changes which would require the recognition of assets and liabilities on the balance sheet of entities to reflect lease obligations.

Under these newly proposed changes, the concept of an “operating” lease would be essentially eliminated. The proposed changes have generated plenty of discussion within the accounting community. Some feel doubtful that the proposed rules would improve financial reporting and have concerns about potential distortion on financial statements. Currently, operating leases are not recorded on balance sheets. This results in many investors having to adjust financial statements (using disclosures and other available information) to estimate the effects of lessees’ operating leases for the purpose of investment analysis.

The proposed treatment may have a considerable impact on entities with debt to equity and leverage ratio requirements which are often contained within lending agreements. The FASB proposes that the new rules would provide more complete and useful information to investors and other users of financial statements. The proposed rules would likely take effect in 2013, and would:

• Record a “right to use” asset and a corresponding lease obligation liability

• Treat traditional operating and capital leases in a similar manner

Raise Your Expectations

11