Spring 2011 issue of Horizons

Will lease accounting changes have an impact on debt covenants?

• Require the “right to use” asset to be amortized over the shorter of the expected lease term or the life of the underlying asset • Provide consistency for both short-term and long- term leases Final vote is expected to occur in the second quarter of 2011. The complete exposure draft can be located on the FASB website at www.fasb.org. In February 2011, the board began deliberations as to whether two types of lease categories would provide more decision-useful information, as opposed to the single attribute model proposed in the exposure draft. The two potential categories discussed were (i) finance leases and (ii) other-than-finance leases. These potential types of leases could have differing income statement effects but would, nonetheless, both be reported on the balance sheet. It should be noted that the board’s discussions of a two- category lease model are preliminary. RubinBrown Lease Accounting Survey In late 2010, RubinBrown surveyed its clients and contacts about their familiarity with the proposed lease accounting rules, along with their impact and expectations with regard to financial reporting. More than 115 people provided their input on the survey. Seventy percent of the respondents worked for companies from a variety of industries with $100 million or less in revenue. The majority of respondents indicated some familiarity with the proposed changes to lease accounting. However, a large percentage of respondents have not quantified the impact on their debt covenants. For those who have, a majority have indicated there will be a negative impact on the covenants.

29%

42%

26%

3%

Haven’t Quantified Impact

Don’t Have Debt Covenants

Yes - Negative Impact

Yes - Positive Impact

A significant majority of respondents have indicated that the proposed changes do not improve the clarity of financial reporting.

Do lease accounting changes improve financial reporting?

2%

24%

74%

No - Do Not Improve Clarity

Yes - Improve Clarity

No Response

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