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Congress Approaches FASB on Lease Accounting Standards

Posted 4:32 PM by

For several years now, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have been working to update the accounting for lease in an effort to shed more light on off-balance sheet leasing (i.e., operating leases). Many manufacturing business plans use leasing as a form of financing equipment that is needed for the operation of the business. As long as this lease is determined to be an operating lease, there is no liability recorded on the balance sheet of the leasee.

The FASB is currently looking at two approaches that would change lease accounting. The first approach calls for the lease liability to be recorded as a nonfinancial asset (at cost) and related liability on the balance sheet. The asset would then be amortized over the life of the lease and the liability amortized off as the lease payments are made. Any leases that are entered into for less than 12 months would be exempt from recognition.

Under the second approach, the leasee would allocate the total lease payments evenly over the lease term, which would result in a straight-line total lease expense. This would result in the liability for the lease being "amortized" off in equal installments regardless of changes in the required lease payments. Any leases that are entered into for less than 12 months would be exempt from recognition.

The impact on manufactures (and other businesses) through the U.S. would be significant under either of these approaches.  This has caused the U.S. Congress to issue a letter to the FASB warning of the potential impact that this change in accounting standard would have on the U.S. economy and on doing business in the U.S.

FASB is set to vote on the lease accounting in mid-June. The change could have a big impact on the manufacturing budgeting process has companies might have to start looking at alternative methods.

About the Author

Justin Hayes is a director in Katz, Sapper & Miller’s Audit and Assurance Services Group as well as being a member of the Not-for-Profit and Governmental Services Groups. Justin works with clients to help them avoid risk and maximize efficiencies by keeping an eye on their bottom line and helping ensure accurate financial reporting. Connect with him on LinkedIn.

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