Expected Resolution of Lease Accounting Impasse Could Soon Impact

The debate about adopting international standards for lease accounting, which seemed at an impasse over the past several months, is nearing a resolution. As a result, CPAs will soon discover new rules for capitalizing leases. Future accountants will find new rules in their CPA exam review. But, a draft of the new measures isn’t expected until late in 2012. That’s still in time to implement the standards as originally targeted in 2013. Disagreement on accounting for leases had centered on the idea of classifying all leased properties as assets. This included a plan for capitalizing basic office leases based upon a definition for every lease as the right-to-use for an asset. The Financial Accounting Standards Board in the US balked at that idea, which is so different than the current rules contained in CPA study material. The lease accounting model now embraced by the International Accounting Standards Board mirrors the FASB concept entailing different lease patterns. Some lease contracts are merely expenses while others embody financing of right-of-use for an asset. This dual standard is the basic concept in study for CPA exam completion in the US. Accountants typically allocate lease payments evenly over the contract term. That process is expected to remain in place when leases call for use of an underlying asset over time. Alternative proposals that had been under consideration would have accounted for lease payments unevenly. This had stimulated the FASB dissent. Apparently, accountants will continue deploying the concept from CPA review courses about evenly expensing a total lease obligation regardless of whether the payment pattern is equal throughout the contract term. The right-of-use approach amortizes the leased asset plus expenses the imputed interest on the lease liability. This results in more total expense early in the term rather than evenly throughout the lease. These rules for capitalized lease obligations will apply when the right-of-use represents a significant portion of the underlying asset. But, applicability is also dependent upon the nature of the asset. Real estate leases, therefore, continue to receive the same accounting treatment under the new international standards as CPAs in the US are accustomed to having. An exception will only exist if the present value of the fixed lease payments accounts for substantially all of the fair value for the underlying asset or the lease term comprises most of the economic life of the underlying asset. These conditions are not the case with most commercial leases. The future standards presume that equipment leases are capitalized right-of-use arrangements. Exceptions are granted when the lease term is insignificantly short relative to the economic life of the equipment or the present value of the lease payments is an insignificant part of the asset’s fair value. Hence, CPA exam courses will teach that leasing a large piece of equipment for a week is an expense, but leasing the item over its useful life is an asset for the lessee. A leasing company treats the receivable lease payments as an asset. The entire situation means that information learned to become a CPA
remains just as challenging as ever. IRS Circular 230 Disclosure Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

Source: http://fastforwardacademy.blogspot.com/2012/07/expected-resolution-of-lease-accounting.html

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