Leases Headed for the Balance Sheet
Lease accounting for property and equipment will soon get a lot more complicated, according to this CFO.com article (found here). The new FASB recommendations are to be released some time in June.
The upcoming joint FASB/IASB exposure draft on lease accounting will put an end to off-balance-sheet treatment for leases, while throwing in some new complications.
This article reveals several other interesting facts worth noting:
The Financial Accounting Standards Board and the International Accounting Standards Board are rewriting the rules on lease accounting, and the exposure draft of their converged standard is scheduled to be released in June…..The new standard will replace FAS 13 in the United States and IAS 17 in countries using international financial reporting standards……
Complication No. 1: Renewal Options
Lease renewal options are one area of contention. Under existing rules, a company uses the minimum lease payment to calculate the present value, and posts that number to the balance sheet. However, under the proposed rule, management must make a judgment regarding what is the most “likely” lease term, and that means considering any renewal options attached to the lease.Complication No. 2: Contingent Rent
More complexity relates to estimates of contingent rent. Contingencies associated with real estate leases include, for example, payments tied to a percentage of sales or the Consumer Price Index.
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