lease accounting may be on its last legs
The FASB wants to issue a final standard from proposed ASU No. 1850-100 and
converge the accounting for lease contracts with U.S. GAAP and IFRS. Before it
does, it has to decide whether the principle for leveraged lease contracts is
worth keeping in the final standard.
FASB is set to decide at its July 13, 2011, meeting whether to scrap an
accounting method for lease contracts that was once common in the U.S. but has
become less prevalent. Overseas, the practice was rarely seen. Leveraged lease
accounting, as it is known under U.S. GAAP, does not exist under IFRS and is
used primarily when a company finances the purchase of a large asset such as an
airplane or power plant before leasing it to another business.
companies that use leveraging call it a solid financial tool that can help
present investments in a leveraged lease on a net basis. With leveraging, the
lessor's after-tax net income is lifted through an accelerated depreciation
schedule or investment credits. The savings are passed on to the lessee.
putting out a relatively small portion of cash to make an investment but getting
all the tax benefits from it, [lessors] are able to basically get a highly
levered return out of the transaction,” said John Bober, managing director,
structuring group GE Energy Financial Services and an alternate member of the
Financial Executives International's (FEI) committee on corporate reporting.
“Because of that, if you look at just the cash they’re putting out,
they’re actually getting returns that are maybe [one to two percentage] points
above what they were going to get if they had to put all the funds out
themselves,” Bober said.
accounting method is especially helpful to renewable energy companies, where
investors can take advantage of several tax breaks.
FASB is reviewing the leveraged lease issue after planning to drop the
accounting method from U.S. GAAP in proposed Accounting Standards Update (ASU)
No. 1850-100, Leases
(Topic 450). The draft
guidance aims to end a longstanding practice under U.S. GAAP that leaves most
operating leases off company balance sheets and converge lease accounting in
this country with IFRS.
proposal offers no special provisions for leveraged leasing, nor does it provide
transition guidance allowing for grandfathering of leveraged leases.
a June 29 education session, staff members told the board that leveraged leases
should be left out of the final standard. One of the project's goals is to
eliminate the distinctions—and potential confusion—among different types of
leases. Eliminating the special accounting “would result in comparability
across all lessor financial statements as well as in financial leases guidance
that is converged,” the FASB staff wrote in a memo to the board.
the education session, board members and the staff discussed the grandfathering
idea, but that didn’t gain traction with members. “If we were to decide to
grandfather, make an exception of some sort... other than just saying, ‘Well,
it’s been done, it’s worked well,’ is there any conceptual justification
for this treatment?” FASB member Daryl Buck asked.
member Lawrence Smith said he believed leveraged lease accounting as it
currently stands does indeed properly reflect the economics of the transactions,
but “the point is, there is a lot of other tax incentive transactions that we
don’t do separate accounting for.”
of keeping leveraged lease accounting in U.S. GAAP say lenders may no longer be
willing to provide capital for businesses that cannot afford such large assets
because they no longer would be allowed to present their investment in the lease
on a net basis and recognize income on an after-tax basis, according to a staff
some investment money is drying up, Bober said, because investors are worried
about the pending changes to lease accounting although they are still only at
the proposal stage. “For certain transactions that would be very well
suited—renewable energy such as solar and wind, because they have heavy tax
benefits—those transactions are not happening,” he said.
comment letters on the exposure draft expressed support for leaving the
leveraged lease principle intact. For example, FEI argued that because leveraged
leases are largely found in the U.S., there would be no hinderance to
convergence. The “impacts of changing the current accounting for leveraged
leases is primarily a domestic issue,” FEI wrote in a December 14, 2010,
WG&L Accounting & Compliance Alert on Checkpoint 7/8/2011