NACUBO Responds to FASB and IASB Lease Proposal
December 15, 2010
NACUBO's final comments for 2010 address concerns raised by a joint Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) Exposure Draft (ED) on Leases. The proposed guidance will eliminate operating leases by requiring recognition of the assets and liabilities arising from all lease contracts. Although inspired by concerns about publicly traded companies and the desire of both boards to keep investors informed about organizations' leverage and return on investment, not-for-profit entities have not been scoped out.
Many organizations currently lease real estate, expensive equipment, and less expensive office equipment as operating leases. The concern among investors and both boards is that the significant use of operating leases, where only a rent expense is recorded by lessees, hides the true financing obligations of public companies. The proposed guidance would ensure that assets and liabilities arising under leases are recognized in the statement of financial position.
The ED applies to both lessees and lessors and would supersede the guidance in Topic 840 on leases in US generally accepted accounting principles (GAAP). The ED proposes that lessees and lessors would consider assets included in the lease agreement to be "right-of-use" assets. The proposed right-of-use accounting model includes leases of right-of-use assets in a sublease, and excludes leases of biological and intangible assets, leases to explore for or use natural resources, and leases of some investment properties. For leases within the scope of the proposed guidance, this means that:
(a) A lessee would recognize an asset representing its right to use the leased ('underlying') asset for the lease term (the 'right-of-use' asset) and a liability to make lease payments.
(b) A lessor would recognize an asset representing its right to receive lease payments and, depending on its exposure to risks or benefits associated with the underlying asset, would either:
(i) Recognize a lease liability while continuing to recognize the underlying asset (a performance obligation approach); or
(ii) Derecognize the rights in the underlying asset that it transfers to the lessee and continue to recognize a residual asset representing its rights to the underlying asset at the end of the lease term (a derecognition approach).
Assets and liabilities recognized by lessees and lessors would be measured on a basis that:
(a) Assumes the longest possible lease term that is more likely than not to occur, taking into account the effect of any options to extend or terminate the lease.
(b) Uses an expected outcome technique to reflect the lease payments, including contingent rentals and expected payments under term option penalties and residual value guarantees, as specified by the lease.
(c) Is updated when changes in facts or circumstances indicate that there would be a significant change in those assets or liabilities since the previous reporting period.
NACUBO will present the objections and questions raised in our comment letter in greater detail in a January roundtable with FASB. Although the comment deadline has passed, NACUBO encourages independent institutions to consider providing comments to FASB before the January 5, 2011 roundtable date.
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