NACUBO Responds to FASB's Lease Proposal
October 3, 2013
On September 17, NACUBO submitted a formal comment letter to the Financial Accounting Standards Board (FASB) on the proposed Accounting Standards Update, "Leases (Topic 842)." NACUBO raised questions about the proposal's complexity and applicability to leasing arrangements and accounting practices that are unique to not-for-profit (NFP) entities such as independent colleges and universities.
NACUBO believes that users of financial statements need a deeper understanding of an entity's leasing transactions but questions whether the proposal meets that objective. Foremost concerns for higher education are:
- Some colleges and universities are lessors with long-term land leases. The proposed guidance could cause the leased land to be classified in a way that de-recognizes the asset over the term of the lease—as if it had been sold. Such a presentation would not properly reflect economic reality, ownership, or the institution's financial position.
- Although both boards recognize that some lessors enter into leases for investment purposes, FASB does not acknowledge that fair value measurement of an asset leased for investment is acceptable for not-for-profit entities such as higher education institutions.
- Not all colleges and universities can easily determine the appropriate discount rate to use in the measurement calculation. As a result, smaller colleges may need to use a risk-free rate, which will result in a greater asset and liability. Larger assets and liabilities may impact debt covenants or other calculations based on financial ratios.
- Using two methods for expense recognition will not result in greater transparency for users. In fact, it is likely to do just the opposite. Using a straight-line method for one type of lease and an amortization method for another obscures the total lease income/expense on the statements of activities and cash flows.
- Separating lease expense into amortization and interest expense rather than showing it all as lease expense will create issues for research institutions that are subject to Office of Management and Budget (OMB) compliance requirements.
- The proposed "right to use" asset and related liability will create issues for NFP institutions that are subject to Department of Education financial responsibility requirements.
- An effective date or an implementation time line has not been proposed. Because colleges and universities are subject to federal regulations monitored by various federal agencies, significant lead time will be needed to allow for regulatory change.
Members of NACUBO's Accounting Principles Council have participated in separate meetings with FASB staff on these issues and represented the industry at a public roundtable. The complete comment letter is available on NACUBO's website.
Director, Accounting Policy
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