The Financial Accounting Standards Board (FASB) is a private sector organization funded by corporations — not the government — and overseen by the Securities and Exchange Commission. Its mission is to develop Generally Accepted Accounting Principles (GAAP), which all public companies must follow. As part of the global effort to establish uniform corporate financial accounting standards, the FASB and its sister organization, the International Accounting Standards Board (IASB), are working jointly to develop a new model for the recognition of assets and liabilities arising under lease contracts. The current model, Statement of Financial Accounting Standards No. 13, Accounting for Leases (known as FAS 13 and IAS 17), governs the accounting for commercial lease transactions in the U.S. The scope of the new project is the same as FAS 13, covering commercial leases (those related to plant, property and equipment).
The Board's intent is to capitalize all material leases on lessees’ books. This would bring all assets and liabilities on balance sheet and account for the lease contract’s rights and obligations as assets and liabilities. The proposed new standard is expected to impact the balance sheets of all companies subject to U.S. GAAP who use leasing to acquire assets or as part of their asset management strategy.
Initially the Project was to address both lessee and lessor accounting and thus replace FAS 13 in its entirety; however, the Project has since been scaled back to address only lessee accounting. This is important because the Boards will take up the issue of lessor accounting at a later time.
The favored initial measurement is to estimate likely lease payments including estimating renewals, contingent rents, purchase options and residual guarantees and record the present value (using the lessee’s incremental borrowing rate) as an asset and a liability. Catch-up adjustments for any changes in estimates will be required on reporting dates.
The favored subsequent accounting is to amortize/depreciate the asset on a straight-line basis and account for the liability as a loan with imputed interest expense, thus front ending the lessee’s expense compared to current GAAP for operating lease rent expense (straight line).
