FASB: Don’t Make Big Changes to the Lease Standard
As we wrap up an unpredictable year, let’s explore the Financial Standards Accounting Board’s recent roundtable discussions, new guidance on lease implementation for public and nonpublic organizations, and what we can expect for non-public implementation next year.
Public companies understand the new lease standard now that they have completed their implementations. For the most part, the guidance works as intended, and the standard is a more transparent way for organizations to account for their leases.
Financial statement users are also gaining comfort in how they understand the impact of the new lease standard on an organization’s financial health. Disclosures are providing the needed information to analyze lease portfolios.
While organizations would like to see improvement, the consensus is that big updates could make future implementations more confusing. Listening in on FASB’s September roundtable session, it was quickly apparent that the participants did not want sweeping changes. Instead, they are seeking additional flexibility and expanded practical expedients to simplify the accounting and auditing of calculations, while achieving the intent of the new lease standard.
Increase decision-making options
Leases within an asset class tend to have many similarities, including materiality, financing options and terms. Implementing the new lease standard could be easier if more decisions, like methods for determining the discount rate, were decided by asset class. Real estate leases have a much greater impact on the financials than photocopiers, and the effort required for decision-making ought to be similarly aligned.
In talking to one CPA about the recent discussions, I heard a similar desire regarding the incremental borrowing rate: “I believe private companies would welcome a practical expedient to reduce the cost and complexity associated with determining the incremental borrowing rate. The Private Company Decision-Making Framework was developed to assist the FASB and the Private Company Council in evaluating potential accounting alternatives such as this.”
Improve clarity around materiality
The new lease standard seemingly assumes that organizations would apply their typical materiality rules, but it’s not clear in the current guidance. As noted in the example above, they might like to use the federal discount rate for smaller items like photocopiers and expend greater effort when determining the discount rate for larger-value leases like real estate. The industry is looking for more guidance on materiality standards.
FASB wants the transition to be easy for non-public organizations
One thing I’ve noticed, especially recently, is that the FASB board and staff genuinely care about accountants’ experiences and actively listen to participant concerns. At the roundtable, they asked additional probing questions to uncover the why behind the issue. They ultimately want the transition to be easy.
In October, FASB proposed three targeted lease accounting changes (separate from the September roundtable) demonstrating their continued commitment to simplifying the new lease standard.
Delaying the new lease standard for nonpublic organizations has created a lack of financial statement comparability, which is a problem for industries where both public and nonpublic entities exist. At the same time, the delays provide FASB with more time to propose further guidance that may ease nonpublic implementation of the new lease standard.
(Source: AccountingToday – Audit & Accounting - Voices – December 28, 2020)