December 15, 2010 marked the last day to send public comments to FASB and IASB on lease accounting. June 2011 is the deadline for the final consideration of the Leases Exposure Draft that will be given to standard setters in order to create a new lease accounting standard.
Landlords, lessees, retailers, airlines industry, etc. are all worried right now about the changes to lease accounting. They feel the changes will be too costly and complex without adding significant improvement to the quality and relevance of financial statements.
In a nutshell, IASB and FASB want to abolish operating leases where the lessee records the periodic payments as an expense over time. The proposed changes will mean that the accounting for leases will move from the P&L and hit both the lessee's and lessor's balance sheets. For companies that occupy a lot of property, this could significantly increase their liabilities not to mention front-load much of the costs that they were able to spread out over time before.
Why are IASB and FASB doing this?
Their goal is to have consistent accounting for both the lessees and lessors with higher quality financial statements. Leasing is one of four major projects being undertaken by the IASB and FASB in order to complete convergence between US GAAP and IFRS.
I spoke to our resident accounting expert Seamus Moran about this to better understand how this might impact accounting software.
He reminded me that the proposed changes to both US GAAP and IFRS in respect to leases are "proposed." It is still inappropriate to account for leases the way they are being proposed and we still need to account for them in accordance to the current regulations, which is what current accounting software programs, such as E-Business Suite Release 12.1 and prior and PeopleSoft Enterprise support.
The FASB (US GAAP) and IASB (IFRS) exposure drafts (EDs) that outline the proposal were published. The FASB edition was published on August 17th, with comments due by December 15th. The IASB edition was published on the same date, and comments were due in London on the same date.
Exposure drafts are the method both the FASB and the IASB use to solicit General Acceptance, the "GA" in GAAP. Both Boards will consider the input they have received, and perhaps revise the proposal. The proposal has come in for some criticism, both from the finance houses and the uses of the leased assets.
There is, given the opposition to it, an excellent chance that the Leasing proposal will be modified or rewritten. We will know this in about six months, the usual time it takes for the FASB and IASB to digest the comments they receive. If they feel the proposal has General Acceptance, they will issue the final Standard at that time; if not, they will issue a revised proposal with another year of comment of drafting.
Oracle participates in the standard setting process and is fully aware of the leasing proposal. We have designs that would reflect the proposal in hand. These designs will be finalized when the proposal is finalized. It is likely that customers will develop new financial arrangements if the proposal is finalized, and we are working with customers and partners to stay in touch with people's business responses to the proposal. The IASB and FASB are aware that ERP companies will have to revise their software, and that the companies filing results under IFRS or under US GAAP will have to implement such software. The form and timing of the release of the updated software will depend on the schedule of the take up of the new standard, the complexity of the standard, and the releases supported at the time the standard becomes effective.
