FASB Begins Lease Accounting Overhaul

The Financial Accounting Standards Board, the organization that writes the rules of accounting in the United States, has voted unanimously to start the process of updating lease accounting standards. FASB will work in conjunction with the International Accounting Standards Board on the rewrite, though new rules may not be published until 2009.

The current U.S. accounting standard in this area, FAS 13, "Accounting for Leases," was published in 1976. According to FAS 13, leases are considered either capital leases or operating leases. Of particular concern to the board, and investor advocates, is the way in which current rules allow operating leases--rental contracts--to exist off a company's balance sheet.

"The board has been asked to take a fresh look at the current accounting standards on leasing for a few reasons," said Leslie Seidman, a FASB member, in a statement late last week. "Investors are concerned that existing standards don't require balance-sheet recognition of significant assets and liabilities arising from leases."

Last year, a Securities and Exchange Commission report on off-balance-sheet activity among U.S. corporations estimated that publicly traded companies keep some $1.3 trillion in future cash obligations stemming from leases off their balance sheets. Such "structuring" in particular raises transparency concerns. "Transparency and the degree to which accounting and disclosure standards achieve their goals can be greatly diminished by the use of structuring, even when that structuring appears to comply with the standards," the report said.

"The goal of this project is to develop principles that would faithfully represent lease transactions in the financial statements of lessees and lessors, and would reflect similarities and differences in a wide variety of leasing arrangements," noted Seidman.

It will be a long process, however. Later this year, the staffs of both FASB and IASB will meet to hammer out a formal agenda on the matter, and next year the two organizations will request public comment. In 2008, FASB and IASB will publish preliminary discussion papers, and the year after that, if all goes according to schedule, formal publication of an amended FAS 13 will follow.