Lease accounting to get overhaul

Apparently FASB is going to overhaul the US GAAP for leases. I’m not sure what exactly is going to be changed, or why it needs changing, but it’ll be interesting to see. Of course, Canadian standards are moving towards harmonization with International Financial Reporting Standards (IFRS), so we might not see Canada following the US revision like we usually have seen occur in the past.

I’ve been discussing the current method of accounting for leases with Greg, whose site I stumbled upon today searching Technorati for accounting-related content. He was blogging about an article in Business Week, and what follows is a quote from that article that may give us some insight into the possible changes:

One new model that FASB will explore, says Herz, would treat a lease as a “right to use” the property, which would be given a value and included among the liabilities and assets of the company that is leasing it. Companies argue that information about these leases is not secret, but is readily available in the footnotes of their annual reports. However, Bear Stearns analyst Chris Senyek has found that such disclosure is far from consistent, with some companies leaving out vital information such as the length of the lease. And the databases that many investors consult to sort through a company’s performance generally don’t include the data from footnotes.

Not sure what the “right to use” means as far as the difference between current rules about leases goes, given that we already have a good method for valuing a lease (the present value of minimum lease payments) asset and corresponding liability. Basically the FASB believes the rules need to be clarified because the criteria have been abused to show more leases as operating versus capital. But that’s just the difference between US rules-based accounting and Canadian and international principles-based accounting.

Plus, the article even notes that the information is already contained in the notes to the financial statements. My firm has a footnote on every page of the financial statements we produce that clearly states “The accompanying notes are an integral part of the financial statements.” If investors are ignoring that information, is this really an accounting problem?

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