COMMENT LETTER GUIDANCE
FASB/IASB LEASE ACCOUNTING PROJECT
The FASB issued the second Leases Exposure Draft (ED) on 5/16/13. While TRALA has
submitted a comment letter on behalf of the industry, you are encouraged to submit your
own letter as well. The deadline for comment letters is 9/13/13.
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The most recent Exposure Draft can be found at this link:
http://www.fasb.org/cs/ContentServer?c=Page&pagename=FASB%2FPage%2FSecti
onPage&cid=1175805074609 An executive summary of the exposure draft is
presented below
Already-submitted comment letters can be read at http://www.fasb.org – the
Comment letter Tab. This will give you ideas for your own comment letters and you
can see the format that others have used.
We urge you to write your own comment letter: Go to http://www.fasb.org – the
Projects Tab. Look up the project “Leases (Topic 842)". Use the electronics
feedback link or, or provide comments in the form of a written letter by
submitting comments via email to director@fasb.org, File Reference No. 2013-270
or by sending by mail to “Technical Director, File Reference No. 2013-270, FASB,
401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116.”
Every letter counts and there is power in numbers. They have listened to us in
the past and changed things to our benefit.
Executive Summary of the Exposure Draft
Estimated timeline per the FASB staff:
-ED issued MAY 16, 2013 with a 120 day comment period ending SEPT
13, 2013 followed by re-deliberation meetings by the Boards beginning in
2014
-This means the new rules will not be issued until 2014
-Transition date likely to be 2017
Lessee Accounting:
-Capitalize all leases @ the PV of the lease payments as defined.
-Some leases (most equipment leases) will have a P&L pattern that is
front ended – rent expense replaced by amortization and imputed
interest, now called Type A Interest and Amortization (I&A) leases. Some
leases (mostly real estate and short term leases of long lived equipment)
will have straight line rent expense, now called Type B Single Lease
Expense (SLE) leases. Real estate leases are presumed to get straight
line expense unless the lease term or PV of rents meet similar tests as
current GAAP while equipment leases are presumed to get front ended
costs unless the lease term and PV of rents are insignificant compared to
the original useful life and current fair value of the leased asset.
Insignificant remains to be defined. This different classification rules
decision is not good for the lessee customers of TRALA members.
-Lease term = substantially the same as current GAAP definition.
-Variable rents based on a rate (i.e. Libor) or an index (i.e. CPI) are
booked based on spot rates with adjustments booked when the rate
change changes contractual lease payments. Variable rents based on
usage (like excess miles driven) or lessee performance (e. g. sales) are
not booked unless used as a tool to avoid capitalization (disguised
minimum lease payments).
-Estimated payments under residual guarantees are booked with review
and adjustment at each reporting date.
- Short term leases, including most short term renewals, can elect to use
operating lease method with additional disclosure.
-Bundled billed full service leases must be bifurcated into a lease
portion that gets capitalized and a services portion that is expensed
as incurred. If the lessee can’t find comparable lease only and/or
services only pricing to support the bifurcation calculation they will
have to capitalize the full payment. This is not good for lessee
customers. Lessors will likely be asked for a breakdown but that is
considered proprietary information and would lead to lessees having
negotiating leverage to force lower pricing. There should be an easier
bifurcation method – say a reasonable estimate - to avoid the lessor
revealing details of pricing. The difference between actual and estimates
will likely be immaterial.
Lessor Accounting:
- Two methods identified for lessors – The Type A “receivable & residual”
(R&R) method (much like the current GAAP direct finance lease method)
(covers virtually all equipment leases), and Type B existing operating
lease accounting which will cover most real estate leases. There is a
short term lease election to use current GAAP operating lease method.
The classification tests will be the same as those for lessees (see above).
-Under the RR method assets are the PV of the receivable and a PV
residual with earnings recognized using the implicit rate in the lease.
-Certain residual guarantees (only “full” TRAC, where guarantor gets the
residual upside are considered minimum lease payments.
-Sales-type gross profits are limited with residual portion of gain deferred
until resolved through a sale or release.
- Leveraged lease accounting is eliminated with no grandfathering. This
is a FASB only issue.
TRALA’s major issues in summary:
OVERALL Issues:
 The project is unnecessary as current GAAP is working well (If the AAA
study (see below) says GAAP is working - why change it other than
improve the accuracy of the footnoted info - then all the rest of our
comments go away
 All that is needed is improved disclosures
 The complete re working of lease accounting will create significant
negative unintended consequences as the current lease accounting GAAP
is in line with the US legal and tax systems
LESSEE
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equipment lease classification is wrong – former operating leases should
get straight line P&L treatment as is proposed for real estate leases
lessee accounting is too complex
bifurcation of services in a bundled billed full service leases should be
easier - possibly with estimates rather than hard numbers as they are hard
to find – any differences would be immaterial
sale leasebacks with an EBO should still be sales as they are under
current GAAP – sale leasebacks are common in the equipment leasing
business and some TRALA members may use them to acquire new trucks
to add to their portfolio
operating lease liabilities are not debt and if not re labeled will cause
technical covenant defaults for lessees
LESSOR
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lessor accounting should be based on the lessor’s business model – either
operating lessor or financial lessor
the proposed lessor R&R method is only cosmetically different than the
current GAAP direct finance lease accounting method – don’t change as
will cause high IT costs
all insured or guaranteed residuals should be financial assets for the
lessor as they are under current GAAP
Issues that may be included in a cover letter:
The following are issues and ideas that you may wish to use in writing your comment
letter. Please use your own words as the FASB will discount comment letters if they
appear to be merely be copies.
Need for the project is questionable
The American Accounting Association (AAA) issued a very important study in July
2013 concluding that the operating lease footnote information is effectively processed by
analysts as evidenced by market pricing of debt and equity issued by lessees which
reflects the as-if capitalized value of operating lease obligations – this means the current
off balance sheet disclosure is working fine. The FASB should be forced to answer the
question “Why change things if things are not broken?” – especially when they are
changing all of lease accounting in very complex way.
The accounting crisis (Enron etal.) that prompted the SEC to study off balance sheet risks
was caused by failing to comply with GAAP – not a deficiency in the rules. The thought
that operating lease obligations are “hidden” is refuted by the AAA study that shows that
the market understands operating lease obligations and their financial impact very well.
The Boards have not justified capitalizing operating leases as they are executory contracts
from a US legal (UCC) perspective and no other executory contracts are capitalized. The
Boards have used the theory that once the asset is delivered to the lessee the contract is
no longer an executory contract. The fact is that the lessor has continuing obligations to
keep the asset free of liens and to allow the lessee “quiet enjoyment” of the asset while
under lease and these lessor obligations are sufficient to cause the US commercial law to
continue to recognize the lease as an executory contract. The UCC and bankruptcy laws
should be the foundation for the accounting – not an accounting “theory”. There is no
need to create a theory or hypothesis when commercial law defines what a lease is and
whether the lease creates a tangible asset and true debt.
Approach to standard setting
 Too much focus on anti-abuse = overly complex implementation. Also the AAA
study seems to be saying that the supposed abuse of off balance sheet operating lease
accounting is not fooling anyone. Operating lease obligations are not “hidden” as the
markets recognize their impact on the creditworthiness of lessees.
 Failure to test the market = 99% of equipment leases are small ticket and relatively
short term so lots of work for no material consequences
 Rules are theoretical/not practical and do not match legal reality. UCC laws define
what leases create assets and which are merely rental contract (executory contracts –
what accountants call operating leases) = rent is an operating expense, not all leases
are right of use, why not just amend IAS 17/FAS 13 to capitalize operating leases and
leave expense as is (straight line average).
 We question whether a cost benefit study was done up front = rules are overly
burdensome, why not just amend IAS 17/FAS 13 to capitalize the value of operating
leases and leave lease expense as the straight line average rent?
Rules must be simple
 No objection to capitalizing a value for operating lease obligations but leave expense
straight line – matches economic nature of right of use lease – rent is an operating
expense
 Leave current capital lease accounting alone – it is logical and matches the UCC and
IRS views re leases
Clarity
 Rights in a lease contract must be analyzed
 The right of use asset is an intangible contract right (the US bankruptcy laws consider
the ROU asset as undelivered services in an executory contract) and the asset goes
away in a bankruptcy. The right of use lease liability is not debt and if not properly
labeled will cause debt limit covenants to be breached
 Right of ownership lease asset is a property right (PP&E) and ownership continues
beyond lease term and the lease liability is true debt in bankruptcy
 Display on balance sheet must break out the different types of leases so potential
lenders and credit analysts can understand the effects of a possible bankruptcy
LESSEE ISSUES
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Substance
o Proposed rules do not reflect the economics of right to use leases (former
operating leases) versus right of ownership leases (former capital leases)
o Right of use leases (former operating leases) are executory contracts which
create contract rights (an intangible asset) and a liability that is not debt in
bankruptcy
o Right of ownership leases (former capital leases) create property rights
(PP&E) and a liability that is debt in bankruptcy
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Cost/Benefit
o 99% of leases are of assets < $5 million in cost
o Most lessees are small/medium sized companies with unsophisticated
personnel and systems
o Consider a de minimus exception
o Proposed rules too complex
o Deferred tax accounting will be required for every former operating
lease/executory contract lease unless the lease cost is the average of the
minimum lease payments. Most all truck leases have level payments that
equal the tax deduction of rent expense but the proposed P&L method for
equipment leases will front load costs.
o The only partial benefit to clarity in reporting is capitalizing the lease liability
but former operating lease liabilities and assets are mixed with former capital
lease liabilities and assets. This means analysts have less info re leases than
under current GAAP without the information needed to adjust the numbers. If
lease expense is front loaded, the ROU asset value and P&L do not match the
economics of the lease.
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Lease Classification
o The project proposes different classification tests for equipment leases and
real estate leases that are all legally the same type of contract. This dichotomy
lacks a common principle and muddles information that analysts need on the
nature of lease assets and liabilities.
o The project must differentiate leases where the lessee rights are ownership
rights (property rights) versus those where the rights are merely use rights
(contract rights – intangibles) regardless of the type of asset leased
o This is necessary:
 To have a different P&L treatment for different types of leases
 Straight line rent expense for right to use lease/former
operating leases (intangible contract right)
 PP&E and loan accounting for right of ownership (property
rights)
 To be able to break out the different lease assets on the balance sheet
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Right to use assets are very different in nature vs. right to own
assets
Users should know which assets are owned and which
liabilities are debt in bankruptcy versus which assets are
intangible assets and liabilities that disappear in bankruptcy –
this is a major issue for potential lenders who analyze what will
happen in a bankruptcy. Proper labeling could avoid technical
defaults of debt limit covenants.
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Straight line expense for right of use/former operating leases
o Suggest retaining notion that rent as an operating expense and an operating
cash outflow – the view held by most business people
o Saying that rent has a finance component is an accounting theory not legal
reality and it creates complexity unintended consequences as you play out the
resulting accounting
o Closely matches the cash expended as most equipment leases have level
payments
o Matches the tax and legal view of rent being the expense
o Avoids complex deferred tax accounting
o Avoids miss matches in cost reimbursement contracts where cash paid for rent
is reimbursed yet the P&L shows a front loaded cast pattern
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Amortizing right-to-use lease asset same as the liability
o Best approximation of fair value of the asset at inception and throughout the
lease term
o Asset and liability are linked in the same contract
o Asset and liability cannot be settled independently
LESSOR ISSUES
o No need for symmetry in lease classification
 The lessee and lessor have different views of a lease
 Lessors have either a financial lease model or operating lease model
 Financial lessors:
o Lease priced like an investment – equipment sold at
expiry
o IRR of cash flows from rent and residual (implicit rate)
o Tax benefits are included in the pricing analysis and
lessee benefits thru lower lease rate
o Most are triple net leases - lessee pays operating costs
o Lessor may provide services but bills lessee for services
(full service lease)
 Operating lessors
o Current lessor “Operating Lease” model reflects the
economics
o Full service leases
o Daily rental lessors – rent-a-car, hotels
o Short term leases
o One asset leased to multiple lessees
o Lessor incurs operating expenses related to asset
Suggested approaches to improve the benefits in the ED using the idea that accounting
should
- reflect the substance of the transaction,
-provide lessees with key information they need and
-provide key information that users (lenders and credit analysts) need to analyze lessees’
creditworthiness and the impact of a bankruptcy
ED Issue
Substance
What preparers
What users want
need
Lessee
Information re:
 Classify by legal/economic nature
 Information for
accounting  Tangible vs. intangible asset
treatment of lease
tax return
assets and lease
preparation
 True debt vs. a going concern only
liabilities in
 Information to
liability
bankruptcy
give potential
lenders
Lessor
Finance vs. operating business model
Internal management Finance leases
accounting – Finance lessors view and price each
accounting uses
(DFL method) for
lease as a discrete investment with the
business model info financial
assumption they will sell the leased
to manage the
lessors/operating
asset when returned. Their leases
business
leases for
should all be finance leases
operating lessors
-Operating lessors buy assets on spec,
– meshes with
lease them over and over again,
ratios & measures
maintain the assets and the pricing is
employed by
market rates (biggest factor is supply
users to evaluate
and demand not the time value of
lessors.
money). The equipment is considered
their stock-in-trade. Their leases
should all be operating leases.
-Symmetry does not reflect that the
lessee’s view is “do I own the leased
asset or am I renting it”, while the
lessor may be viewing the same lease
as a discrete investment or an operating
lease – the lessee does not care what
the lessor business model but rather
only cares about the right to use the
asset.
Sale and
It is legally a sale under a risks and
Need only “owned” Users want clear
Leaseback rewards analysis which is line with the assets for all types of picture of assts
with EBO tax view
tax compliance and
that survive
to provide
bankruptcy (the
information for
true at-risk assets)
potential lenders
Cost/Benefit Grid – suggestions to improve the benefits and reduce
the costs
benefit
Accurate calculation of the
operating lease liability’s value
capitalized on the face of the
balance sheet
comment
 We question whether on balance sheet
recognition is a major issue considering
the AAA study regarding how users
process operating lease disclosures
 Grading the ED in terms of whether it
provides a benefit vs. current GAAP
should be either an “incomplete” or a “fail”
 True, the value of operating lease
obligations has been put on the balance
sheet BUT the important breakdown of
operating lease vs. capital lease assets
and liabilities is no longer available for
users – primarily potential lenders and
credit analysts who are concerned with
the impact of a bankruptcy.
 Is it really a benefit as analysts will still
have to adjust AND won’t have the
information needed to adjust the
numbers to get what they need?????
 SMEs and NIGs are the heaviest users of
leases and they are most prone to
bankruptcy hence the need for separate
operating vs. capital lease assets &
liabilities amounts reported on the
balance sheet
 This is not to say we are accounting for a
bankruptcy – rather we are providing
basic information on the true nature of
lease assets and liabilities to users on a
going concern basis – note that operating
lease assets and liabilities only exist in a
going concern
recommendation
Keep lessee classification tests as is or
use IAS 17 as
-that is in line with the US legal and tax
regimes
- it will result in separate reporting of
capital and operating lease assets and
liabilities which is what lenders and
credit analysts need – they do not need
combined numbers
The following evaluation of the ROU method was largely ignored by the
FASB in drafting the second exposure draft. Many of the points are in line
with TRALA’s thinking. We question why the FASB ignored the
commentary?
Excerpts from:
© 2001 American Accounting Association Accounting Horizons Vol. 15 No. 3 September 2001 pp. 289-298
COMMENTARY
Evaluation of the Lease Accounting Proposed in G4+1 Special
Report
AAA Financial Accounting Standards Committee
Stephen G. Ryan (Chair); Robert H. Herz; Teresa E. Iannaconi;
Laureen A. Maines; Krishna G. Palepu; Katherine Schipper; Catherine M. Schrand;
Douglas J. Skinner; Linda Vincent
CHARACTERISTICS OF A CONCEPTUALLY SOUND LEASING STANDARD
The Committee supports development of a single, conceptually sound approach to
accounting for all types of leases and believes that such an approach should have the
following characteristics:
1. The approach should recognize that all leases, regardless of their specific terms
and conditions, convey rights and obligations, and so create assets and liabilities.
The nature of the property under lease should not affect the accounting, nor should
the length of the lease.
2. The approach should recognize that accounting for leases is a special case of
accounting for contracts. Accounting for all contracts should be placed on a sound
conceptual footing, and the principles developed for leases should be both internally
consistent and generalizable, in the sense that the principles governing accounting
for leases should be suitable for application to accounting for contracts generally.
3. The approach should be robust to shifts in the contractual details of lease contracts
when such shifts do not materially alter the economic substance of the arrangements.
In particular, the approach should require that substantially similar lease contracts be
accounted for similarly and substantially dissimilar lease contracts not be forced into a
misleading appearance of comparability.
4. The approach should take account of practiced realities of the leasing market that make
measuring lease assets and liabilities difficult. Because lease contracts are frequently
tailored to the desires of the parties to the lease, it can be difficult or
even infeasible to identify similar lease contracts. Moreover, public information
about the specifics of lease contracts is often unavailable. For these reasons, the
markets for trading lease assets and liabilities are relatively undeveloped. In addition,
the existence of transaction costs associated with relocating and releasing assets
under lease may yield incentives that affect the contractual lease provisions.