Lease Accounting: Changes the IT Industry Should Know

Contingent Profit and Loss Pattern

Contingent rent will cause large amounts of “estimated” contingent rents to be capitalized at inception where no “true” liability exists until incurred, increasing the asset and liability and exacerbating the front-ending of expense. The estimates would be reviewed and adjusted at each reporting date with complex calculations and catch-up adjustments to be made. The P&L pattern will not match the IRS tax treatment triggering deferred tax accounting.

What Can Businesses Do?

Lessees and lessee groups should become involved in the project by providing comment directly to the FASB/IASB. The discussion paper, Leases: Preliminary Views, is available on the "Open for Comment" section on www.iasb.org and the comment period ends July 17, 2009.

Comments to the Boards could be based on theoretical arguments such as the nature of liabilities, the economics of transactions, the needs of users of financial statements, clarity in financial statements, as well as cost/ benefit and complexity. Specifically, the following points could be emphasized in comment letters:

1. The rights in lease contracts must be considered and lease classification is an important distinction for readers of financial statements.
2. Sales-type lease accounting is appropriate for leases with a gross profit and where they are, in-substance, sales.
3. A straight line expense pattern for P&L reporting more faithfully reflects the economics of a true lease.
4. Certain contingent rents are not liabilities until they are probable to occur.

William Bosco is a member of the IASB/FASB International Working Group on lease accounting and an accounting policy consultant for the Equipment Leasing and Finance Association (ELFA), the trade association that representing companies in the $650 billion equipment finance sector, which includes financial services companies and manufacturers engaged in financing capital goods. For more information, please visit www.ELFAOnline.org.

©Equipment Leasing and Finance Association 2009. Reprinted with permission.