At ELFA’s Lease and Finance Accountants Conference in September, attendees asked guest speaker Tom Linsmeier, a member of the Financial Accounting Standards Board, to reconsider the Board’s decision to drop a key provision from current GAAP. Namely, they asked the Board to restore the “carve out” from the useful life and PV tests for leases where the term begins in the last 25% of the leased asset’s useful life.  Dropping this item, which is of particular value to rail lessors, would add complexity for both lessees and lessors and misrepresent the substance of those leases.

After a coalition of rail lessors and ELFA reached out to the Board on this issue with an email, several phone calls and a comment letter, the FASB agreed with the request, making this their last decision before proceeding with drafting the new lease accounting standard.  The FASB made this decision as follows, as reported on their website:
 
Remaining Economic Life Lease Classification Criterion
The Board’s current decisions would classify a lease as a finance lease (for lessees) or a sales-type lease (for lessors) if the term of the lease is for the major part of the remaining economic life of the underlying asset (the lease term criterion). The Board decided to provide an exception to the lease classification test whereby entities will not consider the lease term criterion when performing the lease classification test for leases that commence “at or near the end” of the underlying asset’s economic life. The Board also decided that the final leases standard should include implementation guidance that one reasonable approach to determining the applicability of this exception would be to conclude that a lease that commences in the final 25 percent of an asset’s economic life is “at or near the end” of the underlying asset’s economic life.

It is important to note that the issue got traction as a result of a member asking the question at the Lease and Finance Accountants Conference. It shows the value of attending this conference and making your voice heard!

Save the date: The 2016 Lease and Finance Accountants Conference will be held Sept. 12-14 in Baltimore.  Also, members will not want to miss a planned first quarter webinar and one-day workshop devoted to the new leasing standard. Details to follow.