Oct. 14, 2015 - ELFA’s 2015 Lease & Finance Accountants Conference, held in Philadelphia in September, delivered a broad range of content. The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) projects on lease accounting may have received the most attention, but the conference’s agenda was not limited to this one subject. There were general sessions on leadership and the state of the industry, and sessions covering specialized topics such as lease pricing, renewable energy and hot topics in lease accounting. Copies of the session handouts and audio recordings of many of the sessions are available on ELFA’s Conference Resource Center. (See photos from the Lease & Finance Accountants Conference here.)

Leadership and Change Management
With the much anticipated release of the new lease accounting guidance later this year, change and preparing for change was on the mind of many attendees. It was therefore fitting that the keynote address by William G. Sutton, CAE, President and CEO of ELFA, was on “Dealing with Change or Changing the Deal.” Drawing on his many years of experience, Sutton’s valedictory address highlighted issues related to leadership, including adapting to new roles, new environments and new realities. His observations were punctuated by personal anecdotes, many of which illustrated the power of listening and preparing yourself to be uncomfortable in a new role or environment.

Sutton also provided the conference with an upbeat assessment of ELFA’s activities and overall health, including the association’s role in fostering the development of leaders in the industry and the role advocacy plays at the association. The Chairman of ELFA, Robert Rinaldi, covered the state of the industry, which is healthy with high valuations and strong business volumes.

Lease Accounting Project: Overview
The Lease Accounting Project is now in its final stages and there was, consequently, a renewed sense of urgency to the topic. We were honored to again this year have the participation of Board members from the FASB and IASB. While the views they expressed were their own and not necessarily the views of the Boards, they provided us with an update on the project and stated a final standard would be issued in either late December 2015 or January 2016. Their presentation highlighted areas where the Boards are converged, including:

• Recognition and initial measurement by lessees of lease assets and obligations,
• Definition of a lease,
• Separation of lease and non-lease related components,
• Term of the lease and
• Most aspects of lessor accounting.

They also referred to areas where the Boards did not reach a converged answer, including how lessees will allocate the cost of lease transactions. Other differences that were discussed included:

• The IASB’s low value asset exception,
• When lease assets and liabilities are re-measured and
• How credit losses will be determined.

Even with these differences the Boards’ primary objective of lease capitalization will be achieved. The Boards planned to vote on an effective date in late October or early November, and we expect the effective date will not be before Jan. 1, 2018.

Lease Accounting Project: Other Topics
Complementing the perspective of the standards setters were other sessions covering the definition of a lease, the interaction of the revenue recognition standard and lease accounting and how common lease products will be accounted for at transition.

The Definition of a Lease
Today there is often no difference between the accounting for an operating lease and for a service. Once lessees need to account for a lease asset and lease liability, the distinction between a lease and a service—or when a customer needs to account for a lease embedded in a service contract—becomes a very significant matter. The proposed definition focuses on the question of who controls the underlying asset—the supplier or the customer. This change should result in fewer transactions being considered leases under the proposals.

The Revenue Recognition Standard and Leasing
The recently issued revenue standard is a converged standard. It moves the accounting model for revenue recognition from a risks-and-rewards framework to a control based framework—though risks and rewards is an indicator of control.

When looking at lessor accounting the Boards viewed lessor accounting as a revenue activity. This is different from today, as leasing is often viewed within the body of financing literature. While lessor accounting was not addressed in the revenue standard, the Boards tried to make lessor accounting consistent with the revenue standard while limiting major changes to the lessor accounting models.

The proposed lease accounting standard will only cover leasing activities and will not cover leasing related activities. This move is part of a bigger trend, as accounting standards are now essentially viewed as separate components that are to be plugged into an entire body of accounting. Specialized guidance will rarely be contained in new standards if there is another standard in existence. For example, the sale of an asset on an operating lease by a lessor will no longer be covered within the leasing literature as it is today. Tomorrow, these transactions will be covered by the revenue recognition literature. Finally, it is worth noting the revenue recognition guidance is more principles based than the literature it is replacing. Preparers will be required to exercise more judgment when reviewing transactions and the standard contains less implementation guidance than many preparers have become used to.

Transition Rules
Once the leasing standard is issued, companies will need to prepare to adopt it. Assuming the new standard is issued in December 2015and the effective date of the new standard is Jan. 1, 2018, companies will have to apply the transition rules for transactions entered into in the years before 2018. Depending upon their reporting requirements, it could impact comparative statements for 2016 and 2017 and summary information for 2014 and 2015.

The Boards have proposed a number of measures to make the transition easier. Companies would apply a modified retrospective approach to all leases that are still active as of the date of initial application. Companies will have the option of applying a package of transition simplifications, including:

• Not determining whether a contract contains a lease under the new definition,
• Using existing GAAP for determination of lease classification and
• Not revising initial direct costs recorded on historical lease transactions.

It is expected that many lessors will avail themselves of these simplifications.

With the review of the final draft in process, the lease accounting project is nearing completion and companies are now beginning to consider how they will adopt the proposals when they are issued.

John Bober is Global Technical Controller for GE Capital and is the Chair of the ELFA Financial Accounting Committee.

Related Content:  Find out what the FASB discussed at its last decision-making meeting on the Leases project.