mission Matters Update on Lease Accounting Project September 28, 2012 Determination made on how leases will be accounted for. The FASB and International Accounting Standards Board (IASB) continue to discuss the issues and concerns raised in response to their August 2010 exposure draft on the subject of lease accounting. In early summer, the boards issued a joint statement announcing they had reached an agreement on an approach for accounting for lease expense. As I mentioned in my previous blog titled Yet More Lease Accounting, the boards had agreed that leases should be recorded on the balance sheet. However, they have struggled to determine how the expense will be recorded in the statement of functional expenses. At this summer’s meeting the boards tentatively agreed that some leases would be accounted for using an approach similar to that proposed in the 2010 exposure draft. This would result in a front-loading of expense. Other leases will be accounted for using an approach resulting in a straight-line lease expense. The approach a lessee uses will depend on whether the lessee acquires and consumes more than an insignificant portion of the underlying asset over the term of the lease. This principle would be applied based on the nature of the underlying asset. For example, leases of property (land or buildings) would use the straight-line approach unless the lease term is for the major part of the economic life of the underlying asset or if the present value of the fixed lease payments amounts to substantially all of the fair value of the underlying asset. Leases of assets other than property would be accounted for using an approach similar to the model described in the exposure draft unless the lease term is an insignificant portion of the economic life of the underlying asset or the present value of the fixed lease payments is insignificant relative to the fair value of the underlying asset. At the same meeting, the boards also decided to change their previous decisions about the accounting used by the lessor to determine when the receivable and residual approach would apply. The lessor would apply a model similar to that described above for lessees. Consequently, a lessor would apply the receivable and residual approach to leases for which the lessee acquires and consumes more than an insignificant portion of the underlying asset over the lease term. For all other leases, the lessor would apply an approach similar to operating lease accounting. A new exposure draft is expected to be out next quarter and a final standard is anticipated to be published in the middle of next year. Questions? Comments? Contact us. As one of the largest CPA firms in Boston, KLR is unique because they service over 220 not-for-profit organizations with compliance and consulting services. We have extensive experience helping Nonprofit organizations regarding boards, and board responsibilities, charitable contributions, taxes and 990 filing requirements.