On May 16, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) (collectively, the Boards), issued a revised proposal (the Proposal) with respect to accounting and reporting for leases. The objective of the Proposal is to increase transparency among organizations that lease assets by requiring that assets and liabilities arising from lease transactions be recognized in the statement of financial position.
The Proposal provides a dual approach to lease accounting. Most equipment leases would be classified as Type A leases. Most real estate leases would be classified as Type B leases. The revenue and expense recognition patterns for these two types of leases would vary considerably. However, both types would require the lessee to recognize a liability for the present value of rents to be paid under the lease.
Most important for NAREIT member companies, for most real estate leases, landlords/lessors would report rental income on a straight-line basis and tenants/lessees would report rental expense on a straight-line basis. For several years, NAREIT has strongly advocated its support of this treatment of real estate leases.
For Type A leases, lessors would recognize a receivable for the present value of rents to be received under the lease and recognize a “sale” of the right to use the underlying asset for the term of the lease. The lessor would derecognize the leased asset and report a gain or loss at the commencement date of the lease, as well as a residual interest in the underlying asset. The accounting required for lessees would result in front-ending rental charges in the lessee’s income statement with the rental charges decreasing over the term of the lease.
Real estate leases would be classified as Type A leases only if one of the following criteria is met:
1) The lease term is for a major part of the economic life of the underlying asset
2) The present value of the lease payments accounts for substantially all of the fair value of the underlying asset
Examples of real estate leases that could qualify as Type A leases are long-term land leases and long-term master leases, sometimes referred to as head leases.
NAREIT will continue to aggressively advocate its views as the Boards consider constituent comments on the Proposal. If you would like to participate in a NAREIT Task Force that will evaluate the Proposal and draft a comment letter to the Boards, please contact George Yungmann, NAREIT’s Sr. Vice President, Financial Standards by May 31 at email@example.com. Comments are due to the Boards by no later than September 13, 2013.