Pushback, and pushed back

Opposition to the Revised Exposure Draft (RED) of the lease accounting standard is starting to build. Asset Finance International is reporting that the FASB's Investors Technical Advisory Committee (ITAC), at a meeting on July 24, unanimously disagreed with the boards' new approach to lease accounting, though the committee split three ways on their preferred methodology (capitalize all leases using the current methodology, use the new SLE (straight line expense) methodology for all leases, or keep current accounting but with more disclosure). "At the meeting FASB chairman Leslie Seidman acknowledged: 'I can hear that none of you think that we got it right.' "

Bill Bosco, a well-known leasing consultant and member of the boards' Leases Working Group advisory group, sent the boards a letter disagreeing with the proposals as well, though for different reasons. He is particularly concerned with the disparate treatment of equipment and real estate leases.

ELFA, the primary trade organization for equipment lessors in the U.S., has also weighed in with an unsolicited comment letter to the boards. They had been broadly in favor of the idea of revising the lease accounting standard, particularly to put leases on the lessee's balance sheet, but now are considering withdrawing support of the proposed standard, primarily because of the standard's presumption that virtually all equipment leases are essentially purchases (and thus merit finance lease accounting).

The boards are meeting this week to discuss sale/leaseback details (in particular, how to coordinate lease accounting with revenue recognition accounting to make them as consistent as possible), as well as handling impairment of SLE leases, whether to allow another systematic basis other than straight line, whether finance vs. SLE classification is subject to revision after commencement, and how to handle classification of a sublease.

The documents posted for this week's meeting indicate that the delivery date for the RED has been pushed back to first quarter 2013. It was previously expected in November.

It's a wrap, finally

On July 17, the IASB & FASB met to make their last decisions before releasing a revised exposure draft (RED) for the new lease accounting standard. The following decisions were reached (according to meeting notes posted at IASPlus):

Lessee accounting

Statement of financial position (balance sheet)

Assets and liabilities for the two types of leases (finance, also called "interest and amortization" or I&A, and straight line expense (SLE)) will be reported separately, either on the SFP itself or in disclosure notes. Assets are to be presented based on the type of underlying asset.

Statement of cash flows

Cash paid for SLE leases will be reported as an operating activity. It was previously decided that cash paid for I&A leases will be reported as a financing activity for the principal portion, and in accordance with applicable IFRS or US GAAP standards for interest (IFRS permits it as either operating or financing, while US GAAP puts it in financing).

Several board members expressed interest in additional disclosure of cash paid for leases that would distinguish I&A, SLE, short-term leases, and variable lease payments. The staffs will review this and potentially provide a future staff paper for board action.

Disclosure

The maturity analysis (future rent commitments by year for at least 5 years, then combined to expiration) will not be separated between I&A and SLE leases. This was justified by the fact that the liability is calculated the same way for both types of leases. The FASB had previously decided that commitments for services and other non-lease components need to be disclosed; the FASB decided that this disclosure will also be a single report for all leases, not separated between I&A and SLE.

Reconciliation of the opening & closing balances on liabilities will be separated between I&A and SLE leases, because the liabilities themselves are being reported separately.

On the asset side, the boards disagreed. The FASB chose not to require a reconciliation at all. The IASB chose to require separate reconciliations for I&A and SLE leases.

The staff recommended a disclosure table for lease expenses, including amortization and interest for I&A leases, variable lease payments, short-term lease payments, SLE, principal & interest on I&A leases, and SLE cash paid. The boards thought this was overload, and decided only to require disclosure of variable lease payments.

Transition: SLE lease asset

The boards previously changed their approach for transitioning existing operating leases to the new regime: in the original exposure draft, they planned to make the asset and liability equal at the date of initial application, but because that would have front-loaded expenses for all leases, they decided to switch to a "modified retrospective" approach which results in an asset value largely similar to what one would have restating from inception (see my discussion of the details here). With SLE leases, however, front-loading isn't an issue, so the boards approved using the original methodology with the asset and liability equal at the date of initial application (though with an option for a fully retrospective application, which is also permitted for I&A leases). If there's a deferred rent liability/asset due to unequal lease payments, that is applied to the asset.

Lessor accounting

The boards decided that when a lease is terminated early and the lessor takes back the asset, the remaining receivable and the residual should be combined and set up as a re-recognized asset. No gain or loss would be reported on the transaction (though impairment might separately be recognized, if the remaining receivable that's being reclassified is less than the fair value of the leased portion of the asset plus any penalty payments made).

Interim disclosure

For both lessees and lessors, the boards decided that generally interim disclosures (that is, disclosures required during interim reporting periods, such as quarterly reports for US companies) should be handled consistently with existing standards (IAS 34, US GAAP Topic 270, and SEC Regulation S-X, Rule 10-01). However, an additional disclosure for lessors to detail components of lease income was approved. The FASB approved the proposal as presented by the staffs; the IASB preferred to permit a single lease income number in some cases. This leaves a rare non-convergent situation to be dealt with in the post-RED redeliberations.

Next steps

This isn't quite the end of the decision-making process. The FASB will be meeting next week to discuss a few FASB-only issues.

With these decisions complete, the staffs will now assemble all the "tentative" decisions into the form of an exposure draft. The draft will then be circulated to the boards to make sure it accurately reflects the decisions reached, then released to the public. The expectation is that it will be released during Q4, probably in November. There will be a 120-day comment period, which thus would be expected to end in March 2013 (though that might get tweaked because it falls in the middle of annual reporting for companies on a calendar year basis). Once that's complete, figure a month or so for the staffs to compile the results of the comments, so probably in May the boards will start their review and redeliberations. One can expect that there is still going to be some controversy over the decisions, so redeliberations will probably take a few months. At the meeting, two members of each board indicated an intention to dissent from the exposure draft, with an additional member of each board considering dissent; concerns included complexity and cost/benefit, exclusion of variable lease payments, insufficient disclosure, maintaining two types of leases when unified accounting was a key objective originally, and inconsistency between lessor accounting and the concurrent revenue recognition project.

If there are no significant changes, it may be possible to get the final standard approved in 2013, but it would seem to me it's not likely to be out until late in 2013. Given that, it seems almost certain that implementation would be required for 2016 (with restatement of prior years going back two years for most U.S. firms). That makes a total of just under 10 years from the time the project was announced in July 2006 to final implementation; the original plan was to have the final standard released in 2009, with implementation in 2011.... In a webinar today (July 19), the staff indicated that they expect that earlier implementation will be permitted, while non-public entities may get additional time for implementation.

Two expense profiles

At the joint meeting of the IASB & FASB yesterday (June 13), the boards came to an agreement on the expense recognition patterns for lessee leases to be presented in the Revised Exposure Draft (RED). (My thanks to Asset Finance International for their summary of the board meeting.) If you're looking at the meeting papers prepared by the staff (available here), the choice made was for Approach 3, meaning that some leases will be accounted for using current finance/capital lease accounting (recognizing interest and depreciation expense, with the effect that expenses are higher at the beginning of the lease), while others will be accounted for with a single lease expense item which is recognized straight line over the life of the lease. If the rent payments are equal over the life of the lease, the asset and liability balances will be equal at any date. If they are unequal, the adjustment required to balance cash rent vs. accrual expense (what is shown under current operating lease accounting as a deferred rent liability) will be taken to the asset. The asset will also be adjusted for any initial direct costs or impairments, both of which are to be recognized over the life of the lease (or remaining life, for an impairment).

The second decision was where to draw the line between the two types of expense recognition. The boards opted for Option 3 (as described in agenda paper 3D/237):

(a) Leases of property (defined as land or a building – or part of a building – or both) should be accounted for using a straight-line presentation in the income statement ... unless:
(i) The lease term is for the major part of the economic life of the underlying asset; or
(ii) The present value of fixed lease payments accounts for substantially all of the fair value of the underlying asset.

(b) Leases of assets other than property should be accounted for under Approach 1 [finance accounting] ... unless:
(i) The lease term is an insignificant portion of the economic life of the underlying asset;
(ii) The present value of the fixed lease payments is insignificant relative to the fair value of the underlying asset.

The boards' push for convergence was in evidence in the voting. A solid majority of the IASB preferred a single methodology for all leases, using finance lease accounting. However, members of the FASB very strongly felt that straight line expensing was a necessary part of the standard, and the IASB agreed in the interest of having a common standard.

The implications are that virtually all equipment (except leases of 12 months or less, which have previously been excluded from the standard and will be treated like current operating leases) will use finance accounting, while the vast majority of property leases will use straight line accounting. Only when a property lease is for nearly all of an asset's useful life (or there is an ownership transfer or bargain purchase option) will finance accounting be used. We'll have to see how this sorts out in practice, but this probably means that a lease of a building for less than 30 or 40 years will use straight line unless there are very special circumstances.

Lessor accounting

Having made that decision, the boards discussed the implications for lessors. Since they previously decided that lessors of "investment property" could use operating lease accounting, and this would cover virtually all property lessors, the focus was on equipment lessors. The boards decided that they would use accounting more or less symmetrical with lessee accounting, so the "receivable and residual" model will apply to equipment leases unless the lease has an "insignificant" term or receivable. This is similar to current capital lessor accounting, but with the benefit to lessors that they are permitted to recognize a portion of profit at inception (proportional to the value of the receivable compared to the residual), whereas currently profit is recognized over the life of the lease.

Next steps

There will be some wrap-up decisions to make at the July joint boards meeting, related to the RED comment period, transition, and disclosure adjustments. After that, the staff will prepare the RED, with the expectation that it will be released in Q4 2012. (If no further hitches come up, early in the quarter would seem likely.) With an expected 4-month comment period, then time to redeliberate based on comments received, a mid-year 2013 release date of the new standard seems possible, unless there's strong pushback. However, the boards seem to have met the biggest objections, so I think any changes this time around are likely to be modest (tweaks of wording, adjustments of disclosures, etc.), not the wholesale rewrite that we got between the original ED and the RED.

At this point, I wouldn't expect an effective date before 2016, to allow companies time to update their systems and gather any needed information. However, the requirement to restate prior years remains, so U.S. companies will generally need to recalculate 2014 & 2015 when they first apply the standard in 2016. If early implementation is permitted, the recalculation period would move forward commensurately. In other words, 2016 isn't that far away.

EZ13

Here at Financial Computer Systems, we're finishing up the latest update of EZ13, which will be released this summer. We won't have the new level expense capital methodology in that version, but will be working on it later this year. We'll have it in place, including transitions from current accounting, long before implementation is required. We do right now provide for pro forma capitalizing operating leases according to current capitalization rules, so you can see what your balance sheet exposure is under the RED.

"We need to be ready to make a decision"

The FASB & IASB had separate "education sessions" on June 6, to review the materials the staffs have prepared for next week's joint meeting regarding the new lease accounting standard (and other projects). The FASB session is available here; the discussion on leases starts at about 1 hour, 30 minutes in from the beginning. You can view the IASB session by clicking on the "Register" link on this page. The discussion won't make a lot of sense without having the agenda papers available to look at; those are available here (right-click to download the zip file).

The staffs have, as directed by the boards last month, prepared three possible approaches for expense recognition:

1. The current plan: All leases are treated using current finance lease accounting.
2. What was called "Approach D" last month: level expense recognition, with the asset and liability linked throughout the life of the lease (if rent payments are equal throughout the lease life, asset and liability will be equal at all times).
3. A combination of the two approaches, with the necessity to decide which leases need which treatment.

More information was provided about Approach D, now Approach 2. It hadn't been clear last month how to account for leases where the rents change over the life. I speculated that there might be a deferred rent liability, as with current operating lease accounting. Now the staff has clarified that such adjustment should be recognized in the asset, rather than in a separate account. Other adjustments to the asset could also result in assets and liabilities being unequal, such as initial direct costs (added) or impairments (subtracted).

If Approach 3 is desired, then the boards need to decide where to "draw the line" to determine which leases get which treatment. Four options were presented:

1. Finance lease accounting when the lease transfers substantially all the risks and rewards of ownership (the language used currently in IAS 17, which is also the concept behind FAS 13; the determination, however, would be made using IAS 17 principles, rather than FAS 13's "bright lines" of 75% and 90%).
2. Finance lease accounting when the ROU asset represents the acquisition of a more than insignificant portion of the underlying asset.
3. Determination based on the nature of the underlying asset:
   
   • Property leases would use Approach 2 (straight line) unless the lease term is for the major part of the economic life of the underlying asset or the present value of the rent accounts for substantially all of the asset's fair value;
   • Equipment leases would use Approach 1 (financing) unless the lease term is an insignificant portion of the economic life of the underlying asset or the present value of the rents is insignificant relative to the asset's fair value. 
4. Determination based on the lessee’s business purpose for entering into the lease arrangement.

Most of the FASB board members (at least 5 of the 7) felt that it was appropriate to draw a line, considering that there are different purposes and intentions for different types of leasing transactions, and that it is appropriate to recognize those. Outreach indicated that virtually all property lessees see their transactions as generally not having a financing component; they see it as simply gaining use of an asset for a period of time. Equipment lessees are more split; some deny a financing component, but major aircraft lessees admit that that's part of the transaction.

Option 4 seemed to have the least support; while it seemed superficially to allow preparers to account for their actual intentions, there was substantial concern of gaming the system and a lack of comparability between different companies. Options 2 & 3 were seen as effectively the same, simply stated differently; Option 2 might be seen as more principles-based, while Option 3 is perhaps easier to put into practice. Some thought that Option 1 would be the simplest to apply, since everyone is familiar with the concept already; however, that would result in most aircraft leases getting straight-line rather than finance accounting, which was troubling. (Aircraft operating lease accounting is a poster child for the need for a new lease accounting standard.)

One board member indicated that he thought in-substance purchases were scoped out of the new lease standard. That's news to me; it had been discussed at one point, but I thought that was long since discarded. I don't see any support for that in the FASB's summary of tentative decisions to date.

During the outreach, most users of financial statements (i.e., financial analysts and investors) expressed a preference for a single approach to lessee accounting, but generally the more important issue to them was getting everything on the balance sheet. It was felt that proper disclosure could enable users who prefer to see leases a different way to make the adjustments they need.

There was some discussion regarding the implications for lessor accounting. Some board members consider symmetry important. Others consider the different business models and purposes on the two sides of the transactions sufficient that symmetry doesn't matter; at least one suggested that no change at all to lessor accounting from current practice is necessary.

The boards are concerned that their decision not seem arbitrary, recognizing that some people will be unhappy with whatever decision they make. They want to be able to defend it on a theoretical, not just practical, basis.

At the end of the session, a FASB board member asked the staff for what preferences had been expressed at the IASB education session held earlier in the day. It was reported that a majority of the IASB seems to have a first preference for Approach 1, but also that the strength of preference for that over Approach 3 would depend on where a line was to be drawn. So we have a difference of opinion between the boards; we know that they want very strongly to release a unified standard, so we'll have to see how that gets resolved.

To wrap up, though, the comment was, "We need to be ready to make a decision." The staff said a similar sentiment was expressed by the IASB. They've scheduled 5-1/2 hours of discussion for Wednesday & Thursday, June 13 & 14.

The staff expects this meeting to include the last substantive decisions on the new standard to be presented in the revised exposure draft (RED). They plan to follow up in July with wrap-up decisions, such as the comment period for the RED and interim disclosures, plus any decisions that may need to follow on from June decisions (such as adjusting disclosures if the approach to lessee accounting changes). After that, they would be ready to draft the RED and release it later in the year. The FASB Current Technical Plan is now reporting that the RED is expected to be released in Q4 2012 (that's a recent development; just a few weeks ago, it was simply "second half of 2012").

Into the second half of 2012

The FASB recently updated their project timeline for the new lease accounting standard, and they've now officially pushed back the date for release of the revised exposure draft (RED) to the second half of 2012. This is at least a 9-month delay from the original plan: last July they expected to finish the redeliberations in September 2011 with the RED to come shortly thereafter. But, of course, the whole project has been a story of delays; it's mind-boggling to think that when they announced the project in 2006, they expected to be finished in 2008.

Schedule for wrapping up the redeliberations

The IASB has posted on its web site the agenda papers for next week's combined IASB/FASB board meeting, which will include discussion of lease accounting. One of the agenda papers details the schedule from here out:

February boards meeting: last substantive discussions
March boards meeting: "sweep issues" such as comment period and any interim disclosures
Following: Second Exposure Draft is drafted. They don't say anything more than "later in 2012" for when it will be released, though the IASB Work Plan page indicates Q2 2012 (the equivalent FASB Project Updates page says the same thing).

This month's boards meeting

On Oct. 19, the FASB & IASB again met to discuss the new lease accounting standard. In a marathon session (scheduled for 5 hours), they reached a number of decisions in several areas. (Note: in the discussion below, and elsewhere in discussions about this standard, "effective date" is the date companies must start reporting under the new standard, while "date of initial application" is the date, normally two years earlier for U.S. companies, as of which leases must be treated as capital once the new standard takes effect, due to the requirement to restate years shown as comparables in the annual report.)

Lessee transition

• All existing capital leases will be carried over with no changes required. Previously, they had planned to require restatement of capital leases with variable payments or renewal options that would be treated differently under the new standard. They decided the benefit wasn't worth the cost, because in most cases the differences would be small (particularly given recent decisions to reduce recognition of variable payments and options).
• The incremental borrowing rate to use for operating leases to be capitalized will be a single company-wide rate, not based on the individual characteristics of each transitioning lease.
• Operating leases can be recalculated using either a "full" or a "modified" retrospective methodology. The same methodology must be chosen for all leases. Full means going back to lease inception and calculating the lease as capital. Modified is different from what was in the original Exposure Draft; I described it last month. They have clarified that the difference between asset and liability generated by this method is to be booked to retained earnings (no P&L impact).
• The simplifications ("reliefs") mentioned last month were all confirmed: leases that terminate before the effective date of the new standard won't have to be restated, even if they start after the date of initial application; initial direct costs are excluded during the same period; and preparers may use hindsight to set up the leases.

Lessor transition

• Capital leases other than leveraged leases can be carried over with no adjustments.
  
• Leveraged lease accounting is eliminated. Such leases will have to be restated.
• Current operating leases will have a receivable and residual set up using the present value of the rents and expected residual value at date of initial application, the interest rate being the rate charged in the lease as of lease inception; the underlying asset is derecognized. Lessors also have the option of full retrospective application.

Lessor receivables held for sale

• A proposal to report receivables held for sale at fair value was rejected. While this would superficially be consistent with IFRS 9 and the FASB's Accounting for Financial Instruments project, it was felt that it added complexity, was inconsistent with the rest of the leasing standard, offered opportunities for structuring, and would add more variability in profit and loss. Instead, any gain or loss would be recognized when a sale of the receivable is completed.

Variable payments for lessors

• If the rate a lessor charges a lessee assumes "reasonably assured" variable lease payments will be made, the residual asset (which by default contains the value of those payments, since the value is not in the receivable) will be adjusted by recognizing an adjustment to the residual. The adjustment is the variable lease payment divided by the fair value of the underlying asset, times its carrying amount.

Lessor receivable and residual

• Investment property is excluded from the lease standard scope. This keeps those properties under IAS 40 for companies using IFRS. The FASB is working on a project to create the same standard for the U.S. (which presumably will be complete by the time the lease standard takes effect).
• Profit on the residual will not be recognized until the asset is sold or re-leased.
• The residual is initially booked at the present value of the residual. The value is accreted, with interest income recognized for the accretion, using the same interest rate as for the receivable.
  

Exposure Draft delayed to 2012

The FASB & IASB have updated their project schedules to indicate that the revised exposure draft (RED) will be released in Q1 2012. That's another delay of three months from what was expected when they announced in July that a RED would be released. The Equipment Lease and Financing Association is reporting that the comment period will be a full 120 days; there had been speculation that the comment period might be shorter the second time around. That means that the comment period won't end until near the end of Q2. With time for redeliberation, that suggests that the final standard won't be out until late in 2012.

It's yet the latest delay in an oft-delayed project. When originally announced back in 2006, the boards expected to be done in 2009. The latest delay could affect the implementation date; speculation recently has focused on 2015 as the implementation date, but given the planned requirement to restate the prior two years of comparable financials, that means there could be just weeks between the release of the standard and when (1/1/2013) leases will effectively need to be reported under it. During those two years until actual implementation, bookings will be done under current standards, but companies will need to make sure they keep complete information on their leases to enable recreating their accounting under the new methodology. Of course, with the active consideration of full retrospective accounting (though probably not to be required, just optional), it would be good to be keeping information right now on any leases that you expect to remain active into 2015. (It is expected that leases that expire before implementation won't need to be recalculated.)

The boards held a lengthy meeting this week on leases, but I don't have time to review the 5 hours of recordings, and my normal sources haven't yet posted summaries of the events.

Boards get back to work, timeline slips further?

When the FASB and IASB decided in July to prepare a second Exposure Draft for the proposed new lease accounting standard, they expected to finish all the loose ends in September and release the RED (Revised Exposure Draft) soon after. Oops, here we go again. The whole history of this new standard has been one of delays: when the project was announced in 2006, it was supposed to be completed in 2009.

Even before the meeting, the boards realized they weren't going to be able to do everything this month. (There was no joint meeting in August; it's not clear whether the month off was considered in their July timeline.) But the agenda for this month included the plan to bring "all remaining redeliberation issues to the boards in the October joint board meeting." Now Asset Finance International is reporting that the boards want more time to redeliberate the remaining issues, and that it might take until next February to issue the RED, with a final standard of course being several months after that (to allow time for public comment, then redeliberation). It's not clear what their basis is for this projection; the FASB's Technical Plan still has a Q4 estimated publication date for the RED (with the notation that this was updated 9/23/11), though it doesn't list any date for the final standard. However, some decisions due this month were either completely deferred or have loose ends dangling.

Decisions made at the Sep. 19 and Sep. 21 joint board meetings:

Scope - inventory
Some people had suggested that the right-of-use asset for a lease could in some cases also meet the definition of inventory, and would be subject to potentially conflicting standards. The boards decided that the situation doesn't really seem possible, and therefore there's no need to prepare guidance to distinguish.

Financial asset guidance application to lessor's right to receive payments
A major concern of the boards is keeping accounting consistent between different types of transactions. The lessor's right to receive rent payments could be considered a financial asset. The boards decided that such standards (specifically, IFRS 9, IAS 39, and US GAAP Topic 825) should not apply to regular measurement of the receivable, but would apply to impairment. This also confirms the previous decision that fair value measurement/revision is not permitted for the receivable.

Lessor impairment
For the lessor receivable, the impairment standard for the applicable GAAP environment (Topic 310 for U.S. preparers, IAS 39 for IFRS) applies. For the residual asset, IAS 36 and Topic 360 apply; for US preparers, this indicates impairment is handled in a manner congruent with property, plant, & equipment, rather than intangibles. This is basically the same as lessee treatment.

Lessor balance sheet presentation
Lessors will be required to report all their leased assets, both receivables and residuals, as a "Lease Assets" line in PP&E. Lessors may choose whether to separate the receivables and residuals in the balance sheet, or footnote the detail. Sublease assets should be shown separately.

Subsequent adjustments of variable rents, lessor
The recalculation of variable rent payments due to changes in a rate or index (such as changes in LIBOR or the CPI) can result in a gain or loss. That is to be recognized immediately in profit & loss, rather than being rolled into the asset (as is largely the case for lessees).

Lessor accounting for residual value guarantees
The boards agreed that a residual value guarantee would not be separately recognized (whether provided by the lessee or a third party). It would be taken into account in determining the value of the residual asset, including testing for impairment.

Lessor cash flow statement
Lease payments are classified as operating (not investing) activities. An exception was made, however, for cash flows related to securitized receivables, which would be accounted for under existing guidance.

Transition, lessees
The ED called for lessees to capitalize the remaining rents on all operating leases, with an equal asset and liability set up at the date of initial application. (Note: the effective date is when the standard takes effect; the date of initial application is the date, two years prior for most US companies, as of which leases have to be treated as capital for comparison purposes.) The problem with this for the income statement is that because it treats all (formerly operating) leases as new on the date of initial application, all of those leases will be at the beginning of the interest amortization curve, when the interest recognized is highest. This means that all lessees would face considerably higher expenses than rent payment as of initial application (with expenses dropping over time, as the principal is paid down and interest correspondingly declines).

It was recognized that this results in artificial swings in expenses. For a lessee with a mix of leases starting and ending roughly evenly from year to year, the overall lease expense profile should be relatively flat, even as each individual lease shows more expense in the early years and less in the later years.

In looking for ways to mitigate this, the staffs presented to the boards two alternatives:
1) full retrospective approach
2) modified retrospective approach (distinguished from the ED's "simplified retrospective approach")

Full retrospective is seen as theoretically preferable. However, it is recognized that for some preparers, this may be difficult to execute. One particularly challenging scenario is leases that have been acquired in a business combination, where the original information for the lease may no longer be available. Long-lived leases may have similar issues. Therefore, the staffs proposed a modified methodology, where the liability would be calculated as the ED specified (present value of remaining rents, using the incremental borrowing rate at the date of initial application), and the asset would use the same calculation back to inception, then recognize the fractional amount of the lease term remaining.

Transition example (provided in Agenda Paper 2G/203):
(Please note: I calculate slightly different present values, using an HP12C or Excel, than the agenda paper presents. In the example below, I list first their calculation, then my calculation in parentheses with an asterisk.)
10 year lease, payments of 1000 CU (generic Currency Units) yearly in arrears
interest rate of 5.7%
date of initial application: beginning of 5th year (i.e., 6 years remaining)

present value of rents at inception: 7,472 (*7,466)
present value of rents at application: 4,967 (*4,964)
asset at application: 7,472 * 6 / 10 = 4,483 (*4,479)

The difference between the asset and obligation would be taken as a "cumulative catch-up adjustment." I believe this would be booked directly to retained earnings, not recognized in profit and loss. Because of the way the interest method works, every lease (except possibly a lease that has lower rents at the end of its life) will book a charge to retained earnings to be set up, so the cost of reducing the impact to the income statement is increasing the impact on the balance sheet (debt/equity ratios will balloon even further). Pick your poison.

The boards, however, didn't pick their poison. They deferred the decision to next month, asking to combine the decision with transition rules for lessors and subleases.

The staffs also suggested a few simplifications: 1) leases that terminate between the date of initial application and the effective date would not have to be restated; 2) exclude initial direct costs for leases that start before the effective date; 3) allow use of hindsight in estimating such lease characteristics as variable lease payments, renewals, and impairment. These will be considered as part of the entire transition package.

This kind of continued change is why no software publisher can claim to be compliant with the new lease accounting standard yet. It's a moving target. But we'll update EZ13 once decisions are finalized; in the meantime, EZ13 allows you to treat operating leases as capital, either from inception or as of a specified cutover date as specified in the original ED, to estimate what your exposure is.

Second Exposure Draft coming

I need to catch up on the boards' activity over the last two months. I've taken a summer hiatus, but they didn't...

The most important news is that at the July 21 meeting, the boards unanimously decided to release a second Exposure Draft. The changes to the proposed standard from the original Exposure Draft are so significant that they felt it important to get feedback from interested parties. Some decisions remain to be made before the new Draft can be released; they expect to complete those deliberations during Q3, with a new Draft released soon after. The wording seems to suggest that the Draft would come out in early October.

Additional decisions reached this month:

Lessor Accounting

The performance obligation model has been scrapped. All leases (except for short-term leases) will be accounted for using a "receivable and residual" model, which is essentially the same as the "derecognition approach" described in the Exposure Draft. Main points of this model:

* The lessor recognizes a right to receive lease payments (matching the lessee's obligation to make payments) and a residual asset.

* The discount rate to present value the payments is the "rate the lessor charges the lessee" (the internal rate of return, based on the asset's value).

* The residual asset accretes (increases using the interest method, same interest rate) over the lease's life.

* If the asset's carrying amount is lower than the lease's value, a profit (on the portion of the asset represented by the lease receivable) can be recognized at commencement of the lease if reasonably assured.

Short-term leases, defined as those with a maximum term of 12 months or less, will be accounted for as operating leases (no balance sheet effect, just income recognized over the lease term on a systematic basis, usually level). This will protect against needing to do convoluted accounting for things like rental cars and hotel rooms.

Operating lease accounting will also be permitted for leases of investment property measured at fair value. This is currently only available under IFRS (IAS 40). But the FASB is working on a proposed investment property standard which would be similar, with an Exposure Draft scheduled for Q3 2011.

Contingent Rents Dependent on an Index or Rate

While other contingent rents are excluded from the capitalized calculation of leases, those that depend on an index or rate have to be included. An example would be a lease whose rent is based on CPI or LIBOR. Such leases are to be initially measured based on the index/rate at the commencement of the lease, then recalculated at the end of each reporting period using the new index/rate. The change is booked to net income if it applies to the current reporting period, or as an adjustment to the right-to-use asset (for a lessee) for adjustments that relate to future periods. Lessors would recognize an adjustment in the receivable in profit or loss.

This is a potentially significant cause of recalculations on leases; many real estate leases have CPI escalators that adjust every year. The boards decided that the benefit of more accurate presentation of actual rents due outweighs the effort required.

Lessee disclosures

The boards approved a lengthy set of disclosures for lessees:

* Reconciliation of opening & closing balance of right-to-use assets, disaggregated by class of underlying asset
* Reconciliation of opening & closing balance of lease liabilities (no disaggregation required)
* Future rent commitments, similarly to current FAS 13 requirements (by year for five years, then all remaining, then subtracting interest to reconcile to the liability balance). Note that this is different from current IFRS requirements. Preparers would have the option to disclose by year for more than 5 years, if that would provide better information.
* Information about leases signed but not yet started if they create "significant" rights and obligations
* Information about contingent rentals and options
* A table of expenses: amortization, interest, variable payments, and short-term rents, plus a breakdown of principal and interest paid
* Information regarding any expected material changes in short-term rentals

However, they explicitly are not requiring disclosure of discount rates, fair value of liabilities, purchase options, or initial direct costs.

They also explicitly forbid combining interest and amortization expenses and presenting the total as lease or rent expense.

The boards split over whether or not to disclose future commitments for services and other non-lease components; the FASB wants such disclosure (which is already required by the SEC in the unaudited portion of the financial statements), while IASB does not. Presumably this will be reconciled at a later date (perhaps after the Exposure Draft is released and reviewed).

Lessee primary financial statements presentation

Lease right-of-use asssets and liabilities either must be presented separately in the Statement of Financial Position (balance sheet), or shown separately in footnote disclosures. The right-of-use asset is to be presented according to the type of underlying asset (land leases with land owned assets, etc.). They have decided not to define whether the right-of-use asset is tangible or intangible. This is a question that affects some regulated industries for tax and other purposes. The boards have decided to let the relevant regulatory bodies make the determination appropriate to their purposes.

The Statement of Cash Flows would show principal and interest payments in accordance with requirements for other financing. Variable lease payments (not capitalized) and short-term rentals are operating cash flows. New leases (creating a new asset & liability) would be an additional non-cash disclosure.

June meeting results in next post...

Lease accounting standard delayed

The FASB & IASB have decided that they cannot complete the new lease accounting standard (as well as standards on revenue recognition and financial instruments) by their target of June 30, 2011. Instead, they will continue to work on the standard into the second half of 2011. The FASB Current Technical Plan page suggests a Q3 final standard, but notes that they expect to release a new Exposure Draft, because of the magnitude of changes from the original Exposure Draft released in August 2010. The boards have not officially committed to re-expose, but if they do not, they will do an enhanced public review, making a draft standard available for review, with outreach to interested parties.

Other decisions made this month:

Contingent (variable) payments: The boards stepped back further from their widely criticized ED proposal to capitalize contingent rents. Now the only contingent rents that are to be included are 1) those dependent on an index or rate, and 2) those that are "in-substance fixed lease payments but are structured as variable lease payments in form." This is essentially an anti-abuse provision; it is unlikely that any normal lease would be affected by this. The boards haven't yet decided whether contingent rents based on an index or rate need to be reassessed when the reference number changes; that will be decided at a future meeting. If they decide not to reassess, it would mean a complete reversion to the current standard.

Definition of a lease: There has been substantial discussion over the requirement for a "specified asset." This month's deliberations concluded that a physically distinct portion of a larger asset (like a floor of a building) qualifies, but a capacity portion (like partial usage of a pipeline) does not. The asset can be explicitly or implicitly identifiable.

Other-than-finance leases: Operating leases are back as a category, with the primary difference being that they will now be on the balance sheet. But on a divided vote (with 7 IASB members opposed, plus 1 FASB member), the boards decided to have two accounting approaches for lessees, with the distinction being basically the same as IAS 17 (the IFRS leasing standard, which is similar to FAS 13 but doesn't use the 75% and 90% "bright lines" to differentiate between operating and capital leases). They're using the awkward term "other-than-finance," presumably because they want to differentiate it from current operating lease accounting, which doesn't hit the balance sheet. Maybe somebody will come up with a better name before the standard is released. Such leases will have their expenses recognized as rent expense in the operating section of the income statement, rather than as a financing activity. The liability will still be amortized using the interest method, but the asset will be amortized so as to keep the combined periodic expense level over the life of the lease.

There will similarly be two accounting approaches for lessors, but the boards reached no conclusions on application.

More decisions, summarization so far

The FASB and IASB met again last week to further deliberate on leases. Among the decisions reached:

Start of accounting: A lease may be signed well in advance of when the lessee takes possession of the property (particularly with property, which may need extensive construction before occupancy). The boards have affirmed that the lease does not hit the books until the "commencement" of the lease, which is normally when possession is granted. Payments made between the "inception" (signing) and "commencement" will be accounted for as prepayments (an asset that is then folded into the ROU asset at commencement). If the lease meets the definition of an "onerous contract," it is to be accounted for during the inception to commencement period according to the Contingencies accounting standards: IAS 37 and FASB Topic 450.

Tenant incentives: Lessees are to subtract these from the right-of-use asset.

Sale & leaseback: Rather than a series of tests in the Exposure Draft to determine whether a transaction qualifies for sale and leaseback accounting, the boards have now decided that as long as the sale part of the transaction meets the existing accounting requirements (under the Revenue Recognition standard) to recognize a sale, it qualifies for SLB treatment. In general, if control of the asset has passed to the buyer/lessor, it qualifies. One change from current SLB accounting is that if the seller/lessee has a gain or loss on sale, that is to be recognized immediately, rather than amortized over the life of the lease.

Leases with service components: When the service component is not clearly identified separately in the agreement, the FASB in the ED called for capitalizing the entire contract as a lease (the IASB favored split recognition). Both boards have now decided that if the purchase price of one component (lease or service) is "observable," you can calculate the split based on that.

Discount rate: FAS 13 calls for the interest rate on lessee capital leases to be based on the lease's implicit interest rate, if known, or the lessee's incremental borrowing rate (IBR). In many cases, the lessee doesn't know the lessor's implicit rate, because the expected value of the asset at lease expiration (the "unguaranteed residual") is not stated, so the IBR tends to be used. (The rate may be higher if the present value of the rents using these rates is more than the fair market value; in that case, a rate is calculated to make the PV of the rents equal to the FMV.)

The ED introduced a new term: "the rate the lessor charges the lessee." This is to be used when available, a decision now confirmed. Finally, though, the boards have defined what they meant; this can be (from the observer summary) "the lessee's incremental borrowing rate, the rate implicit in the lease, or, for property leases, the yield on the property. When more than one indicator of the rate that the lessor charges the lessee is available, the rate implicit in the lease should be used." The lessor always by definition knows this rate. If the lessee does not, the IBR is to be used.

Initial direct costs: The boards defined this as "Costs that are directly attributable to negotiating and arranging a lease that would not have been incurred had the lease transaction not been made." The intent is to have a consistent definition for a series of standards (including insurance and revenue recognition, which are at similar stages of development), though there may be slight modifications to meet specific needs of the different standards. Any such differences are intended to be explained by the boards, to maintain the overall consistency.

IDCs are to be capitalized by both lessees and lessors, by adding them to the right-of-use asset and right to receive lease payments, respectively.

Summarization: The IASB staff has prepared a detailed description of the impact on the ED of the new decisions by the boards. This describes both the confirmed decisions and the changes, with links to IASB observer notes for each.

Thanks to the IASB for their podcast and to Asset Finance International for their summary.

Purchase options and short-term leases

The FASB & IASB met this week for continuing discussions, on leases as well as other topics. In their meetings on March 14 & 15, they reached the following conclusions for the new lease accounting standard:

• The ED had scoped out (excluded) leases with bargain purchase options and ownership transfers (also called "in-substance purchases") from the new lease accounting standard, stating that they should be treated as a sale & purchase and handled according to the revenue recognition standard (which is also at the ED stage). However, this decision was left over from when the boards had briefly planned to treat all lessor leases according to the "performance obligation" model, which would have been inappropriate for these transactions. With a derecognition model for lessors now in place, the need to separate out these types of leases is less evident. The boards agreed that leases with a bargain purchase option should be returned to the scope of the leases standard. It's not yet clear if leases with ownership transfer will be considered leases or sales.
• Relatedly, the boards are adjusting the treatment of purchase options. In the ED, these did not need to be accounted for until exercised. Now, they must be accounted for if there is a "significant economic incentive" to exercise them. It remains to be determined how the accounting will work if the conclusion of a significant economic incentive changes in the middle of the life of the lease (in either direction), though the boards concluded that they would not permit a switch between the "finance" and "other than finance" categories they set up last month.
• Short-term leases: The boards have decided that leases with a maximum lease term of 12 months or less, including renewal options, can be treated like current operating leases. They will not be shown on the balance sheet for lessees; income and expense will be shown on the income statement as currently (with rent leveling as needed). This will be an option; lessees & lessors can choose to treat short-term leases like other leases. However, the option must be chosen for all leases in an asset class, rather than lease by lease.

Thanks to Deloitte's IAS Plus and Asset Finance International for their reviews of the meetings, which were the basis for this entry.

They hear you

Anyone who had any doubts that the FASB and IASB seriously consider responses received during their "due process" steps need only look to last week's meetings and the decisions reached on lease accounting. In addition to the previously reported complete reversal on the lease term, the boards have made an almost complete reversal on contingent rents, and are planning to substantially alter the standard to respond to the desires of those who want level recognition of expenses over the life of a lease. These three topics were probably the most strenuously argued in comment letters to the Exposure Draft.

The boards aren't backing down on putting lessee leases on the balance sheet. But they're showing that they are willing to work with preparers and accountants to make the standard more workable and less onerous.

Contingent rents

The Exposure Draft called for all contingent rents to be included in the capitalized lease payments using a probability-weighted estimate, based on a "reasonable number" of estimates. Rents based on an index or rate were to use forward rates when "readily available." Estimates would need to be revised as often as once a quarter, with changes in future rents booked as upward or downward adjustments to both the asset and the obligation (changes affecting current or prior periods would be immediately expensed).

Preparers howled. The work involved would be enormous, and would often involve forecasting well beyond normal planning horizons (a 20-year lease with a percent of sales kicker would require forecasting sales out that far, when few companies go past 5 years in their regular forecasting). The requirement for quarterly reassessment, even if softened by stating there needs to be a "significant change," would add measurably to the load of releasing statements. Much of this could not be automated, because contingent rents have immense variability in terms.

The boards have now almost completely reversed themselves. The new plan agreed to last week is that contingent rents need to be included in the capitalized rent stream in just the following cases:

* they are based on an index or rate--and in that case, the current rate is used, with no use of forward rates, though it will need to be updated each reporting period (unlike current GAAP, where the rate at lease inception is used throughout the life of the lease)

* they are "reasonably assured," with the definition to be determined later

* the base rent is below market rates

Other contingent rents will be subject to disclosure, but not capitalization.

Expense recognition pattern & placement

Many respondents to the ED complained about the income statement effect of capitalizing all leases. They didn't like two different aspects of this:

* Amortizing the obligation using the interest method, while amortizing the asset on a straight-line basis, means that expenses are greater in the early months & years of a lease, then decline over time.

* Lease payments and interest expense would classified as financing activities. Both interest and depreciation expense are excluded from EBITDA (earnings before interest, taxes, depreciation, and amortization), which is an important measure of earnings for many companies.

Those who objected felt that level expense recognition was more reflective of economic reality, and that leasing should be considered operational rather than financing activity.

The boards concluded that there are two types of leases. Some leases truly are financing transactions (such as most current capital/finance leases). For those, the boards believe the current plan of interest and depreciation is appropriate. But others, they conclude, do not have a strong financing component, and a level expense pattern would be more appropriate.

Can you say "classification"? One of the big reasons for the new lease accounting standard was supposed to be eliminating classification of leases into two types, because of the concern that similar leases are being accounted for differently (those just on either side of the dividing line). The stories about leases with a present value of 89.9% of the fair value (just below the 90% line that makes a lease capital) have been around for a long time. Just because the bright lines are going away doesn't mean that there won't be structuring.

But the boards seem to be accepting that different reasons for leasing merit different accounting treatment. They may also be swayed by the fact that different ways of recognizing expenses can have collateral impact--companies that depend on expense reimbursement from government medical and other contracts, for instance, noted that rent expense is often reimbursable, while depreciation and interest on debt are not. They may also be concluding that the effect of possible structuring in these cases isn't as egregious as making things disappear entirely from the balance sheet.

Of course, once you say that there are two types of leases, the question becomes, how do you tell which is which? The new standard is supposed to be "principles based" rather than "rule based," so we won't have a 90% or 75% test. Instead, the boards are looking to prepare a list of factors which would be considered. Some of them are (a) residual asset, (b) potential ownership transfer, (c) length of lease term, (d) rent characteristics, (e) underlying asset, (f) embedded or integral services and (g) variable rent (thanks to Deloitte for its notes on the meeting that had this list). The boards will be discussing in the future how these factors interact, as well as proper presentation of leases considered "other than financing."

Lease vs. Service Contract

The boards spent considerable time continuing to try to differentiate between leases and service contracts (when a contract has elements of both). One conclusion they reached is that if an asset is incidental to a service, it doesn't have to be accounted for separately. (So, for instance, when you get a cable TV subscription that includes a cable box, the box doesn't have to be treated as a lease.) They also tentatively decided that the requirement for a specified asset is still met if the lessor has the right to swap out an equivalent item assuming no disruption of service (such as replacing a copier with another of the same model).

Most discussion was focused on lessee accounting. The boards have decided to discuss that primarily at this point, with the intention to get back to lessor accounting to keep things as symmetrical as possible.

A number of the decisions and issues will be reviewed with preparers, users, and accountants, with a report back to the boards at a later date.

"More likely than not" is dead

At yesterday's meeting (Feb. 16), the IASB and FASB agreed to withdraw the proposal to include lease renewal options in the lease term when judged "more likely than not" to be exercised. This was the proposal in the Exposure Draft, which was almost universally opposed by respondents, particularly preparers of statements. Asset Finance International's summary of the meeting notes in addition to complaints of difficulty of implementation and subjectivity, another persuasive argument for board members was that real estate lease renewals frequently are not actually implemented as stated in the original option, but are subject to negotiation like a new lease, so the stated option doesn't necessarily reflect what the terms will be even if "exercised."

Rather than reinstating current terminology on when to include options (when "reasonably certain" or "reasonably assured" of exercise due to various economic factors), the boards have tentatively chosen the phrase "clear economic incentive." The boards didn't seem to think there was a substantial difference in impact, so it seems to be more a stylistic choice.

Reassessment of lease terms, which previously was required on a quarterly basis, is now to be required only when there is a significant change in circumstances, such as an addition or removal of a "clear economic incentive" on a renewal option.

Contingent rents will be discussed today.

ED response reviews

Deloitte & Touche has released a "Heads Up" summary of responses to the lease accounting exposure draft.

Asset Finance International (an association of lessors primarily focused on Europe) has its own summary.

Death knell for "more likely than not"?

The IASB & FASB will be meeting next week. On the agenda on Feb. 16 meeting: the definition of the lease term. The staff briefing paper for the discussion, noting the almost universal rejection of the proposal to include lease options in the lease term if they are judged "more likely than not" to be exercised, recommends that the lease term be defined essentially the same way as it is now under both IAS 17 and FAS 13: the contractual minimum, plus options that are reasonably certain to be exercised. The staff's recommendation is that "reasonably certain" be determined solely on economic factors (such as bargain renewal options, penalties for cancellation, presence of long-lived leasehold improvements, etc.), with no weight given to past practice or management intention, which the majority of the staff considers too subjective. They do list that as an option for the boards, though, along with keeping the "more likely than not" criterion.

Given the vehement rejection of "more likely than not" in the comment letters and other outreach activities, this was, I think, expected by most observers. But assuming it comes through, it'll be a very clear indication of the significance of participating in the boards' due process.

Also on the agenda for the boards' meetings next week is variable (contingent) lease payments.

The majority staff position is that only contingent rents dependent on an index or rate should be included in the lessee's liability to make payments, with the valuation based on the prevailing (spot) rate. A minority would add all payments that are "probable" or "reasonably certain." Additional disclosures would be required, but those won't be discussed at this meeting.

This is again a pretty thorough repudiation of the Exposure Draft, which called for probability-weighted estimates of all contingent rents, including those based on usage and percentage of sales. Combined with the original proposal to include "more likely than not" options, it raised the potential of needing to estimate business and economic conditions for 50 years, an exercise that was unlikely to bear any significant connection to reality.

With these two changes, the complexity in the ED is greatly reduced. There is still the inherent complexity of capitalizing the leases, but that's far less challenging to deal with.

First redeliberation session

The IASB & FASB met in joint session last week. On the agenda, as previously noted, was the first round of reconsideration of the new lease accounting standard, reacting to the responses received on the Exposure Draft.

The separation of leases from service contracts is a major issue, including the question of service contracts that include physical assets. One example is a cable TV subscription; if the cable company gives you a cable box, does that make the whole transaction a lease rather than a service? Does the box need to be accounted for separately as a lease? Or should some small amount of physical assets be ignored in this situation? (How small?)

The boards also discussed whether all leases should be considered a form of financing (which merits the accounting proposed with delinked asset and obligation), or if some aren't really financing and should be recognized with a straight-line expense/income pattern.

Lessor accounting was also discussed in detail. Some respondents suggested putting off lessor accounting, but the boards agreed to keep discussing both sides of the transaction, particularly issues that are relevant to both. There is a wide range of views on whether there ought to be one or two kinds of lessor accounting, and if one, which one, though the boards seem to have considerable sympathy for the idea that there are two different business models for leasing that ought to be accommodated.

A number of respondents complained about the lack of symmetry between lessee and lessor accounting (sauce for the goose, sauce for the gander?); the boards directed the staffs to consider two approaches to accounting for both lessors and lessees, one based on the financing concept and the other using straight-line recognition. (One challenge, of course, will be how to differentiate.)

FASB Chairman Leslie Seidman held a webinar on Jan. 25, providing her views on what the board is doing. She noted that the count of comment letters on the lease accounting Exposure Draft is now over 750. She sees general agreement with the concept of placing lease obligations on the lessee balance sheet, but recognizes that many are concerned about the complexity of the current model, especially with regard to options and contingent rents. She also noted that there is "general disagreement" with the front-loaded expense pattern as it affects leases that are currently considered operating, and the classification of the expense in financing rather than operating activities. While she didn't officially back off from a June 30 due date for this and the other current projects, she noted that the boards have been stating that the target dates are subject to the nature and extent of the feedback received. Their goal is standards that are understandable and implementable at a reasonable cost, and "if it takes a little longer to reach that comfort level, we will take that time."

In the webinar's Q&A period, someone asked how the FASB decides when to re-expose a standard if changes are made from the exposure draft. She said their general question is: How significant are the changes from both the original exposure draft and from current accounting? The implication is that if their new plan is significantly different from both an ED and current GAAP, they would re-expose. It is, of course, too soon to tell whether that would happen to the lease accounting standard.

Redeliberations starting, comment letter summary

The FASB & IASB will have a joint meeting in London on Wednesday, January 19, when they will begin to discuss comments received on the Exposure Draft, and their plan for redeliberations. On Wednesday and Thursday, they will discuss 1) distinguishing leases from services, and 2) lessor accounting. They are not planning to make decisions on those topics.

The IASB meeting page for January has agenda papers for the leases discussions. These include a list of the major issues that the staffs feel should be thoroughly reconsidered, and a secondary list of additional possible issues for reconsideration. Five major issues are noted:

1) Definition of a lease (particularly differentiating from service/executory contracts)
2) Lessor accounting model
3) Lease term (i.e., when to include renewal options)
4) Variable lease payments (i.e., contingent rentals)
5) Profit & loss recognition pattern (whether asset amortization should be adjusted so that overall expense/income for leases is straight-line rather than front-loaded)

A laundry list of other items is listed as potentially needing reconsideration, including scope exclusions, short-term leases, foreign exchange, disclosure, fully retrospective application, lease incentives, and leasehold improvements, among numerous others.

The staffs' comment letter summary notes the "very high" number of responses (760 letters as of Jan. 12), and the fact that the boards have had contacts with several thousand people through various outreach activities. They note that very few financial statement users sent in comment letters, but outreach events included over 500 users.

The summary indicates that almost all comment letter writers disagreed with defining the lease term as the longest possible term more likely than not to occur. Respondents generally suggested either the current standard of including options that are "reasonably assured/reasonably certain" (current US GAAP/IFRS terminology), or "virtually certain" (seen as an even higher threshold), or the Alternative View listed in the IFRS Exposure Draft, to include options only when there are incentives to exercise those options.

The summary indicates likewise almost total disagreement with the contingent rent proposal. Alternative approaches suggested included 1) capitalizing only contingent rents based on an index or rate, 2) including only those that are outside an entity's control, or 3) using a different estimation approach (such as "best estimate" rather than "expected value" with multiple scenarios).

The summary is 70 pages long, so trying to fully recap it here would be tedious. Suffice to say that every question that the boards asked in the ED received lots of comment, with numerous alternatives presented.

Over half of the respondents were preparers of financial statements, with sizable numbers of industry organizations, individuals, and professional organizations. Half came from North America, a bit more than a quarter from Europe. The largest industries represented were financial services (almost 1/4), retail, real estate, and transportation.

Volume of comment letters

How does the volume of comment letters on the proposed lease accounting standard compare to other recent exposure drafts? The following list may be of interest:

Leases: 746 (and counting)
Fair value measurement: 95
Comprehensive Income: 72
Accounting for Financial Instruments: 2814
Derivative Instruments and Hedging Activities: 127
Amortised Cost and Impairment: 179
Revenue Recognition: 971
Troubled Debt Restructuring: 117

So leases isn't the biggest, but it's up there.