The Conceptual Framework and Accounting for Leases

Article excerpt

SYNOPSIS: For years, users of financial statements, academics, and standards setters alike have criticized the lease accounting standards as unnecessarily complex and ineffective in portraying liabilities arising from lease contracts in the balance sheets of lessee enterprises. Recognizing that current standards were adopted before the Financial Accounting Standards Board (FASB) and other standard-setting bodies completed their conceptual framework projects, critics of the lease accounting standards contend that the principal defect in existing standards is that they are at variance with the definitions of assets and liabilities in those frameworks. Some, including the Chairman and several other charter members of the newly formed International Accounting Standards Board (IASB), have called for new lease accounting standards anchored securely in the framework definitions of assets and liabilities. There is not universal agreement, however, on exactly what assets and liabilities result from applying these defi nitions to a lease contract. For companies that lease a significant amount of physical plant, financial statements produced under the two alternative interpretations explored in this paper are radically different.

This paper proposes a decision model for choosing between two alternative interpretations of the definitions of assets and liabilities in a leasing context, illustrates the effects on the basic financial statements of a lessee enterprise of applying these two alternative interpretations, and evaluates the results using the proposed decision model.

BACKGROUND

Standard setters, academics, auditors, users, and preparers of financial statements have long debated whether or when assets and liabilities result from lease contracts. In a very real sense, a workable method of reporting leases in the financial statements of lessees has been the Holy Grail of accounting standard setters in this country for at least 40 years. Neither the Accounting Research Committee of the AICPA nor the Accounting Principles Board was able to build a consensus for doing anything substantive with this issue.

The newly formed FASB took up the subject of accounting for leases as one of its first priorities and, during the first seven or eight years of its existence, the FASB devoted nearly half of its staff resources to lease accounting issues. The focus of these efforts, Statement of Financial Accounting Standards No. 13, Accounting for Leases (FASB 1976, SFAS No. 13), clearly represents progress when compared to all previous attempts at developing lease accounting standards. Nevertheless, despite multiple revisions including nine FASB amendments, six FASB Interpretations, 12 FASB Technical Bulletins, and EITF consensuses too numerous to count, there is virtually universal agreement that SFAS No. 13 fails to achieve its stated objectives and needs to be reconsidered.

I first became involved in the lease accounting standard-setting process as a young manager in the San Francisco office of KPMG, when I assisted my firm's national office in responding to the two FASB Exposure Drafts that culminated in the issuance of SFAS No. 13 in November 1976. Later, I met annually with the FASB and its staff to discuss FASB projects affecting the leasing industry and assisted in developing industry-specific responses to various FASB proposals to amend SFAS No. 13. Initially I was a member of the Accounting and Finance Committee of the Equipment Leasing Association of America (ELA) and later I served as an Associate Member of the ELA Board of Directors. After transferring to the Department of Professional Practice in KPMG's national office in 1992, I also served for several years on a Working Group formed to advise the EITF on various lease accounting issues. In March 1999, I accepted appointment to the Financial Accounting Standards Advisory Council, which meets quarterly with the FASB and its staff to discuss the Board's current and possible future standard-setting agenda. …