Simple is best, or in the case of lease accounting, simple is preferred. Since 2006 The U.S. Financial Accounting Standards Board and the IASB have been collaborating on a lease accounting overhaul, an attempt to address how significant off-balance sheet leases contribute to inaccurate portrayals of a company’s financial position. The latest proposal up for review presented a compromise where companies could record their leases in one of two ways: Type A, similar to amortization of a financial asset with lease expenses front-loaded as the asset’s value depreciates over its life, or Type B, similar to the operating lease classification under GAAP guidelines, which follows a straight-line expense method.
The controversy regarding these options for capital lease holders stems back to a recurring theme in our study of accounting practices: the role and agenda of management in influencing or potentially manipulating financial reporting to skew stakeholders’ and investors’ views and confidence in a company’s stability and performance level. Fear that this compromise provides too much leeway and too little guidance to management highlights the opinion of the majority of investors who would prefer a single measurement model rather than this two-type model. There are others who believe FASB and IASB should abandon these adjustments, rather than complicating the classification process.
While change may not be for the worse, FASB and IASB must consider how these changes will impact companies with various asset amounts across diverse sectors. Furthermore, it must consider whether it will lean towards IFRS principle-based methodology or GAAP’s current rule-based methodology in its readjustment. In so doing, the amount of influence left in the hands of management and greater professional judgment will be determined. With the prospective deadline of any adjustment being instituted by February 2014, policy makers and stakeholders alike need to investigate how these potential changes will impact their company’s financial reporting and valuing in the stock market.
Sources:
http://online.wsj.com/news/articles/SB10001424052702304213904579091122175205920