A Better Approach to Lease Accounting

Fixing the Shortcomings of the Proposed Rules

Kevin M. Lightner, PhD, and Bill Bosco, CPA (inactive), and David G. DeBoskey, PhD, CPA (inactive), and Sharon M. Lightner, PhD

Lease accounting based on a leased asset's “right-of-use” (the ROU approach) capitalizes the intangible ROU and its associated obligation at the present value of expected payments under the lease contract. This new ROU approach adopted by the FASB/IASB Leases Project had its origins in G4+1 papers written in 1986 and 2000. The project rose to an active level following the financial crisis of 2001/2002 (featuring Enron and WorldCom) and the passage of the Sarbanes-Oxley Act of 2002 (SOX). SOX mandated the SEC to identify off–balance sheet arrangements that could hide or obscure financial risk. In the SEC's 2005 report on off-balance sheet arrangements, operating lease obligations were identified as one of the largest off–balance sheet items (http://www.sec.gov/news/press/2005-91.htm). This prompted FASB to add the Leases Project to its agenda of convergence projects. Work began in 2006 and, thus far, has resulted in a 2008 exposure draft and a second exposure draft (ED2) issued on May 16, 2013, with a comment period ending September 13, 2013.