FASB and IASB Continue Discussions on Leases

As you know the FASB and IASB have been working on a project to get leases onto corporate balance sheets. The two boards have decided that there may be some reason to create two categories of leases. The original proposal would establish a single accounting method for all leases. The boards are now considering a proposal in which leases would look a lot like today's operating leases and capital leases. They have agreed to consider a structure where “finance leases” would be treated like an installment purchase, putting an asset on the balance sheet as well as a liability to be paid down over time. “Other-than-finance” leases would also appear on the balance sheet, but would flow through the income statement like today's operating leases because the financing element would not be considered significant.

The boards have asked their staff to establish indicators that would be used to identify the difference between the two types of leases and do some outreach to see if that would quell the criticism of the original proposal. They have softened their views on how companies should account for renewal options and other factors that lead to variable lease payments when it's not clear at the outset of the lease when or whether such circumstances would ever come into play.

In addition the boards

• Decided to raise the threshold for deciding when lease renewal options should be included in the liability.
• Tentatively concluded that lessees and lessors should follow the same basic guidelines for deciding if an obligation tied to some kind of variability would be included in the liability or the receivable.

More details on this discussion may be found in the February 16, 2011 Summary of Board Decisions on the FASB website, www.fasb.org.

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FAF/AICPA/NASBA Blue-Ribbon Panel on Standard Setting for Private Companies is Seeking Input from Accountants

The American Institute of Certified Public Accountants (AICPA), the Financial Accounting Foundation (FAF; the parent organization of the Financial Accounting Standards Board (FASB)), and the National Association of State Boards of Accountancy (NASBA) have established a “blue ribbon" panel (the Panel) to address how accounting standards can best meet the needs of U.S. users of private company financial statements. The Panel will conclude its work and issue a report, with any recommendations on the future of standard setting for private companies, to the FAF Board of Trustees (the Trustees) in approximately one year. The Panel’s report will be made available to the public and the Trustees’ resulting action plan is expected to be exposed for public comment prior to that plan being finalized.

The Panel will comprehensively review the current system of standard setting for private companies in the U.S., including the following matters:

• Who are the actual users of private company financial statements and how do they use GAAP financial statements in their decision making?
• What is the key, decision-useful information that the various users need from GAAP financial statements?
• Are current GAAP financial statements meeting those needs? Why or why not?
• Are the benefits of GAAP financial statements outweighing the costs of preparing those statements for private companies?
• How does standard setting for private companies in the U.S. compare to standard setting in other countries, both those that have adopted IFRS for Small and Medium-Size Entities and those that have not?
• To the extent that current GAAP is not meeting user needs in a cost-beneficial manner, what are some possible alternatives for private company standards (e.g., separate, stand-alone standards; base-level standards for all entities with additional disclosure requirements for public companies) and what are the implications for standard-setter structure and/or processes?

The Panel is currently seeking input from accountants regarding these matters at: http://www.fasb.org/cs/ContentServer?site=FASB&c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176157332360 . The time to have our voices heard is now!

ASU No. 2010

The FASB issued ASU No. 2010–20, Receivables (Topic 310) Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses in July 2010.

The objective of this ASU is to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. It is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. Currently, a high threshold for recognition of credit impairments impedes timely recognition of losses.

Amendments in this Update:

• Apply to all entities, both public and nonpublic. Affect all entities with financing receivables, excluding short-term trade accounts receivable or receivables measured at fair value or lower of cost or fair value.
• The extent of the effect depends on the relative significance of financing receivables to an entity’s operations and financial position.

Disclosures

This Update requires an entity to provide disclosures that facilitate financial statement users’ evaluation of the following:

• The nature of credit risk inherent in the entity’s portfolio of financing receivables
• How that risk is analyzed and assessed in arriving at the allowance for credit losses
  The changes and reasons for those changes in the allowance for credit losses.

To achieve the above objective, an entity should provide disclosures on a disaggregated basis. The amendments in this Update define two levels of disaggregation—portfolio segment and class of financing receivable.

Effective date

For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. Therefore, for calendar year issuers, the year end information will be presented for 2010, but activity for the year will not be presented until 1st quarter 2011.

For nonpublic entities the disclosures are effective for annual reporting periods ending on or after December 15, 2011.

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