Fasb Vs. Fasb 's Report On Lease Accounting Standards Essay

Fasb Vs. Fasb 's Report On Lease Accounting Standards Essay

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In 2010 and 2013, the FASB, in connection with the IASB, released exposure drafts outlining upcoming changes to lease accounting standards. This draft was in direct response to the SEC’s 2005 report outlining the problems associated with off-balance sheet transactions (FASB and IASB, 2013). The SEC’s main concern was that business managers are intentionally negotiating lease terms that do not actually meet FASB bright-line rules for capitalization, but in all other aspects, should be capitalized.

For example, a manager negotiates a 5-year lease with a 5-year renewal option on a piece of equipment with a 10-year useful life. The manager has exercised the renewal option, so in substance, this transaction is a 10-year capital lease, but using FASB bright-line rules, this transaction is recorded as an operating lease and kept off the balance sheet. The SEC’s report estimated that U.S. companies held $1.25 trillion in lease liabilities, structured as non-cancellable operating leases, and not recorded on the balance sheet, only in disclosure notes (United States Securities and Exchange...

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