The Financial Accounting Standards Board (FASB) has published an exposure draft of proposed accounting changes which will require the recognition of assets and liabilities on the balance sheet of entities to reflect lease obligations. The concept of an “operating” lease will be essentially eliminated.
Currently, operating leases are not recorded on balance sheets. This results in many investors having to adjust financial statements (using disclosures and other available information) to estimate the effects of lessees’ operating leases for the purpose of investment analysis.
This proposed treatment may have a considerable impact on entities with debt to equity and leverage ratio requirements often contained within lending agreements.
The FASB proposes that the new rules would provide more complete and useful information to investors and other users of financial statements.
The proposed rules would likely take effect in 2013, and would:
- Record a “right to use” asset and a corresponding lease obligation liability
- Treat operating and capital leases in a similar manner
- Require the “right to use” asset to be amortized over the shorter of the expected lease term or the life of the underlying asset
- Provide consistency for both short term and long term leases
The proposals are published for public comment until December 15. It is anticipated that the final vote will occur in the second quarter of 2011. The complete exposure draft can be located on the FASB website.
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