New Accounting Rules Effect Subleasing decisions

The Financial Accounting Standards Board (FASB) and
the International Accounting Standards Board (IASB)
are working together to create a common standard
on lease accounting to ensure that the assets and
liabilities arising from lease contracts are recorded and
recognized on the financial statements in a consistent
manner. Under the current regulations, similar
transactions can be accounted for very differently,
reducing both the transparency and comparability for
users of financial statements.
Many industries utilize leasing as an important source
of finance to the business. The proposed lease
accounting standard would require that all operating
leases be treated as capital leases and that assets and
liabilities arising from lease contracts are recognized
on the balance sheet as a “Right of Use”1 asset and
an obligation. It has been estimated that this change
could add over $1 trillion onto U.S. company balance
sheets2 in increased assets and liabilities. The proposed
standard, if adopted, will impact all publicly traded
companies and all companies who produce financial
statements in accordance with Generally Accepted
Accounting Principles (GAAP). While under the
proposed rules, the timing for implementation by
lessees and lessors may differ, eventually both will be
impacted.
The proposed regulations are expected to be
adopted in 2011, but [at the time of publication of this
document] timing on implementation is uncertain.
Once implemented, accounting for leases from the
lessee and lessor perspective, financial reporting for the
commercial real estate industry, as well as any industry
where leasing is utilized, will change.
The purpose of this White Paper is to illustrate the
potential impact on the Lessee’s or Lessor’s

Under the proposed standard, accounting for subleases
will most likely change for both the lessor and lessee.
There are three methods currently under consideration
for lessor sublease accounting, but the FASB and IASB
have not reached a preliminary view on any of the
approaches:
(1) Continue to use existing lessor accounting
standards to subleases but provide additional
guidance.
(2) Exclude the lessor sublease from the scope of the
proposed standard.
(3) Develop a right-of-use model to deal strictly with
subleases.
All three of the suggested approaches have advantages
and disadvantages which will be addressed as the FASB
and IASB consider issuing a new standard to account for