Leases

Project Objective:

The FASAB has recently approved a Leases project whose goal is develop comprehensive lease accounting standards for the federal government. This project is being undertaken by the Board primarily because the current lease accounting standards, Statement of Federal Financial Accounting Standards (SFFAS) 5 and 6, have been criticized as ineffective because they do not make meaningful distinctions between capital and operating leases regarding the substance of lease transactions. In addition, the lease accounting standards in SFFAS 5 and 6 are based on Financial Accounting Standards Board (FASB) lease accounting standards which are currently being revised. The FASB and International Accounting Standards Board (IASB) have undertaken a joint project on lease accounting that focuses on the conveyance of rights to future economic benefits (such as the right of use).

FASAB staff continues to be asked the following question:

Once the new FASB/IASB lease standards are issued as final, should federal entities that present general purpose financial reports in conformance with SFFAS 34 follow those new FASB/IASB lease accounting standards?

The answer to that question is no. The FASB/ IASB lease standards are expected to be released as final during 2012. Issuance of those standards will not automatically change federal financial accounting standards.

Current FASAB standards addressing leasing transactions include Statement of Federal Financial Accounting Standard (SFFAS) 5 Accounting for Liabilities of the Federal Government [pars. 43 – 46] and SFFAS 6 Accounting for Property, Plant, and Equipment [pars. 20 & 29]. These lease standards were originally developed from FASB lease standards effective at that time.

Current FASAB standards addressing leasing transactions include Statement of Federal Financial Accounting Standard (SFFAS) 5 Accounting for Liabilities of the Federal Government [pars. 43 – 46] and SFFAS 6 Accounting for Property, Plant, and Equipment [pars. 20 & 29]. These lease standards were originally developed from FASB lease standards effective at that time.

The primary objectives of this project are to:

  1. Develop an approach to lease accounting that would ensure that all assets and liabilities [consistent with Statement of Federal Financial Accounting Concepts (SFFAC) 5 definitions] arising under lease contracts are recognized in the statement of financial position and related costs are recognized in the statement of net cost.
  2. Evaluate and revise as needed the current lease-related definitions and recognition guidance in SFFAS 5 and 6, including consideration of the advantages and disadvantages of applying the FASB/IASB lease standard in the federal environment.
  3. Ensure that the standards to be developed fully address the various lease transactions/activities currently being used in the federal community (e.g. enhanced use leases).
  4. Consider the differences between lease accounting and the budgetary treatment of lease-purchases and leases of capital assets as outlined in Office of Management and Budget (OMB) Circular A-11.

HISTORY OF BOARD DELIBERATIONS (reverse chronology)

March 5-6, 2014 Board Meeting

The FASAB met jointly with the GASB to discuss similar issues related to each of their ongoing lease accounting projects. The Boards first discussed the lessor model.  Both Boards agreed that they should begin with the goal of developing symmetry between the lessee and lessor models. The FASAB was also very focused on the intragovernmental leasing issues involving federal entities. The Boards also discussed GASB’s tentative decisions to date on the lessee model. The following lessee model points were discussed.

  • Termination clauses
  • GSA occupancy agreements
  • Differences between the accounting for federal leases and the budget scoring for federal leases
  • FASAB and GASB’s definitions of probable as it relates to assessing the likelihood of a renewal option being exercised – GASB’s definition of probable has a higher threshold of probability
  • Factors affecting the reassessment of the lease term
  • Defining a short-term exception
  • The discount rate used to calculate the lease liability – the government’s incremental borrowing rate vs. the lessor’s implicit rate

There were no major decisions made by the FASAB. Staff was directed to continue its research.

Issue paper for March 2014 (PDF)

December 18-19, 2013 Board Meeting

Ms. Deborah Beams, GASB Practice Fellow (leading the leases project) and audit manager at the Dallas office of Grant Thornton, presented to the Board the tentative decisions discussed by GASB on the leases project to date.

Ms. Beams identified the following GASB major tentative decisions on leases:

  • The definition of a lease be revised to be “a contract that conveys the right to use an asset (the underlying asset) for a period of time in an exchange or exchange-like transaction”
  • The scope of the Leases guidance continue to include contracts not identified as leases but that meet the definition of a lease
  • A single accounting model be developed, potentially with exceptions for certain circumstances
  • The lease term include:
    • The noncancellable period
    • Periods covered by renewal options (or exclude periods covered by termination options) that are probable of being exercised based on an assessment of qualitative factors
    • Periods covered by fiscal funding and cancellation clauses if the possibility of cancellation is remote (If the possibility of cancellation is more than remote, the period should be treated as any other termination option when determining the lease term.)
  • The underlying assumption that leases are financings be the foundation for the governmental leasing model
  • Leases that transfer ownership not qualify for the short-term lease exception, even if they meet the other criteria
  • The right to use the underlying asset be recognized as an asset by the lessee
  • The general approach to measuring lease assets and liabilities will be to measure the liabilities first and base the assets on that amount
  • The general measurement approach for a lease liability be based on the present value of future payments
  • Prepayments (amounts paid for the lease prior to measuring the lease liability) be included in the value of the recorded lease asset
  • Lease incentives received be reductions in the cost of lease assets
  • Initial direct costs be capitalized if they are ancillary charges to place the leased asset into use or expensed if they are other costs.

Ms. Beams also stated that the current GASB plan is to issue an exposure draft on leases at the end of November 2014 and a final statement in late 2015.

Ms. Monica Valentine, FASAB Project Director for the leases project gave a brief overview of the responses to the ten-question federal lease activities questionnaire sent to several federal entities.  The purpose of the questionnaire is to gather the necessary data on the leasing activities and practices of federal entities – the input will assist FASAB in developing new lease standards for the federal government. The following points were highlighted:

  • Federal agencies primarily serve as the lessee, however three federal entities noted substantial lessor activities
  • The list of leased items included facilities/office space, equipment, land, vehicles, and several other items.
  • Five federal entities noted enhanced use lease (EUL) activities

Staff noted that the responses highlight the need for comprehensive lease accounting standards for the federal government, especially now since FASB is actively working to modify its current lease standards.

The Board noted the following comments based on the results of the lease questionnaire:

  • Focus in on the federal aspects of lease accounting
  • Highlight possible issues related to intra-governmental leasing activities
  • Identify the user needs as it relates to federal lease activities
  • Identify the cost-benefit of having different lease accounting recognition and lease budget scoring.

An additional staff paper provided to the Board asked the following questions:

  • Based on the [SFFAC 5] definition of an asset, does the Board believe that a federal entity’s right to use a leased asset meets the definition of an asset to the entity?
  • Based on the [SFFAC 5] definition of a liability, does the Board believe that a federal entity’s obligation to make lease payments meets the definition of a liability to the entity?
  • Based on the GASB staff paper, does the Board support the Type A and Type B consumption based distinction proposed by the FASB and the IASB?
  • Does the Board believe there are other inherently different types of leases so that a different accounting treatment is needed?

All of the members agreed to explore the single-model approach as opposed to the dual-model approach.

The Board highlighted the following as it relates to the lease project:

  • It would be helpful to know the annual interest expense for federal entities’ leases
  • The single model is preferred because it will be easier for agencies to have just one class of leases
  • The single-model approach is a practical expedient and is conceptually sound.
  • Articulation is necessary between the lessee and the lessor reporting because of significant intra-governmental leasing
  • Identifying any possible exceptions
  • Implementation issues should be addressed
  • The current two year useful life criteria used to determine capitalization of general property, plant & equipment should be considered as a possibility for lease balance sheet recognition.
  • Assess the cost-benefit of having two approaches to leasing analysis – one for budget purposes and the other for accounting purposes
  • The Board should be looking at providing decision useful information.

The following are the next steps for the project.

  • Hold a task force meeting in late January 2014.
  • Prepare for the joint meeting with GASB in March 2014
  • Continue to follow the progress in both GASB and FASB’s lease projects.
  • Survey the user community on the usefulness of the lease balance sheet recognition and the interest expense breakout

Issue Paper for December 2013 (PDF)


October 23-24, 2013 Board Meeting

The Lease Project was not discussed at the October Board meeting. Staff is continuing preliminary research on the project by following the developments of the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board lease project, conferring with the Governmental Accounting Standards Board, and gathering information from federal entities on their leasing activities.

August 28-29, 2013 Board Meeting

At the August meeting, staff presented several questions to the Board related to the revised exposure draft released in May by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) on leases, as well as the Governmental Accounting Standards Board’s (GASB) initial board discussions on leases. Ms. Roberta Reese, GASB Project Manager, participated in the discussion to provide background to the FASAB on the GASB discussion.

The discussion centered on the eight questions staff posed to the Board.

Question 1 related to the scope of the lease project and what topics should be considered. Staff recommended that all of the topics tentatively agreed to be addressed by GASB should also be addressed in the FASAB project.  Also, more research is necessary to determine the extent of sale-leaseback, leveraged lease, and SCA-like transactions within the federal community. Staff also recommended adding enhanced use leases to the project’s scope.

Question 2 related the definition of a lease – should the term “contract” or “agreement” be used in the FASAB definition of a lease. Staff recommended that the FASAB definition of lease use the term “agreement” as opposed to “contract”, which is what FASB is proposing, because using “contract” could narrow the scope of the lease standards and not capture all leasing transactions involving federal entities. The Board tentatively agreed to leave the “terminology” question open and to concentrate on the substance of a lease.

Question 3 also related to the definition of a lease – should the term “asset” or “property, plant, & equipment” be used in the FASAB definition of a lease. Staff and the Board agreed with GASB’s tentative decision to use the broader term “asset” as opposed to “property, plant, & equipment” which could narrow “leases” in a way that leads to similar activities being excluded from coverage of the standards. Staff believes narrowing should be accomplished through specific exclusions (the approach taken by the FASB and IASB) as they are likely to be clearer to the reader.

Question 4 related to the definition of a lease – should staff assess the prevalence of nonexchange and “exchange-like” (as defined by GASB standards) leasing transactions and whether “control” of a resource is generally conveyed in such transactions in the federal environment. Staff also noted that “exchange-like” transactions are generally included in “exchange transactions” under the current federal standards. It was noted that in situations where we have one federal entity allowing another federal entity to use space free of charge – it is covered by the imputed cost standards and there is no asset or liability currently recognized. The Board agreed that staff should include intra-governmental nonexchange transactions in the scope of the lease project to consider options for balance sheet recognition.

Question 5 related to the inclusion of explanatory guidance to assist in determining if an arrangement is a lease that is currently included in the FASB ED.  Staff recommended that this question be deferred until the proposed lease standards are further developed. Since FASAB establishes standards for a single reporting entity more detailed guidance at the standards level may be cost-effective for FASAB.

Question 6 related to the scope of standards (inclusions) – should the scope of FASAB lease standards include agreements that reflect the substance of a lease even if they are not called a lease. Staff recommended that the scope of FASAB lease standards include agreements that reflect the substance of a lease even if they are not called a lease.

Question 7 related to the scope of standards (exclusions) – should the scope of FASAB lease standards exclude the following four bulleted topics:

  • Agreements that contract for services that do not transfer the right to use an asset from one contracting party to the other would not meet the basic premise of a lease which transfers/conveys the right to use an asset.
  • Federal natural resources is addressed in Technical Bulletin (TB) 2011-1: Accounting for Federal Natural Resources Other than Oil and leases involving oil and gas are covered in SFFAS 38: Accounting for Federal Oil and Gas Resources.
  • Intangible assets, other than internal use software (which is considered to be PP&E), are not addressed in the current FASAB standards. Additional staff research is necessary to determine the extent federal entities are involved in leasing activities of intangible assets other than internal use software.
  • Service concession arrangements (SCAs) will be addressed in the FASAB Public-Private Partnership project.

Staff recommended that the scope of FASAB lease standards exclude three of the above four bulleted topics, with the exception being internal use software and other intangible assets that will be further researched.

Question 8 related to drafting the scope and applicability sections of the standard. Staff recommended that drafting the scope and applicability of the lease standard be deferred until further staff research can be performed to address the scope issues identified earlier.

The next steps for the project are as follows.

  • Continue research to determine the types of lease transactions being used by federal entities (e.g., sale-leaseback, leverage, SCA-type leases, and enhanced-use leases)
  • Identify any lease agreements that would not meet the criteria of a lease contract.
  • Research nonexchange lease transactions and nominal consideration exchange lease transactions between federal entities and between a federal entity and a non-federal entity.
  • Research the extent of federal leases involving intangible assets.
  • Hold a task force meeting.
  • Continue to follow the progress in both GASB and FASB’s lease projects.

Issue Paper for August 2013 (PDF)

April 25 – 26, 2012 Board Meeting
At its April meeting FASAB Staff provided the Board with an update on the lease project.

April 2012 Lease Update (PDF)

February 22 – 23, 2012 Board Meeting
At its February meeting FASAB Staff provided the Board with an update on the lease project.

February 2012 Lease Update (PDF)

January 17, 2012 Lease Questionnaire
The lease accounting project plan presented to the Board in August 2011 noted that staff would develop a questionnaire to be used to gather data from federal entities on their leasing activities and practices. On January 17, 2012 the questionnaire was distributed by FASAB staff to 27 federal entities via email. In an effort to gather the necessary data on the leasing activities and practices of federal entities we requested the assistance of Deputy CFOs and Accounting Directors in completing the questionnaire. Staff requested that questionnaire responses be submitted by February 27, 2012.

January 2012 Lease Questionnaire (PDF)

August 24-25, 2011 Board Meeting
At its August meeting, the FASAB approved a plan to review existing lease accounting standards and to consider whether changes are needed to address the needs of the federal community and will include more comprehensive standards on federal leasing activities than the existing standards. A task force will be formed to assist in consideration of issues and options.

Leases Project Plan (PDF)

Leases Project Plan Appendix (PDF)

Ms. Deborah Beams, GASB Practice Fellow (leading the leases project) and audit manager at the Dallas office of Grant Thornton, presented to the Board the tentative decisions discussed by GASB on the leases project to date.

Ms. Beams identified the following GASB major tentative decisions on leases:

§ The definition of a lease be revised to be “a contract that conveys the right to use an asset (the underlying asset) for a period of time in an exchange or exchange-like transaction”

§ The scope of the Leases guidance continue to include contracts not identified as leases but that meet the definition of a lease

§ A single accounting model be developed, potentially with exceptions for certain circumstances

§ The lease term include:

- The noncancellable period

- Periods covered by renewal options (or exclude periods covered by termination options) that are probable of being exercised based on an assessment of qualitative factors

- Periods covered by fiscal funding and cancellation clauses if the possibility of cancellation is remote (If the possibility of cancellation is more than remote, the period should be treated as any other termination option when determining the lease term.)

§ The underlying assumption that leases are financings be the foundation for the governmental leasing model

§ Leases that transfer ownership not qualify for the short-term lease exception, even if they meet the other criteria

§ The right to use the underlying asset be recognized as an asset by the lessee

§ The general approach to measuring lease assets and liabilities will be to measure the liabilities first and base the assets on that amount

§ The general measurement approach for a lease liability be based on the present value of future payments

§ Prepayments (amounts paid for the lease prior to measuring the lease liability) be included in the value of the recorded lease asset

§ Lease incentives received be reductions in the cost of lease assets

§ Initial direct costs be capitalized if they are ancillary charges to place the leased asset into use or expensed if they are other costs.

Ms. Beams also stated that the current GASB plan is to issue an exposure draft on leases at the end of November 2014 and a final statement in late 2015.

Ms. Monica Valentine, FASAB Project Director for the leases project gave a brief overview of the responses to the ten-question federal lease activities questionnaire sent to several federal entities. The purpose of the questionnaire is to gather the necessary data on the leasing activities and practices of federal entities – the input will assist FASAB in developing new lease standards for the federal government. The following points were highlighted:

§ Federal agencies primarily serve as the lessee, however three federal entities noted substantial lessor activities

§ The list of leased items included facilities/office space, equipment, land, vehicles, and several other items.

§ Five federal entities noted enhanced use lease (EUL) activities

Staff noted that the responses highlight the need for comprehensive lease accounting standards for the federal government, especially now since FASB is actively working to modify its current lease standards.

The Board noted the following comments based on the results of the lease questionnaire:

§ Focus in on the federal aspects of lease accounting

§ Highlight possible issues related to intra-governmental leasing activities

§ Identify the user needs as it relates to federal lease activities

§ Identify the cost-benefit of having different lease accounting recognition and lease budget scoring.

An additional staff paper provided to the Board asked the following questions:

  • Based on the [SFFAC 5] definition of an asset, does the Board believe that a federal entity’s right to use a leased asset meets the definition of an asset to the entity?
  • Based on the [SFFAC 5] definition of a liability, does the Board believe that a federal entity’s obligation to make lease payments meets the definition of a liability to the entity?
  • Based on the GASB staff paper, does the Board support the Type A and Type B consumption based distinction proposed by the FASB and the IASB?

§ Does the Board believe there are other inherently different types of leases so that a different accounting treatment is needed?

All of the members agreed to explore the single-model approach as opposed to the dual-model approach.

The Board highlighted the following as it relates to the lease project:

§ It would be helpful to know the annual interest expense for federal entities’ leases

§ The single model is preferred because it will be easier for agencies to have just one class of leases

§ The single-model approach is a practical expedient and is conceptually sound.

§ Articulation is necessary between the lessee and the lessor reporting because of significant intra-governmental leasing

§ Identifying any possible exceptions

§ Implementation issues should be addressed

§ The current two year useful life criteria used to determine capitalization of general property, plant & equipment should be considered as a possibility for lease balance sheet recognition.

§ Assess the cost-benefit of having two approaches to leasing analysis – one for budget purposes and the other for accounting purposes

§ The Board should be looking at providing decision useful information.

The following are the next steps for the project.

§ Hold a task force meeting in late January 2014.

§ Prepare for the joint meeting with GASB in March 2014

§ Continue to follow the progress in both GASB and FASB’s lease projects.

§ Survey the user community on the usefulness of the lease balance sheet recognition and the interest expense breakout