SPECIAL SERIES: LEASE ACCOUNTING
Proposed Lease Accounting Rules
Will Change Our Business
FOCUS ON HEALTHCARE
BY BILL BOSCO
BILL BOSCO
President, Leasing 101
This is the last of a six-part series on how the proposed lease accounting rules will impact major
market segments in the leasing industry. This segment will focus on healthcare. The municipal,
IT/office equipment, vehicles, large-ticket market and construction/materials handling/
agriculture equipment segments were covered previously, although readers should note that
new information regarding recent FASB and IASB joint decisions is included below. The boards
have completed virtually all of their deliberations, so the summaries are a good representation
of their final proposed rule.
SUMMARY OF THE PROPOSED CHANGES (Per the Exposure Draft Issued 8/17/10)
NOTE: Most of what was proposed in the Exposure Draft (ED) issued by the FASB/IASB boards has
changed as they addressed most of the negative aspects that the industry and the ELFA pointed
out in comment letters. It should be noted that the FASB/IASB have decided to re-expose the proposed
rules in the first quarter of 2012. This is great news as it gives us and our customers another chance
to comment. We know what the new exposure draft will include (see summary below for lessee and
lessor accounting and timing). There are three major issues remaining that I see the industry hopes
the FASB/IASB will change: Retain straight line P&L rent expense as per current GAAP for operating
leases as currently defined, retain some form of leveraged lease accounting and improve the proposed
profit recognition for sales-type leases. I hope readers will send comment letters to the new exposure
draft when issued as there is power in the number of comment letters. If you don’t comment, don’t
complain about the results.
LESSEE
Where we are now is that all operating leases will be capitalized as an
asset (the right of use (ROU) of the leased asset) and a liability (
capitalized lease obligation) measured by the present value of the estimated
lease payments based on the definition of the term of lease (virtually
unchanged versus current GAAP). Minimum lease payments to be
capitalized will include interim rent payments, contractual payments,
bargain or compelling renewal payments, estimated payments under
residual guarantees (the amount by which the residual guarantee is
in the money) and estimated contingent rent payments, as explained
below, occurring during the estimated lease term.
Variable payments based on usage, like cost per use or excess
mileage charges, will only be considered a minimum lease payment
if they are considered to be “disguised” minimum lease payments
(where the contractual rents are below market and the contingent
rents are sure to occur and make up the difference). Variable payments
based on interest rates (floating rate leases) or an index like CPI are to
be included as a minimum lease payment using the spot rate to esti-
mate future payments. As the spot rate changes for floating rate leases
or when the rent changes based on changes in CPI, the new spot rate
is used to recalculate and book the adjustment of future rents.
