Type A or Type B? Lease concerns emerge at round table

The economics of cellphone towers was cited Monday as one of the many challenges the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board are encountering as they attempt to build one, converged, principles-based financial reporting model for leases.

The boards proposed a standard that would mandate a dual approach to recognition, measurement and presentation of cash flows and expenses for lessees in leases that last longer than one year. The principle of consumption would govern the categorisation of leases:

• In Type A leases, a more than insignificant amount of the value of the leased asset is consumed during the lease period. Most leases other than property, such as equipment and vehicles, fit into this category. Type A lessees would recognise a right-of-use asset and lease liability, initially measured at the present value of the lease payments, and recognise the unwinding of the discount on the lease liability as interest separately from the amortisation of the right-of-use asset.
• In Type B leases, an insignificant portion of the leased asset is consumed during the lease period. Most real estate leases fit into this category. Type B lessees would recognise a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, and would recognise a single lease cost on a straight-line basis, combining the unwinding of the discount on the lease liability with the amortisation of the right-of-use asset.

The first of many round tables the boards are holding to seek feedback on the proposal was held Monday in Norwalk, Connecticut. Monty Garrett, the vice president of finance at telecommunications company Verizon, said many cellphone tower lease contracts contain equipment and real estate components that would make it difficult to categorise them as Type A or Type B.

“Without some further clarification on how to categorise the leases, we would see, especially in the telecom industry, some variance between the carriers with the same exact type of lease,” Garrett said.

Categorisation is not the only concern the standard has created:

• FASB’s own Investor Advisory Committee declined to endorse the proposal, saying it does not improve on current accounting.
• Citing questionable benefits to investors, businesses from around the globe wrote comment letters to the boards saying the costs of implementing the standard would exceed the benefits.
• Although many stakeholders agreed with the dual-recognition approach, others preferred one approach to all leases.

Even if you take the idea of a dual approach as a given, some round-table participants said, it may be difficult to apply. The vast majority of leases by companies that are members of the US Truck Renting and Leasing Association (TRALA) cover all the services needed to keep the trucks on the road, as well as the trucks, according to TRALA President and CEO Tom James.

“In some cases the services can account for 40% of the payment for the right to use that asset, and that changes over time,” James said. “As the asset gets older, the service agreement can be up to 60% of the cost of the lease payment.”

So consumption of the asset explains only part of the economics of the situation, and James said the lease should be treated more like a service or executory contract.

Another round-table participant said mobile storage containers would be treated differently from storage buildings, even though they seem to serve the same purpose. Overall, the round-table comments reflected the complexity associated with the boards’ attempts to create one model for a transaction with so many variations.

“Are there two types of leases?” said ExxonMobil executive Joe Horne, who also was representing the American Petroleum Institute. “To me, that’s a little bit like trying to describe a rainbow using the colours red and blue.”

—Ken Tysiac (ktysiac@aicpa.org) is a CGMA Magazine senior editor.