The FASB issued the exposure draft that led to Statement No. 157 on June 23, 2004. Paragraph 2 of that exposure draft dealt with the scope of the proposed standard.  It stated that the statement would apply to all assets and liabilities except for several, including those listed in subparagraph b, which exempted those assets and liabilities arising from leasing transactions.  Paragraph C14 supplied the basis for the FASB’s conclusions when it stated that some fair value measurements employ “a measurement objective that differs from the fair value measurement objective in this Statement…”  The FASB planned on thinking about the interaction between leasing transactions and fair value measurements in a separate project.  Until then, the FASB scoped out leasing from the new standard on fair value measurements.

Per standard operating procedure, the FASB gave a period of time for whoever wished to comment on the exposure draft.  These letters can be read on the FASB’s website as well as the FASB’s summary of these comment letters. Paragraph 62 of this summary addresses the scope exclusions.  According to the FASB staff, “Some respondents indicated that there should be few, if any, scope exclusions.”  And, “Other respondents questioned the need for the scope exclusion relating to leasing transactions, noting that the fair value objective for those transactions is essentially the same as for other transactions.”

The FASB published Statement No. 157 in September, 2006. The FASB listened to the commentators on the exposure draft, for the scope restrictions in paragraph 2 no longer exempt leasing transactions.  The FASB defends its switch in paragraph C9:

[T]he Board was concerned that applying the fair value measurement objective in this Statement to leasing transactions could have unintended consequences when considered together with longstanding valuation practices common within the leasing industry… However, respondents indicated that the fair value measurement objective for leasing transactions is generally consistent with the fair value measurement objective in this Statement… Others in the leasing industry affirmed that view.  Based on that input, the Board decided to include those accounting pronouncements in the scope of this Statement.

Something strange must have happened between then and now.  Approximately one year later the FASB is on the verge of flip flopping—again!  In a Board meeting on September 26, 2007, the Board discussed the possibility of amending its newly issued Statement No. 157 to scope out leasing transactions.  The staff notes and handouts are found at http://www.fasb.org/board_handouts/09-26-07.pdf.  It seems that lessors are now concerned about the impact of Statement No. 157 on lease accounting.  These worries concentrate on two issues, the first being the initial fair value measurement when the lessor is not a dealer.  The fear by some lessors is that their leases will not qualify as a direct financing or a leveraged lease.  The second concern is related because if the lease is treated as a sales-type lease, then the lessor’s gross investment includes the unguaranteed residual value and fair value measurement will change this computation.

The FASB has several ways of dealing with these issues such as scoping out leasing transactions or leaving things as they are, perhaps with some added implementation guidance.  Rather than focusing on the technical issue, I find it more interesting to ask about the process of setting accounting standards.  Where were these lessors when the issue was first debated?  Why did they not write comment letters to the FASB or make a presentation at the public forum?  And, who spoke for the leasing industry beforehand and why didn’t they know about this potential concern?

My advice to the FASB is to ignore the belated concerns and leave Statement No. 157 unamended.  If the FASB kowtows to these preparers, then corporate America will not pay as much attention as it should to the work of the FASB.  They can wait and voice their concerns after due process has taken place, thereby trumping the FASB’s decisions.  The FASB will be a yo-yo in the hands of preparers.

Give the preparers and others a voice on the issues—when the topic is up for debate.  Afterwards, tell them to pay the consequences for their sloth or their hubris.  The FASB has to flex its muscles and show some strength against such snobbery.

This essay reflects the opinion of the author and not necessarily the opinion of The Pennsylvania State University.