FEATURE
UPDATE ON THE CURRENT STATE OF LEASE ACCOUNTING FOR FINANCIAL REPORTING PURPOSES BY WILLIAM REDPATH
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he portion of United States financial accounting standards that involves lease accounting has recently undergone major changes. Right-of-use leases, including IRUs (Indefeasible Rights of Use), are important assets to telecommunications companies, including those involved with submarine cables as lessors or lessees. This post is addressed to non-accountants (although accountants are welcome consumers of this article), so I will address lease accounting standards and these changes at a rather high level. Financial accounting rules in the United States are set by the Financial Accounting Standards Board (FASB), based in Norwalk, CT, which is empowered by the Securities and Exchange Commission (SEC) to set accounting standards for all companies that file their financial results with the SEC. The FASB does this through its issuance of Generally Accepted Accounting Principles (GAAP), which also usually must be adhered to by private companies in their audited, reviewed or compiled financial statements. As an aside, accounting standards for most other nations are issued by the International Accounting Standards Board (IASB). Although there has long been discussion of a “convergence” of GAAP and the IASB’s International
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SUBMARINE TELECOMS MAGAZINE
Financial Reporting Standards (IFRS), that has not yet happened, and that is not in the foreseeable future. I also want to note that this post addresses only financial accounting, not tax accounting, for leases. Tax accounting for leases is not within the purview of the Financial Accounting Standards Board (FASB), but is a matter of tax law in the United States and was not affected by the issuance of ASB 842. Before I get to the lease accounting changes brought about by ASC 842, a predicate issue must be addressed: What qualifies as a lease? The rules by which an agreement qualifies as a lease have been tightened in ASC 842. A lease agreement involves at least two parties, a lessor and a lessee, and an asset that is to be leased. A lease involves Property, Plant or Equipment (PPE). Assets to which ASC 842 does not apply include intangible assets, natural assets (such as timber or coal), inventory, assets under construction, and financial assets. The lessor is the party that agrees to provide the lessee with a right to use an asset for a specified period of time in return for consideration. Leases can be structured in many different ways, and that leads to the accounting complexity with leases. The structure of a lease can include allocation of income tax benefits between lessor and lessee. Leases can be used to transfer