Symmetry in Recording Lease Agreements

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Symmetry in Recording Lease Agreements Powered By Docstoc
					July 17, 2009

Technical Director
Financial Accounting Standards Board
401 Merritt 7
P.O. Box 5116
Norwalk, CT 06856-5116

File Reference: 1680-100

Dear Mr. Golden:

The Accounting Principles Committee of the Illinois CPA Society (Committee)
appreciates the opportunity to provide our perspective on the discussion paper entitled
Leases: Preliminary Views.

The Committee is a voluntary group of CPAs from public practice, industry and
education. Our comments represent the collective views of the Committee members and
not the individual view of the members or the organizations with which they are
affiliated. The organization and operating procedures of our Committee are outlined in
Appendix A to this letter.

The Committee’s comments are organized as follows: We first provide a general
comment. This is followed by our responses to the 29 specific questions posed in the
discussion paper.

General Comment:
Our committee believes a new leasing standard should be comprehensive and address all
aspects of lease transactions. As there are already lease standards in place, albeit
containing some deficiencies, we believe the Boards should take the time to consider all
elements of the leasing model and provide a single comprehensive revision rather than
taking a piecemeal approach, which would both confuse financial statement users and
potentially lead to inconsistencies in different elements of the final set of leasing

To be comprehensive, the standard must address both lessor and lessee accounting;
consider the extent to which lessor and lessee accounting should be symmetric; contain
precise, formal definitions of the concepts used in the standard; address accounting for
subleases; and consider how the leasing standard will relate to other existing or proposed
standards, such as for revenue recognition, investment property accounting, and
accounting for derivatives.

Chapter 2: Scope of lease accounting standard
Question 1
There are two conceptual models one can use for a lease transaction – a rights model and
an economic ownership model. Which is used dictates whether it is appropriate to base
the scope on the scope in the existing standard. A rights model focuses on the right to
use an asset that is conveyed in the transaction. An economic ownership model focuses
on where the bulk of the risks and rewards generally associated with ownership of an
asset reside.

The existing lease standards use an economic ownership model wherein an obligation is
recorded only when economic ownership of an asset has been obtained. The proposed
standard uses a rights model. Under this model, an obligation is recorded whenever a
right to use an asset has been obtained, even if the right is not so extensive as to
constitute economic ownership.

This suggests that the scope of the standard should be reconsidered. Many transactions
are not leases but nevertheless create rights to use assets. As noted in ¶2.7(c), for
example, licenses of intangible assets create right-to-use assets that are economically no
different from leases of tangible assets. If the final standard employs a rights model, then
all contracts creating such a right-to-use asset should be within the standard’s scope.

There are two interrelated issues the Boards will need to deal with in considering the
scope of the standard. These are (a) whether exclusive and non-exclusive agreements
should be treated similarly, (b) whether treatment by the lessor and lessee should be

Consider a non-exclusive license to use software. An argument can be made that the
licensee should treat this agreement similarly to how a lease of a building would be
treated, by recording an obligation and an asset, both valued at the present value of the
payments to be made. From the licensee’s perspective, this transaction is similar to a
lease agreement for a building, the only difference being that the underlying asset the
licensee has obtained a right to use is intangible. This would lead to the conclusion that
the lease standard’s scope should encompass such transactions.

However, it is difficult to argue the licensor should de-recognize an asset as a result of
this same transaction. The number of licenses that can be sold is not limited, and selling
one license does not affect its ability to sell another. Therefore, de-recognizing the
licensed asset is not appropriate.
A related issue with which the Boards must deal is the extent to which accounting
symmetry is desirable. The lessor and lessee (or licensor and licensee) have entered into
the same transaction, so an argument can be made that their accounting treatments should
mirror each other. But this would be difficult to reconcile with the logical treatment of
non-exclusive licenses from the two perspectives described above.

We believe the Boards must deal with these issues in detail in order to reach an
appropriate conclusion on the scope of the new standard.

Question 2
We see no reason to exclude leases of non-core assets from the scope of the standard.
Such leases create the same rights and obligations as other leases, with the only
difference being how the leased asset is used. In addition, exclusion of leases of non-core
assets could lead to abuse as firms might have a financial reporting incentive to
misclassify assets as non-core.

We believe it is appropriate to exclude short-term leases if the effect on the balance sheet
would be immaterial. For example, excluding the asset and obligation from the
December 31 balance sheet related to a one-month lease running from December 15 to
January 15 would be appropriate. However, in determining the effect, firms should
evaluate the excluded leases in the aggregate. So, firms with a large number of relatively
short-term leases should not exclude those leases. Thus, we view the appropriate
exclusion as a de minimis exclusion, not based on the length of the lease per se.

Chapter 3: Approach to lessee accounting
Question 3
The analysis in this chapter through ¶3.28 is based on a simple lease contract. In that
limited scenario, we agree with the analysis. However, as discussed later in this letter,
we believe that when the Boards considered more complex leases, such as those
containing options, residual guarantees, or executory costs, the Boards did not take into
account how the analysis would differ from the simple case. For example, under this
proposal, the value of a right to use an asset would exclude the portion of the lease
payments associated with executory costs, such as maintenance of the asset (See ¶9.25.)
Thus, even at the inception of the lease, there would be a difference between the value of
the obligation and the value of the right-to-use asset. The proposal is vague on how that
difference would be treated, although it appears that the obligation reported in the balance
sheet would simply exclude the portion attributable to executory costs, which our
Committee views as inconsistent with the nature of the obligation.

Furthermore, it is conceptually difficult to separate the right to use an asset from the
lessor’s obligation to keep it in good working order. The right to use an asset that does
not function is worthless. So, the value associated with the lessor’s obligation to
maintain is integral to and inextricably linked with the right to use the asset. Once the
standard moves to a model rights model, rather than an economic ownership model, we
believe it is inappropriate to exclude executory costs from either the asset or the
obligation. The lessee is responsible for making all of the lease payments described in
the lease and the lessee has a right to use an asset that is well maintained, making that
right more valuable.

Our committee believes, however, that executory costs should be included in the asset
and obligation only for leases that obligate the lessor to maintain the asset. Under leases
that require the lessee to make additional payments to third parties for maintenance costs,
the lessee has not incurred a current obligation to make such payments to the lessor and
does not yet have an enforceable right to a well-maintained asset.

Question 4
As we discussed in our response to question 3, the Boards’ analysis is based on a lease
with no executory costs. When executory costs are considered, we believe what the
Boards mean is that an asset and a liability would be recognized for the right to use an
asset (but not the future executory costs associated with it) and the portion of the
obligation not associated with the executory costs. Thus the balance sheet would report
on the asset side the right to use an asset but not the right to have that asset in working
condition, and on the liability side a portion of the obligation created by the lease.

Implications for Asset Recognition
We believe it is impossible to separate the right to use an asset from the right to have the
asset in working condition. Because the underlying concept in the new standard is to
recognize a right-of-use asset and that right cannot be separated from the right to have the
asset in working condition, we believe this approach is conceptually flawed. The asset
valuation must reflect the cost to acquire the right-to-use asset and the right to have the
asset in working condition.

Implications for Liability Recognition
A lease obligation consumes debt capacity whether it is associated with the asset itself or
the right to have the asset in working condition. In addition, if a lessee defaulted only on
the portion of a required lease payment representing executory costs, it would still be in
default of the entire lease agreement and the leased asset would be subject to
repossession. As a result, the proposed approach would understate the liability a lessee
has incurred when it enters into a lease agreement.

The proposal would treat a full-service lease, which locks in the amount of future
executory costs, and a net lease, which does not, in the same way, even though the lessee
is not in the same economic position under these leases. This difference will likely cause
lessees to structure leases to be economically equivalent to full-service leases but is
technically not full-service leases according to the standard, in order to minimize the
reported lease obligation.
A key element of financial analysis when there are substantial operating leases is
constructive capitalization, whereby the financial statements are recast as if the operating
leases had been capitalized. Because the proposed approach would leave a portion of the
lease obligation off the balance sheet, analysts interested in the extent to which debt
capacity has been used would still have to constructively capitalizing the unrecognized
obligation for future lease payments.

Coordination with Revenue Recognition Standard if Symmetry is Desired
The revenue recognition document recently circulated excludes leases from its scope. If
the Boards determine that symmetry between lessor and lessee treatment is desirable,
then they need to address how lessors would recognize revenue and whether the
principles on which that decision is based must be consistent with the revenue
recognition standard. If so, those decisions will have implications for the recognition of
assets and liabilities by lessees.

Question 5
We disagree with the premise that the proposal does not adopt a components approach. It
does so at times. As noted in our response to question 4, the Boards have proposed a
components approach to the asset. That is, payments are separated into those associated
with the right to use an asset versus other services, such as maintenance of the asset. As
noted above, we believe this approach is not conceptually sound.

The Boards’ rejection of the components approach applies only to options, contingent
rental payments, and residual guarantees. We believe not using a components approach
for these elements of a lease leads to conclusions that are difficult to accept conceptually.
Examples of these conclusions follow.

In Chapter 6, the Boards concluded that for a lease with a purchase option the lease
payments to be discounted should either include or exclude the option’s exercise price,
depending on the probability of exercise. Consider a lease with an option that is
sufficiently likely to be exercised that the payment is included. This creates the odd
result that a liability is recognized as a result of existence of holding an option, whose
value can only be positive.

Contingent Rentals
In Chapter 7, the Boards concluded that rentals contingent on performance of the leased
asset (e.g. percentage rent arrangements) should be valued at their expected value, even
though no obligation exists unless and until sales are made. It also results in the odd
situation that the right-to-use asset related to this obligation is a function of future
transactions rather than past transactions and events, the usual criterion for asset
recognition. These results are a consequence of not treating lease payments differently
depending on the event that triggers an obligation to pay them.
Residual Guarantees
In Chapter 7, the Board concludes that residual guarantees should not be separated from
other lease payments. Once again, not using a components approach leads to accounting
that is not true to the underlying economics, in this case by not recognizing the true
nature of a residual guarantee, which is the issuance of a put option on the leased asset by
the lessee.

All of these results, which we view as inconsistent with the underlying economics of
common leases, results from not using a components approach. We encourage the
Boards to reconsider that decision.

Chapter 4: Initial measurement
Question 6
It is clear in the analysis in Chapter 4 that the Boards are implicitly assuming the simple
lease case they analyzed in the beginning of Chapter 3. However, the conclusions are not
appropriate for a lease with executory costs. Thus, the conclusion in Chapter 4, which
sounds reasonable, really is to value the obligation initially at the present value of the
portion of the lease payments associated with the right to use the asset, but excluding
executory costs. We would not separate the executory costs and therefore would value
the obligation at the present value of all minimum rental payments.

As for the discount rate, we believe the incremental borrowing rate approximates the
appropriate discount rate only in certain circumstances. Conceptually, the lease
obligation is a debt instrument, suggesting the appropriate discount rate is the incremental
borrowing rate. However, a lessor’s ability to repossess the leased asset is generally
stronger than a lender’s ability to seize collateral. In jurisdictions that provide relatively
strong rights to lenders, this difference may not be significant and the incremental
borrowing rate reasonably approximates the discount rate the lessor would have used in
assessing the lease. However, in jurisdictions that make it relatively difficult for lenders
to seize assets, the protection afforded by a lease could significantly reduce the rate of
return the lender demands. Thus we believe that in determining the discount rate, firms
should adjust the incremental borrowing rate to reflect such differences.

In addition to the conceptual reason for adjusting the discount rate – not doing so would
understate the obligation – adjusting the discount rate would also mitigate the financial
reporting incentive to enter into leases in jurisdictions that do not protect creditors
(assuming this would not raise the rate implicit in the lease), in order to maximize the
discount rate and thereby minimize the reported obligation.

The Boards should also consider whether to use the incremental borrowing rate at the
parent company or the subsidiary, if that is where the lease was executed. They should
also consider the appropriate rate when the parent guarantees a subsidiary’s lease.
Question 7
Similar to our response to question 6, we believe the Boards are implicitly assuming the
simple lease case they analyzed in the beginning of Chapter 3. However, the conclusions
are not appropriate for a lease with executory costs. Thus, the conclusion in Chapter 4,
which sounds reasonable, really is to value the asset initially at the present value of the
portion of the lease payments associated with the right to use the asset, but excluding
executory costs. We would not separate the executory costs and therefore would value
the asset at the present value of all the minimum rental payments.

Chapter 5: Subsequent measurement
Question 8
We agree with the amortized cost approach to subsequent measurement of the asset and
liability. Further, we agree with the Boards’ decision not to link subsequent
measurements of the asset and liability. There is no reason to believe that the asset is
consumed in the pattern determined by the timing of the lease payments, so there is no
reason to link the two measurements.

Question 9
We believe the obligation should be treated like any other debt instrument. As a debt
instrument, it would fall under the scope of SFAS No. 159.

We do believe there may be merit in using a fair value measurement for real estate
investment properties. The Boards should consider permitting or even mandating fair
value in that case.

Question 10
We believe the obligation should be treated like any other debt instrument and should not
be revalued to reflect interest rate changes per se. However, as note above, it would fall
under the scope of SFAS No. 159.

Question 11
The amortized cost approach is consistent with accounting for other debt instruments.
We agree that this should be stated in the standard so that it is clear that other
measurement approaches, e.g. fair value, are explicitly excluded.

However, as noted earlier, the lease obligation described in this proposal excludes the
obligation to pay executory costs. We believe this obligation is no less a liability and
should be included. Further, if the Boards are going to exclude this obligation from the
liability reported in the balance sheet, we believe there should be a conceptual
justification for doing so.

Question 12
Although we understand the argument that rental expense is a cost incurred for the right
to use an asset, we believe that such usage would be confusing to financial statement
readers. However, the cost for the right-to-use asset is conceptually no different from
depreciation, which is the cost related to the right to use an owned asset. Financial
statement users are unlikely to care about the difference between these two expenses and
we see no need to segregate them. As it is customary to amortize assets that have been
recognized as their productive abilities are consumed, we believe characterizing the
expense as amortization is more descriptive.

We also believe this is an issue that should be addressed as part of the financial statement
presentation project.

Chapter 6: Leases with options
Question 13
We disagree with the approach the Boards took. As noted earlier, the Boards’ proposal
creates a liability as a result of holding an option, which can only have a positive value.
There has to be an asset associated with the option, which is valuable to the holder.
Further, one cannot apply simple probabilitistic techniques to options because the
probability of exercising is related to the value of the asset.

We believe the value of an option granted to the lessee under the lease agreement should
be valued and recorded in the balance sheet as an asset. In fact, part of the lease
obligation arises because of such an option – presumably the lease payments would have
been lower had the option not been included in the lease agreement. Therefore, not
including the value of the option causes the value of the right-to-use asset to be misstated.

As an example, suppose a 10-year lease with annual payments of $1 million contains a
purchase option valued at $2 million. Assuming a 6% discount rate and payments at the
beginning of each year, the total value of the lease payments is $7,801,692. The
substance of the transaction is that the lessee acquired a right-of-use asset for $5,801,692
and an option worth $2,000,000 in exchange for $1,000,000 in cash and a lease obligation
$6,801,692. This transaction should be reflected in the financial statements at the lease’s

The lessee could allocate the value of the lease payments between the option and the
right-to-use asset in one of two ways: (a) directly estimate the value of the option using
an option pricing model and assign the remaining value to the right-to-use asset, or (b)
assign to the right-of-use asset the present value of the lease payments that would be
required under an otherwise similar lease not containing the option and assigning the
remainder of the total value to the option.

The Boards should consider subsequent measurement of the option in light of other
projects on the Boards’ agendas.

We also note that some options may be mutually exclusive. For example, a lease may
contain an option to renew the lease or an option to purchase the asset. The lessee could
obviously exercise only one of the options and the two options capture much of the same
value – the ability to continue to control the asset after the end of the initial lease term if
the asset is relatively valuable at the time. Holding the two options together would be
less valuable than the sum of the values of either option on a standalone basis (but more
than the value of either of the options on a standalone basis). Therefore, such options
should be valued together in order not to overstate their value.

A final comment relates to the effect of an option on the depreciable lives of other assets.
In particular, a firm might have a ground lease and construct a building on the leased
land. If the ground lease contains a purchase or renewal option, we believe that lease and
the option should be accounted for as we have described above. However, the
depreciable life of the building should include option periods so long as the firm expects
to exercise the option and the depreciable life does not exceed the useful life of the

Question 14
Reassessing the lease term would become moot if the approach we described in our
response to question 13 were followed. The right-of-use asset would reflect only the
term of the existing lease. The option would be revalued as the asset value, and hence the
probability of exercise, changed.

Question 15
We agree the treatments should be similar. However, we disagree with the treatment the
Boards proposed, as discussed in our responses to questions 13 and 14.

Chapter 7: Contingent rentals and residual value guarantees
Contingent rentals
Question 16
There are (at least) three types of contingent payments that should be treated differently.
They are performance contingencies, usage contingencies, and external contingencies.
 External contingencies are those that are beyond the control of the lessee either
   through decisions that affect productivity or usage. An example would be rent
   escalations based on an inflation index.
 Performance contingencies include percentage-of-sales rent and other similar
   arrangements where the rental payment due was tied to the productivity of the asset.
 Usage contingencies include rental payments that depend on the amount of use the
   lessee derives from the asset, where use tends to make the asset less valuable. For
   example, a vehicle lease that includes a per mile charge if the vehicle is driven more
   than some distance would be a usage contingent lease.

External Contingent Rentals
We believe external contingent rental payments should be included in the obligation.
Rent escalations based on an inflation index, for example, should be included in the
obligation based on a best estimate of the future values of the index. Although one could
argue that no obligation to pay the higher rent exists until the index actually increases, the
lease agreement was made with an expectation of particular values of the index, and the
value of the right-of-use will be best approximated by the value of the obligation given
reasonable assumptions about the future index values. Further, not including these
contingent payments is tantamount to forecasting an inflation rate of zero, which is
clearly erroneous.

Performance-Contingent Rentals
We disagree with the Boards’ conclusion regarding contingent rental arrangements based
on performance of the leased asset. Consider a typical percentage-of-sales rental
agreement. Until sales are made, no transaction or event requiring the payment of rent
has taken place and there is no liability. We disagree with the Boards’ argument at
¶7.8(a) that not including these contingent rentals understates the value of the right-of-use
asset. Under such arrangements, the lessor holds an undivided percentage interest in
future sales to be generated by the asset. Until those sales are generated, the lessor has no
right to receive any compensation and the lessee has no obligation to make any payments.
Furthermore, including these contingent rentals in the obligation would record expense in
a period different from the period the revenue that caused the cost to be incurred was

We also note that percentage-of-rent arrangements are often used as a way to allocate
truly executory costs among several lessees. For example, a food court in a shopping
mall is likely to have a central seating area that is commonly served by the mall operator,
which is responsible for bussing tables, stocking utensils, maintaining restrooms, etc.
Relative sales levels would be a reasonable approximation of the usage of each
restaurant, so a percentage-of-rent arrangement results in each contributing
proportionately to maintenance of the common area.

Usage-Contingent Rentals
Usage contingent rentals are designed to compensate the lessor for usage in excess of that
contemplated by the non-contingent payments specified in the lease. This provision is
generally included to protect the lessor from receiving the leased asset back having less
value than contemplated when the lease was negotiated. In effect, the lessee has an
option to extend the lease (in terms of usage, although not time) and that option is
valuable. We believe the option should be recognized and additional usage should be
considered an exercise of the option. However, if the rate charged for additional usage is
very high (e.g. an excessively high mileage charge), the option is unlikely to be exercised
and its value would generally be nil.

The implication of the above is that for leases that are entirely usage-contingent, the only
right conveyed is an option to use an asset. (But assuming the rental rate is a fair market
rate that could be replicated elsewhere, ignoring transaction costs and other market
frictions, the value of the option would be zero.) This suggests such a lease would be
accounted for similarly to existing operating leases, with no recognition of either an asset
or an obligation at the lease’s inception. The Boards would need to consider whether a
separate model would be needed to deal with such leases or whether the proposed model
could effectively deal with such leases.

Question 17
As noted in our response to question 16, we disagree with both of these approaches with
respect to rentals contingent on performance. With respect to external contingencies,
such as rent escalation due to inflation, we believe a probability-weighted approach is
most logical, for it represents the best expectation of the ultimate cash outflow, and it is
consistent with the conceptual framework (CON7).

Question 18
We disagree with the FASB’s conclusion. The value of the obligation at the lease
inception should be a best estimate of the economic value of the obligation. That
necessarily requires a forecast of the future value of the index. The FASB’s approach
does not avoid the necessity of forecasting the index; it is tantamount to forecasting that
the index will not change. This will result in systematic misstatements of the values of
lease obligation, most likely understating those values significantly, and creating a
financial reporting incentive to include index-based payments.

We believe it is entirely possible for lessees to make reasonable estimates based on
external forecasts of inflation or other economic factors as well as inflation rates implicit
in interest rates. Rather than relying on lessees and auditors to make reasonable
judgments, the proposal is a rules-based procedure that imposes consistency at the cost of
representational faithfulness.

Question 19
With respect to changes in rental payments contingent on performance, this issue
becomes moot if our recommendation not to include such contingent rentals in the lease
obligation is taken.

With respect to rentals that are contingent on an index, we believe such leases should not
be revalued. This is to keep the accounting for such obligations consistent with
accounting for otherwise similar debt instruments. If a fair value option is permitted,
then lessees should be permitted to revalue obligations to reflect changed expectations for
the future values of indices.

Question 20
As noted in our response to question 19, we do not support recognizing changes in
estimated contingent rental payments for either performance contingent payments or
index-based payments. For changes in contingent rental payments related to usage, if the
change in the obligation to pay rentals relates to future periods, it should be capitalized as
part of the asset. If the change relates to the current period, it should be reflected in profit
and loss.
Residual value guarantees
Question 21
When a lessee takes on a residual value guarantee, it has written a put option on the
underlying asset. It should be accounted for as such and the lessee should record a
liability at the lease inception for the value of the put option. We believe a residual value
guarantee is a derivative and should be accounted for as such. The put option should be a
separate element; i.e. not simply included in the lease obligation.

Under the proposal, a residual value guarantee would receive different treatment
depending on whether the guarantor was the lessee or a third party, in which case the
guarantee would be subject to FIN 45. We see no logical reason to treat such guarantees

Chapter 8: Presentation
Question 22
We see no reason to require separating the lease obligation in the face of the balance
sheet. If a single debt amount were shown, the debt footnote would have a separate
amount for lease obligations that would provide any information that users might want.
The ultimate decision should be made as part of the financial statement presentation

Question 23
Valid arguments can be made for different classification schemes, depending on the
perspective of the financial statement user. An equity investor may be most interested in
a classification based on the nature of the assets under lease. For example, the right to
use a building would be included in buildings; the right to use equipment would be
included in equipment; etc. What is important to an equity investor about a lease is the
nature of the asset it transfers the rights over and that will be employed in the operations
of the enterprise. However, from a creditor’s perspective an intangible asset representing
the right-to-use asset may be more informative because the underlying asset will likely
not be available to creditors in the event of liquidation.

We believe this issue should be addressed as part of the financial statement presentation

Chapter 9: Other lessee issues
Question 24
We believe a new leasing standard should be a comprehensive document addressing all
leasing issues. Therefore, the standard should address sale and leaseback transactions
and subleases. In addition to making the document more complete, we believe that
dealing with sublease issues will highlight the issue of symmetry – like treatment of a
given transaction by the lessor and the lessee – and allow the Boards to consider the
implications of symmetrical accounting and whether it is a desirable feature.
We also believe the Boards needs to define more formally key elements of the standard,
such as executory costs and right-to-use asset.

In question 13, we addressed depreciable lives of assets constructed on leased land. More
generally, the standard should address accounting for all leasehold improvements.

Chapter 10: Lessor accounting
Question 25
Yes, it does. A right to receive rentals is a resource that will be converted into cash when
the rental payments are made. It meets the conceptual definition of an asset.

Further, we believe the right to receive the entire amount of a required lease payment,
including executory costs, is an asset. This should be partially offset by a liability for
unearned revenue, which would be removed as the services represented by the executory
costs are provided.

Question 26
We believe approach (b) double-counts some of the lessor’s assets. In Example 11, the
machine ceases to have any economic value to the lessor except for the rental payments it
will generate. Thus once the lease receivable is recorded, the machine is no longer an
asset from the perspective of the lessor and should be derecognized.

A third choice, not discussed in the proposal, is to rely on the revenue recognition model
being developed separately.

We believe the Boards should more fully develop the implications of all possible
approaches to determine what issues need to be addressed.

Question 27
Yes. When a lessor acts both as a provider of goods and as a financial institution, as in
what are currently classified as sales-type leases, it is appropriate for lessors to recognize
gross profit on the provision of goods when they are provided. Failure to do so would
induce firms to find third parties to purchase the asset and provide lease financing to the
lessee, so that the firm could recognize gross profit on the sale. As a result, similar
transactions would be accounted for differently depending on whether the lessor provided
financing or a third party was used.

However, the Boards need to consider when a lease (or a portion thereof) is more like a
sale, which would warrant recognition of gross profit at the lease inception, and when it
is more like the provision of a service, which would suggest recognition of profit over the
life of the lease. This can lead back to an operating/capital lease dichotomy and bright-
line rules separating them, as well as a lack of symmetry with lessee accounting, unless
the rules take a strict component approach to evaluating when lessors may recognize
gross profit at inception; i.e. revenue related to the provision of services would be
recognized over the lease term while revenue related to transfer of a right-to-use asset
would be recognized at lease inception.

Question 28
We see no reason to exclude investment properties from the scope of the standard.
Furthermore, given IAS 40, we see no feasible way to keep accounting for investment
properties out of the scope.

Question 29
As discussed earlier, we believe the Boards must discuss revenue recognition issues and
determine how the lease standard will relate to contractual framework in the recently-
circulated revenue recognition document. We also believe the Boards should consider
balance sheet classification issues in the context of the project on financial statement

The Boards will also need to consider the issue of rent abatements. Consider, for
example, a lessor of railcars that rebates rent for the time a railcar is out of service for
maintenance. This creates an interesting anomaly wherein the more service is provided
the less the amount of revenue that is collected. Would the possibility of a rebate be
considered a (negative) contingent rental and how would the proposed model deal with
such a situation?

We appreciate the opportunity to offer our comments.


Reva Steinberg, CPA
Chair, Accounting Principles Committee
                                           APPENDIX A
                                      ILLINOIS CPA SOCIETY
                               ACCOUNTING PRINCIPLES COMMITTEE

The Accounting Principles Committee of the Illinois CPA Society (Committee) is composed of the following
technically qualified, experienced members appointed from industry, education and public accounting. These
members have Committee service ranging from newly appointed to more than 20 years. The Committee is an
appointed senior technical committee of the Society and has been delegated the authority to issue written
positions representing the Society on matters regarding the setting of accounting standards. The Committee’s
comments reflect solely the views of the Committee, and do not purport to represent the views of their
business affiliations.
The Committee usually operates by assigning Subcommittees of its members to study and discuss fully
exposure documents proposing additions to or revisions of accounting standards. The Subcommittee ordinarily
develops a proposed response that is considered, discussed and voted on by the full Committee. Support by
the full Committee then results in the issuance of a formal response, which at times, includes a minority
Current members of the Committee and their business affiliations are as follows:

Public Accounting Firms:
  Large: (national & regional)
    James J. Gerace, CPA                            BDO Seidman LLP
    John A. Hepp, CPA                               Grant Thornton LLP
    Alvin W. Herbert, Jr., CPA                      Retired/Clifton Gunderson LLP
    Matthew G. Mitzen, CPA                          Blackman Kallick LLP
    Reva B. Steinberg, CPA                          BDO Seidman LLP
    Jeffrey P. Watson, CPA                          Blackman Kallick LLP
Medium: (more than 40 employees)
    Barbara Dennison, CPA                           Selden Fox, Ltd.
    Marvin A. Gordon, CPA                           Frost, Ruttenberg & Rothblatt, P.C.
    Ronald R. Knakmuhs, CPA                         Miller, Cooper & Co. Ltd.
    Kathleen A. Musial, CPA                         BIK & Co, LLP
    John M. Becerril, CPA                           Cabot Microelectronics
    Melinda S. Henbest, CPA                         The Boeing Co.
    James B. Lindsey, CPA                           TTX Company
    Michael J. Maffei, CPA                          GATX Corp.
    Laura T. Naddy, CPA                             Gaming Capital Group
    Anthony Peters, CPA                             McDonald’s Corporation
    James L. Fuehrmeyer, Jr. CPA                    University of Notre Dame
    David L. Senteney, CPA                          Ohio University
    Leonard C. Soffer, CPA                          University of Chicago
Staff Representative:
     Paul E. Pierson, CPA                            Illinois CPA Society

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