APRIL 2010

August 2010 Lease Exposure Draft: An Overview
______________________________________________________________________________________ “One of my main goals in life is to one day fly on an airplane that appears on the balance sheet of an airline.”
-Sir David Tweedie, Chair, International Accounting Standards Board.

I like this quote. I think we all know by now that, soon, all leases whether they are currently capital leases or operating leases will be liabilities on our balance sheets. This is the main proposal in the August 2010 Lease Exposure Draft. However, there are several other provisions in the exposure draft that have not garnered as much attention but will change GAAP and have an effect on us, if approved. Here is just one such proposed change regarding the definition of the lease term. Currently, the lease term is generally defined as the non-cancellable period of the lease i.e. excluding renewal options. Under the proposed lease rules, the lease term would need to be calculated taking into account renewal and termination options. A lessee would be required to identify all the possible lease term options and assess a probability of the occurrence of each term. Then, starting with the longest possible term, the lessee would consider the cumulative probability of occurrence until a probability of 50% is reached. The reaching of a cumulative probability of 50% marks the lease term. For example, say a lease is for 5 years and includes two five-year renewal options. Such a lease has possible lease terms of 5, 10 and 15 years. The lessee has assessed the probability of staying in the space as follows: 5 years at 45%, 10 years at 20%, and 15 years at 35%. Under these facts, the probability of a 15 year lease is 35%, not over 50%. The probability of at least a 10 year lease is

55%, over 50%. Hence, the lease term is 10 years. (Note that in this example 10 years is the least likely outcome in isolation, but at least 10 years is most likely here). There are several other interesting proposals in the exposure draft. The final standard is not expected until later this year, and it is expected that the effective date will not be for several years. It is certainly not too early to start thinking about how these proposed changes might affect you and your Nonprofit. Please feel free to contact us if you would like our assistance in working though the proposed changes, since they might affect your specific situation. Please enjoy the February 2011 edition of our Nonprofit Newsletter.

Lewis Sharpstone Partner & Nonprofit Practice Leader LSharpstone@singerlewak.com

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