APRIL 2010

August 2010 Lease Exposure Draft: An Overview

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“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