In one of our discussion groups at the FASB’s Financial Reporting Issues Conference, we had a lengthy discussion about whether a lease represented the promise to transfer a bundle of rights (which could be satisfied at contract signing) or the promise to allow someone to use an asset for a fixed period of time (which could only be satisfied over the lease period). The discussion was far ranging with strong opinions and arguments on both sides. But at one point, someone in our group pointed out that there probably isn’t a right answer to this debate, and the Boards simply need to tell us what approach they want to take. This comment hit me rather forcefully at the time, given how many reporting issues I’ve debated with the Boards and staff. How often have I tried to find a theoretically “right” answer, not realizing that sometimes any number of sound answers would have sufficed, and we should just aim for the one that makes the most practical sense while satisfying enough of our needs for theoretical consistency.

In the case of leases, perhaps it doesn’t matter at the end of the day whether (1) we conclude that the lessor has satisfied its promise to transfer the rights to its asset at the point it signs a contract with the customer or (2) we conclude that the lessor satisfies its promise over the lease term in which it allows the customer to use its asset. If the Boards decide that the lessor has satisfied its promise at contract signing, then revenue is recognized and a cost of sale is recognized. Any additional services (such as maintenance on the leased asset) are recognized as revenue as they are provided. Preparers, investors, and regulators can understand that approach, and they will adapt their lives accordingly. In contrast, if the Boards decide that the lessor can only satisfy its lease promises over time, then revenue is recognized over time and the leased asset is depreciated over the lease period. Manufacturers would not get to recognize manufacturing profit up front, but only over the lease period. Again, preparers, investors, and regulators can understand that appraoch, and they will adapt their lives accordingly.

So, rather than focus on the theoretical justification for either approach, are both approaches theoretically sound enough that we should just focus on practicalities?  Would this represent a more common-sense approach to standard setting, at leaste for this issue in the leasing project? Is this a situation in which there is truly no right answer?  How should a standard setter approach their task in a world with such strong alternative opinions? And how does a conceptual framework really play into a standard setter’s own mental musings and deliberations?