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Operating Leases

As of this writing, the IASB and FASB have continued their long-standing inability to agree on what constitutes an operating lease and what criteria should be used for keeping it off the lessee's balance sheet.  Having dealt with synthetic leases, first amendment leases, and a variety of forms designed to qualify either as operating leases or capital leases for accounting purposes, we have begun looking at alternatives to the operating lease.

The death of the operating lease has been reported for over ten years but, to steal from Mark Twain, rumors of its death appear to be greatly exaggerated.  Nevertheless, we believe clients should be well-versed in what constitutes an operating lease because many accountants will be paying closer attention.  As we have reported in our newsletter, there is a basis for excluding leases that include "subjective" defaults (such as material adverse change or insecurity defaults) or cross defaults with other transactions that do.  We have heard of situations in which accountants have objected to cross-collateralization, general cross-defaults and other seemingly standard lease language. 

Stay tuned.

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