Operating Lease Costs

your CFO is right: a) effective last year, the new accounting rules require capitalization of most operating leases; b) the office lease generates future revenue in future accounting periods - it builds the brand, and other intangibles.

Michael's answer as far as the requirements are spot on. But I don't believe that most of the operating leases actually meet the original definition of asset and as such imho, the changes were made to distribute tax dollars, not revenue benefits.

Last I checked, the rules are still in draft stage. Intrinsically, you need to look at the materiality of the legal costs and whether the costs added value to the lease. If the CFO is deferring costs due to bad months, looking for a better day, the costs could come back to haunt you later. If you are required to defer, amortize over the remainder of the year.

This treatment may not be exactly by the book, but if you get into the mode of constantly defering costs, you can easily lose track, building up a huge nut to cover each month before getting to actual operations.

Thanks everyone. Any of you have a link to this new literature?

Michael - I'm assuming you mean "capitalization of most operating lease costs" and not the lease payments? Also, we're just renting a space in a building (don't have any logo/advertisement on top of the building) so how does it generate future revenue/buidling brand?

Dabney - I believe it does add value. It's for a specific issue and not just general reviewing of lease,

Any of you know if commissions we pay to agents should also be capitalized? This is just standard service of using an agent for the lease so don't think it's value adding.

Here is the link to the latest guidance that is still at exposure draft stage. After this guidance is approved, all the operating leases will be required to be capitalized.

http://www.fasb.org/jsp/FASB/FASBContent_C/ProjectUpdatePage&cid=900000011123