The Financial Accounting Standards Board has introduced two new proposals related to its longer-term lease accounting proposal to try to sort out what kinds of companies should follow fair value instead of lease accounting to book the value of their holdings.

The FASB introduced a proposed amendment to accounting standards that would establish criteria to distinguish investment companies from other types of companies, then a second amendment that would require such entities to measure their investment properties at fair value rather than following lease accounting. FASB decided to develop the guidance to make U.S. Generally Accepted Accounting Principles more consistent with International Financial Reporting Standards, where investment companies leasing out their properties would not be required to apply the proposed lease accounting requirements to those properties.

While FASB generally tries to steer clear of bright lines in accounting standards these days, it chose to develop some specific criteria to sort out investment companies from other companies for the sake of consistency with international rules, the board said in a statement. “In response to consistent investor input, the FASB decided to prescribe the circumstances when fair value would be required, rather than introduce an optional accounting practice into U.S. GAAP,” the board said.

The problem arises at least in part because the FASB is trying to develop a single model for lease accounting when there are different business purposes for leases, says Tom Wilkin, a partner with PwC. Equipment leases, which resemble short-term financing transactions, are different from real estate leases, which are longer-term contracts typically meant to achieve a different purpose, he says. “There are a whole host of reasons people lease real estate that are different than equipment leases, which usually are just financing transactions,” he says.

Wilkin said the proposal would produce a big change in current accounting practices for certain types of investment vehicles, such as public real estate investment trusts, that do not follow fair value today for their investment holdings. “It's all about scope,” he says, as the proposals seek to define who belongs in lease accounting and who should follow fair value. Entities will need to study the proposal carefully to determine on which side of FASB's proposed line they will fall to determine how the guidance would affect their current accounting.

FASB has already taken heat for its single model when it considered but dismissed an idea to distinguish short-term, rental-like contracts and give them a more straight-lined treatment. Instead, by treating all lease contracts like financing transactions, companies will front-load their interest expense in a way that doesn't exactly match the cash flow associated with paying down a lease contract.

FASB is accepting comments on the two new proposals to define investment companies and scope out investment properties through Jan. 5.