New accounting proposal will record almost all leases on lessee’s balance sheets
London, 16 May 2013
Today, the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) (collectively the Boards) released a revised proposal that would bring significant changes to the accounting for leases.
In August 2010, the Boards issued the first lease accounting proposal for both International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP). The main objective was to record assets and liabilities arising from a lease on lessees’ balance sheets. Some constituents raised concerns about the proposed model and the practicability of some of the requirements in that proposal. Based on the feedback they received, the Boards revised the model and issued this new proposal today.
EY’s Global IFRS Services Leader, Ruth Picker, says: “The Boards have tried to address respondents’ concerns about the definitions of a lease and lease term, to what extent variable payments affect the lease liability and receivable, as well as the accounting model for lessors. In addition, this revised proposal introduces a new classification requirement creating two types of leases. Depending on how a lease is classified, the income or expense recognition pattern, as well as the balance sheet, would differ between the two types of leases. The Boards’ main objective was retained - both types of leases would be recorded on a lessee’s balance sheet”
Ruth Picker adds, “Despite the revisions made by the Boards to address respondents’ concerns, the revised proposal changes existing practice and may be challenging to apply. The proposal would require the use of greater judgment and estimates compared to current practice, for example, when determining if the arrangement meets the definition of a lease or classifying a lease based on whether the lessee consumes more than an insignificant portion of the underlying asset. As most leases would be recorded on a lessee’s balance sheet, key metrics may change, for example, debt ratios and return on assets. Also, lessees and lessors would need to provide greater disclosure”.
Ruth Picker concludes, “The Boards have been able to develop a single proposal for lease accounting under both IFRS and US GAAP. The leases project has been one of the more difficult convergence projects, but throughout the process the Boards have been able to remain largely converged. The reissue of the proposal will provide constituents with the opportunity to evaluate the revised model. Given the expected impact of the changes, it is important that all entities assess how they will be affected and provide comments to the IASB and FASB.”
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