IASB, FASB Propose Changes to Lease Accounting
The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) today published for public comment a revised exposure draft outlining proposed changes to the accounting for leases. The boards said the proposal aims to improve the quality and comparability of financial reporting by providing greater transparency about leverage, the assets an organization uses in its operations and the risks to which it is exposed from entering into leasing transactions.
A joint news release issued by the boards reads as follows:
Leasing is an important activity for many organizations. Under existing accounting standards, a majority of leases are not reported on a lessee’s balance sheet. The amounts involved can be substantial. Additionally, the existing accounting models for leases require lessees and lessors to classify their leases as either capital leases (for example, a lease of equipment for nearly all of its economic life) or operating leases (for example, a lease of office space for ten years) and to account for those leases differently.
For capital leases, a lessee recognizes lease assets and liabilities on the balance sheet. For operating leases, a lessee does not recognize lease assets or liabilities on the balance sheet. The existing standards have been criticized for failing to meet the needs of users of financial statements because they do not always provide a faithful representation of leasing transactions.
In response to this criticism, in 2006 the IASB and the FASB initiated a joint project to improve the financial reporting of leasing activities under International Financial Reporting Standards (IFRSs) and U.S. Generally Accepted Accounting Principles (U.S. GAAP).
The boards have developed an approach to lease accounting that would require a lessee to recognize assets and liabilities for the rights and obligations created by leases. A lessee would recognize assets and liabilities for leases of more than 12 months.
Stakeholders have informed the boards that there are a wide variety of lease transactions with different economics. To better reflect those differing economics, the revised exposure draft proposes a dual approach to the recognition, measurement, and presentation of expenses and cash flows arising from a lease. For most real estate leases, a lessee would report a straight-line lease expense in its income statement. For most other leases, such as equipment or vehicles, a lessee would report amortization of the asset separately from interest on the lease liability. The boards are also proposing disclosures that should enable investors and other users of financial statements to understand the amount, timing and uncertainty of cash flows arising from leases.
The leases project is a converged effort between the FASB and the IASB. The revised exposure drafts for both organizations are nearly identical. The differences between the two proposals are primarily related to existing differences between U.S. GAAP and IFRS and decisions the FASB made related to nonpublic entities.
The boards are also proposing changes to how equipment and vehicle lessors would account for leases that are off balance sheet. Those changes would provide greater transparency about such lessors’ exposure to credit risk and asset risk.
Stakeholders are encouraged to review and provide feedback on the revised exposure draft by September 13, 2013.
On Monday, May 20, the FASB and the IASB will host IN FOCUS: THE LEASES PROJECT, a live webcast taking place from 10:30 to 11:30 a.m. EDT (3:30 to 4:30 p.m. GMT). The webcast will feature FASB member Russell Golden, IASB member Darrel Scott, and FASB and IASB staff members discussing the proposal and answering questions submitted by viewers. U.S. viewers of the live broadcast will be eligible for up to 1 hour of CPE credit. For more information or to register for the event, click here.
Hans Hoogervorst, chairman of the IASB commented, “The development of an improved standard for leasing is vital. At present, investors must take an educated guess to determine the hidden leverage from leasing by using basic disclosures in financial statements and applying arbitrary multiples. It is clearly not in the best interests of investors to expect analysts and others to guess the liabilities associated with leases. The proposal outlined in this revised Exposure Draft will go a great distance towards improving the quality and comparability of financial reporting in this area.”
Leslie Seidman, chairman of the FASB commented, “The FASB and the IASB have worked together to develop a revised, converged proposal to address the inadequacies of current lease accounting and disclosures. The proposal is responsive to the widespread view of investors that leases are liabilities that belong on the balance sheet. The Boards revised the original proposal to distinguish between different types of leases for income statement and cash flow purposes, in response to feedback received from stakeholders.”