On August 17, 2010, the FASB and IASB issued exposure drafts proposing a new approach to lease accounting that would significantly change the way entities account for leases. Once finalized, this will result in a converged standard for “Leases” that aims to improve upon the existing standards. The key objective is to ensure assets and liabilities arising from lease contracts are recognized on the balance sheet that will ultimately gross-up the balance sheet.
So what is changing?
Lessee Accounting
This proposal maintains the guidance that was released earlier, effectively eliminates off-balance sheet accounting for most of the operating leases. All assets currently leased under operating leases would be brought onto the balance sheet, removing the distinction between finance (i.e. capital leases under U.S. GAAP) and operating leases.
All lessees will record a new asset (“Right-to-use asset”) equivalent to the present value of the future lease payments and a corresponding liability that represents the obligation to pay rental payments. This accounting is similar to the accounting for the asset retirement obligations, wherein the present value of the liability is accreted until the maturity date and recognized asset will be amortized over the life of the lease term.
This standard will have an impact of higher interest expense (due to the accretion) and grossing up on the statement of financial position (balance sheet). So the final standard will have a major impact of grossing up the balance sheet for the industries that leases most of its assets (e.g. airline industry).
Lessor Accounting
A dual model for lessor accounting has been released. Depending on the economic characteristics of the lease, a lessor would apply either:
- a performance obligation approach (i.e. when the lessor maintains control either during the term of the contract or subsequent to the term of the contract) or
- a derecognition approach (for all other leases).
Read the Snapshot on the Leases exposure draft from IFRS.org website (PDF) that provides a very good summary of these proposals.
Links from IFRS.org
Read the exposure draft from IFRS.org website (PDF)
Read the basis of conclusion document from IFRS.org website (PDF)
Link to the “Leases” project page on IFRS.org
Links from FASB.org
Link to the proposed exposure draft under U.S. GAAP