• Register
Return to: Home > News > Joint lease accounting proposal issued

Joint lease accounting proposal issued

The second exposure draft on the proposed lease accounting changes has been published jointly today by the global and US accounting standard setters.

The International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) put out an initial exposure draft in 2010 which met with considerable criticism from the leasing industry.

The original proposals, which set out a model for capitalising all lease and rental contracts, were criticised in about 800 comment letters for being unnecessarily complex and failing to be conceptually consistent.

The second exposure was originally scheduled for publication in early, and then late, 2012 but faced delays as the two standard setters and stakeholder groups representing the leasing industry, including Leaseurope and the US Equipment Finance and Leasing Association, tried to thrash out an agreement.

Stakeholder groups expressed concern the initial proposed approach did not reflect the wide variety of lease transactions used and the second proposal attempts to address this concern through a double-barrelled approach incorporating both straight-line accounting, primarily for real estate, and a right-of-use approach similar to that proposed in the initial exposure draft.

The boards are also proposing disclosures to enable investors and other users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases and changes to how equipment and vehicle lessors would account for off-balance sheet leases.

"The proposal aims to improve the quality and comparability of financial reporting by providing greater transparency about leverage, the assets an organisation uses in its operations and the risks to which it is exposed from entering into leasing transactions," the IASB and FASB said in a joint statement.

The boards will publish separate exposure drafts which are "nearly identical" but contain small differences relating to existing differences between US GAAP and IFRS and decisions the FASB made related to non-public entities.

IASB chairman Hans Hoogervorst called the development of an improved standard for leasing "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. 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."

The FASB and the IASB plan to host a live webcast to discuss the proposal on 20 May and stakeholders have until 13 September to review the draft and provide feedback.

Stakeholder response
KPMG partner in the international standards group Brian O'Donovan questioned whether the changes represent "a sufficient improvement over current lease accounting standards to satisfy financial statement users, or justify the considerable cost and complexity of implementation."

"The transition to the new proposals would require all existing leases and potential lease contracts to be re-analysed. There would also be an ongoing need for increased monitoring of leases to comply with the re-assessment requirements," he said.
"For some - particularly lessors and lessees with large existing leasing portfolios - the system changes required are likely to be significant."

"Many lessee companies would see an increase in reported assets and liabilities, and the proposals would have significant impacts on many different lease transactions - ranging from leases of 'big-ticket' items such as manufacturing facilities and aircraft, to leases of office space and smaller items such as company cars and computers," O'Donova added.

Institute of Chartered Accountants in England and Wales (ICAEW) head of financial reporting faculty Nigel Sleigh-Johnson said that in the revised exposure draft the standard setters have removed a lot of the complexity found in the 2010 proposals, "for example in relation to renewal options and contingent rentals".

"Those requirements would have been costly to implement and difficult to understand in practice. We are glad that our call for less complexity has been heeded, and that a converged solution has been possible," he said.

"However, today's proposals introduce a new 'dual model' for lessee expense recognition. To many, this solution is a compromise too far, although it does address widely-held concerns about 'front-loading' of costs. Nonetheless, it is still likely to be subject of intense debate in the coming months," Sleigh-Johnson added.

Related article
FASB to re-expose lease accounting
Related links
International Accounting Standards Board
Financial Accounting Standards Board

Top Content

    Accountancy Europe: the winner takes it all

    Jonathan Minter spoke to Olivier Boutellis-Taft, chief executive officer at Accountancy Europe, about how technology could change the industry, and how training needs to keep up to enable the profession to develop

    read more

    Embracing global technology trends

    Accountancy Europe’s Digital Day 2018 found the European accounting profession looking to tackle the challenges presented by new technologies head on. Jonathan Minter reports from the day

    read more

    IMA Conference: automation of the audit

    At the annual conference of the Institute of Management Accountants (IMA) in Indianapolis, Deloitte partner Alex Smith gave a presentation on digital transformation in the profession. Joe Pickard spoke to Smith following the presentation to find out more about his views on the future of audit

    read more

    IMA Conference: technology and the human effect

    The annual conference of the Institute of Management Accountants (IMA) took place in Indianapolis this year. Members of the profession gathered to hear the latest from the institute and other market players, covering some of the challenges and opportunities the profession faces.

    read more

    The Caribbean: a digital paradise

    The ICAC hosted its 36th annual conference in June this year – very much looking to the future following a tough 2017 for the Caribbean. Jonathan Minter spoke with chief executive officer Misha Lobban Clarke

    read more
Privacy Policy

We have updated our privacy policy. In the latest update it explains what cookies are and how we use them on our site. To learn more about cookies and their benefits, please view our privacy policy. Please be aware that parts of this site will not function correctly if you disable cookies. By continuing to use this site, you consent to our use of cookies in accordance with our privacy policy unless you have disabled them.