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March 24, 2014

IASB and FASB fail to agree on lease accounting

Hopes of a converged lease accounting standard between the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have been set back after a meeting between the two boards on 18 and 19 March revealed a difference in opinion.

The meetings followed near universal opposition to proposed changes to lease accounting rules aimed at getting leases onto companies’ balance sheets.

As a result, in January 2014, Hans Hoogervorst, IASB chairman, said they had started re-deliberations and expected to announce a number of decisions in March.

At a meeting, the boards found common ground on exemptions for short-term leases and that both lessee and lessor should include extension options in the lease term if a lessee had a significant economic incentive to exercise such options.

However, the two boards had different opinions on how to recognise the expense associated with leased assets for the lessee.

The FASB members supported a dual model for lessee accounting, with lease classification determined in a manner similar to current leasing requirements.

In this approach, most existing capital and finance leases would be counted as "Type A leases," which recognises amortization of the right of use asset separately from interest on the lease liability. Most operating leases would be accounted as "Type B leases," and would be recognised as a single total lease.

The IASB instead wanted more of a singular approach to accounting, with most leases classed as a Type A lease.

For the lessor, the boards agreed the lessor should determine if a lease is classed as a Type A or a Type B lease on the basis of whether the lease is considered a financing arrangement or sale, or if it is considered an operating lease.

The IASB and FASB are still working to find agreement, and jointly released a statement which said: "While differences remain, most notably in their preferred approaches to expense recognition, the Boards are committed to working together to minimize these differences and to creating greater transparency around lease transactions for the benefit of investors worldwide".

Related Links

The Financial Accounting Standards Board

The International Accounting Standards Board

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