IASB, FASB Propose Eliminating Differences in Lease Accounting

The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) want to bring consistency to lease accounting by eliminating the differences in treatment of lease contracts under International Financial Reporting Standards (IFRSs) and U.S. generally accepted accounting principles (US GAAP).

That is the crux of Leases: Preliminary Views, a joint discussion paper released by the IASB and FASB in mid-March that is currently available for public discussion.

“The proposals contained in this discussion paper are intended to improve the transparency, credibility and usefulness of lease accounting,” said FASB Chairman Robert Herz.  “We encourage our constituents to review the discussion paper, and to let us know whether or not they agree that these proposals would better reflect the rights and obligations arising from leasing contracts on the balance sheets of lessees.”

According to the World Leasing Yearbook 2009, total annual leasing volume in 2007 amounted to $760 billion.  However, many of those lease contracts do not appear on company balance sheets because IFRS and US GAAP split leases into two categories: finance leases, which are considered capital leases under US GAAP, and operating leases.  Only the assets and liabilities arising from finance leases are recognized.  In the case of operating leases, payments are recognized as an expense over the lease term.

According to the boards, this has resulted in numerous problems.  For example, the split can result in similar transactions being accounted for very differently, reducing comparability.  Also, the difference in the accounting treatments provides opportunities to structure transactions to achieve a particular lease classification.

The boards also noted that, because they believe all lease contracts give rise to assets and liabilities that should be recognized on financial statements, investors routinely adjust the recognized amounts in an attempt to assess the effect of the assets and liabilities resulting from operating lease contracts.

The IASB and the FASB propose that lease accounting should be based on the principle that all leases give rise to liabilities for future rental payments and assets – the right to use the leased asset – that should be recognized on a company’s balance sheet.  This approach is designed to ensure that leases are accounted for consistently across sectors and industries.

The boards decided in July 2008 to defer consideration of lessor accounting in order to resolve the problems associated with lessee accounting as quickly as possible.  Consequently, the discussion paper deals mainly with lessee accounting.  However, it also describes some of the issues that will need to be addressed in a future proposed standard on lessor accounting.

Noted IASB Chairman Sir David Tweedie: “While much of public attention rightly focuses on accounting issues relating to the financial crisis, this is a project of great importance and deserves public interest. Leasing is a significant source of financing for many companies.  It is therefore important that interested parties should take the time to familiarize themselves with our proposals and give their views through the comment letter process.”

The discussion paper is available online at http://www.fasb.org/draft/index.shtml.  Public comments will be accepted until July 17, 2009.
 

Also in this month's issue:

Despite Delays and Ongoing Concerns, Companies See the Wisdom of Advanced IFRS Preparations

Consultant of the Quarter:  Bill Leonard, Boston