Accounting Standards Boards to Propose Improvements to Financial Reporting of Leases

The International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) have released for public comment joint proposals to improve the financial reporting of lease contracts.

One of the main projects included in the boards’ Memorandum of Understanding, the proposals, if adopted, will create a new accounting model for lessees and lessors, as well as the elimination of the concept of operating leases.  Essentially, this will subject all outstanding leases to the new lease accounting model as of the date of the initial application, with no grandfathering of existing leases.

“The leasing industry plays an important role in many economies by helping companies manage cash flow and working capital,” said Sir David Tweedine, chairman of the IASB, in response to the exposure draft.  “However, much of the estimated annual $640 billion of lease commitments fails to appear on the balance sheet of lessees, thereby giving a false impression of companies’ liabilities and gearing.”

Under existing requirements, the accounting requirements depend on the classification of a lease.  Classification as an operating lease results in the lessee not recording any assets or liabilities in the statement of financial position under either IFRS or U.S. standards.  This means that many investors must adjust the financial statements to estimate the effects of lessees’ operating leases for the purpose of investment analysis.

Resulting in a consistent approach to lease accounting for both lessees and lessors, the proposals would utilize a “right of use” approach.  This approach would result in the liability for payments arising under the lease contract and the right to use the underlying asset being included in the lessee’s statement of financial position.  This, in turn, will provide more complete and useful information to investors and other users of financial statements and greatly improve the financial reporting information available to investors about the financial effects of lease contracts.

“This proposal continues the progress both boards are making to improve and converge our standards in significant areas of accounting,” said Bob Herz, chairman of the FASB.  “The proposal is intended to improve the transparency of lease accounting and also decrease its current complexity.  I encourage all constituents that engage in leasing transactions to provide us with your views on this important proposal.”

The boards developed the proposals after considering responses to their discussion paper, “Leases: Preliminary Views,” published in March 2009, and considered extensive input from constituents, including more than 300 comment letters.

The proposal will be out for public comment until December 15, 2010, and can be accessed via the “Comment on a Proposal” section of www.ifrs.org or on www.fasb.org.  The board expects to issue a final standard in June 2011.

Also in this month's issue:

PG&E Takes Proactive Approach to IFRS

Senate to Vote on Repeal of 1099 Reporting Requirements