Lease accounting

The FASB and IASB issued a revised Leases exposure draft in May of 2013 (the "revised ED"). The boards have concluded their redeliberations and are in the process of drafting the final leasing standard. Current proposals differ in important ways from the prior ED. Details of the key developments in the proposed new leasing standard are listed below.

  • There appears to be alignment on reporting virtually all leases on the balance sheet. However, the boards remain split on their views regarding the lessee income recognition model. The IASB is supportive of an approach that would present all leases in a manner similar to today’s financing leases (which the revised ED refers to as Type A leases). Under that approach, the lessee's expense would be front loaded. The FASB prefers a dual model that, in addition to Type A leases, would permit a straight-line expense recognition pattern similar to today's operating leases (which the revised ED refers to as “Type B”). Under the FASB's dual approach, determining whether a lease is Type A or Type B would be based on guidance similar to the classification model under current US GAAP but without the bright lines.
  • The boards are more closely aligned on the lessor model, which is expected to result in financial reporting similar to current US GAAP and IFRS. Although the boards agreed on the basic model, they differ on how they would identify when the lessor has sold an asset via the lease arrangement. The IASB’s focus is on the transfer of risks and rewards, which is consistent with the principle in its current literature as well as US GAAP. The FASB, on the other hand, has proposed an approach based on the transfer of control of the asset, which is similar to the model in the new revenue standard.
  • The boards are largely aligned on the definition of a lease, determining the lease term, identifying short-term leases, reassessment of lease term, lease modifications, application of the standard to a group of assets rather than individual assets, and separation of lease and non-lease components, while diverging on how often a lessee should reassess index-based variable lease payments.
  • The FASB, in its standalone meetings, has made decisions on related party leases, elements of accounting for sale leasebacks, and the prospective elimination of leveraged leases (existing leveraged leases should be grandfathered during transition).
  • The current lease accounting guidance has been criticized for allowing leased assets and, perhaps more importantly, the obligations for future lease payments to be excluded from the balance sheet, and for using “bright line” thresholds that can lead to significantly different accounting for similar transactions. The project was originally expected to result in a standard that provided generally consistent accounting for leases on a global basis; however, based on the redeliberations, this will not be fully achieved.
  • The approaches under consideration would significantly change the accounting for leases and impact financial statement presentation and financial metrics, including many that relate directly to debt covenants and compensation arrangements.
  • Management should begin thinking about how the new rules may affect existing leases as well as considering those potential implications for contemplated new agreements. In addition, they need to communicate with banks, rating agencies, and financial analysts about how the company’s financial picture may be affected.

In brief: It’s finally here - IASB publishes new standard on lease accounting!

1/14/16

The leases standard under IFRS is here! Changes are in store, particularly for lessees.

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The lease standard is changing - are you ready? IFRS 16: Leases - Webcast replay

01/20/16

In this recorded webcast, we discuss highlights of the new IFRS 16 guidance, including the new significant judgements involved, nuances that might lead to unexpected financial results, and new lessee accounting requirements. We also discuss the impact on industries and companies and why management should be attuned to the cross functional impacts of this change.

In brief: It’s finally here - IASB publishes new standard on lease accounting!

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The leases standard under IFRS is here! Changes are in store, particularly for lessees.

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On November 11, the FASB deliberated and voted on the effective date for the proposed new leasing standard.

The quarter close: Directors edition Q3 2015

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Lease modifications and assessing the lease term

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Financial statement presentation guide - 2014 second edition (July 2015)

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Retail & consumer sector: Knowledge brief: Technical and quality newsletter

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This edition provides an update on the FASB’s simplification initiative, the new revenue standard, leasing, and omnichannel financial reporting.