Leases

The FASB and IASB (the "boards") issued a revised Leases exposure draft in May of 2013 (the "revised ED"). The proposal, like the original exposure draft, would fundamentally change the accounting for leases and have significant business implications on entities in virtually every industry. Under the revised ED, lessees would record substantially all leases on the balance sheet (i.e., an asset and a lease obligation). A dual model was proposed for the recognition of income and expense for both lessors and lessees based primarily on the nature of the underlying asset.

Key developments in Lease accounting

  • The revised ED drew significant feedback from both boards' constituents, many of whom raised significant concerns over the complexity, and, in turn, cost of implementation of the dual income statement approach.

  • At joint board sessions during 2014, the boards discussed ways to reduce cost and complexity for preparers while achieving the overall objectives of the project. Other than affirming their views that virtually all leases should be reflected on the balance sheet, no final decisions have been reached. Although the boards are continuing joint deliberations, the boards are not currently aligned on key elements of the model.
  • – 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 U.S. 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 U.S. 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 U.S. 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 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 boards continue to redeliberate on the definition of a lease and the concept of control.

    – 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).

What's next for Lease accounting?

  • The boards will continue to meet and redeliberate topics including transition and effective date. The redeliberations are expected to be completed by the end of 2014.
 

Point of view

Lease accounting - Enhancing the financial reporting model

10/8/13 | Assurance services

In this Point of view on the leasing proposal, we recommend an alternative approach, based on indicators of effective ownership, for income statement recognition. Read more

10Minutes on lease accounting

6/4/13 | Assurance services