In brief: FASB and IASB redeliberate lessee accounting - May 2012 (No. 2012-13)

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Since the FASB and IASB's February meeting, the staff have been consulting with users, preparers, and auditors to hear their views on how a lessee should subsequently measure a right-of-use asset arising under a lease. The boards held an education session this week to discuss the results of this outreach. After debating the feedback, the boards instructed the staff to explore three different approaches for discussion at next month's meeting: (1) apply the approach proposed in the 2010 exposure draft to all leases, possibly with some exceptions, (2) require a straight-line total expense recognition for all leases, and (3) a combination of the first two approaches. This In brief article provides an overview of the feedback the boards discussed at the education session and what's next for this project.

What's new?

Since the FASB and IASB’s (the boards’) February meeting, the staff have been consulting with users, preparers, and auditors to hear their views on how a lessee should subsequently measure a right-of-use asset arising under a lease. The boards held an education session this week to discuss the results of this outreach. The key points were as follows:

• There was almost unanimous support among financial statement users for recognizing all leases on-balance sheet, regardless of the expense recognition pattern, in accordance with the project’s primary objective.
• Most constituents did not support either the “underlying asset” or the “interest-based amortization” approach described in our March 2, 2012 In brief. Although some saw conceptual merit in these approaches, most agreed they were too complex and costly.
• There were mixed views about the preferred alternative approach. Some constituents preferred the simplicity of applying one model to all leases (whether this be the approach proposed in the 2010 exposure draft, which results in expense front-loading, or a straight-line total expense similar to today’s operating lease expense recognition); others preferred different approaches for different types of leases.

After debating the feedback, the boards instructed the staff to explore three different approaches for discussion at next month’s meeting:

1. Apply the approach proposed in the 2010 exposure draft to all leases, possibly with some exceptions
2. Require a straight-line total expense recognition for all leases
3. A combination of the above two approaches

For the third option, the boards made a number of suggestions as to when each approach should be applied. These ranged from using the existing indicators in IAS 17 (retaining the distinction between operating and finance leases while recognizing assets and liabilities for both types on-balance sheet); using a new set of indicators based on a mirror image of IAS 17 (specifically identifying operating leases, with all other leases being finance leases); and differentiating leases based on the nature of the underlying asset (treating equipment and real estate differently).

What's next?

The boards aim to make tentative decisions about which approach they prefer and consider the implications for lessor accounting at the June meeting. If this is achieved, the boards plan to discuss all outstanding issues in July, with the goal of publishing a revised exposure draft by the end of 2012.

Questions?

PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams that have questions should contact the Leasing team in the National Professional Services Group (1-973-236-7805).

Authored by:

Tom Wilkin
Partner
Phone: 1-973-236-4251
Email: tom.wilkin@us.pwc.com

David Humphreys
Partner
Phone: 1-973-236-4023
Email: david.humphreys@us.pwc.com

Mark Pollock
Senior Manager
Phone: 1-973-236-5601
Email: mark.a.pollock@us.pwc.com

In brief is designed to provide a timely, high-level overview of significant financial reporting developments. It is issued by the National Professional Services Group of PricewaterhouseCoopers LLP. This publication has been prepared for general information on matters of interest only, and does not constitute professional advice on facts and circumstances specific to any person or entity. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication. The information contained in this material was not intended or written to be used, and cannot be used, for purposes of avoiding penalties or sanctions imposed by any government or other regulatory body. PricewaterhouseCoopers LLP, its members, employees and agents shall not be responsible for any loss sustained by any person or entity who relies on this publication.