After more than a year of redeliberations, the FASB and IASB (the boards) took a big step forward this week in finalizing their revised proposals for lease accounting. They made significant decisions about how a lessee should recognize lease expense. In addition, they revisited some previous decisions concerning lessor accounting. This In brief article provides an overview of their decisions and what's next.
After more than a year of redeliberations, the FASB and IASB (the boards) took a big step forward this week in finalizing their revised proposals for lease accounting. They made significant decisions about how a lessee should recognize lease expense. In addition, they revisited some previous decisions concerning lessor accounting.
All decisions noted in this In brief are tentative and therefore subject to change, as the boards have not yet concluded their deliberations.
The boards reconfirmed that lessees will recognize all leases with a maximum lease term of more than 12 months on balance sheet. Short term leases, with a maximum lease term of less than 12 months, will not be required to be put on balance sheet.
There will be two approaches to recognizing lease expense in the income statement:
The boards agreed on a dividing line to determine when each approach should be applied. In principle, the dividing line will depend on whether a lessee acquires or "consumes" more than an insignificant portion of the underlying asset. The boards decided that, as a practical expedient, this principle will be applied based on the nature of underlying asset.
It is presumed that leases of property - defined as land and/or a building or part of a building - should be accounted for using a straight-line expense recognition pattern. This presumption is overcome if:
These criteria are similar to some of the criteria used today for capital lease classification under U.S. GAAP.
For leases of assets other than property - such as equipment – it is presumed that lessees should apply the approach proposed in the 2010 exposure draft, unless:
The boards decided that there should be symmetry between lessors and lessees in how they determine which approach to apply. They agreed that lessors should use the same dividing line and presumption as lessees (as outlined above). The boards previously decided that lessors of investment property should apply an approach similar to existing operating lease accounting. The boards’ latest decisions are expected to produce similar results in that most lessors of investment property will not apply the receivable and residual approach.
Where a lease gives a lessee the right to acquire or consume more than an insignificant portion of the underlying asset (typically presumed when the underlying asset is not property), the lessor will apply the receivable and residual approach. For a description of this approach, see In brief 2011-44, FASB and IASB make significant decisions related to lessor accounting and transition.
Conversely, where a lease gives a lessee the right to acquire or consume an insignificant portion of the underlying asset (typically presumed for leases of property), the lessor will apply an approach similar to today’s operating lease accounting. The underlying asset will remain on the lessor’s balance sheet and income will be recognized on a straight-line basis over the term of the lease.
While there are similarities in the criteria, there could be differences in the dividing line under the new model and existing U.S. GAAP. For example, real estate lessors may have to apply the receivable and residual approach for certain longer term real estate leases that are considered operating leases under current guidance.
The boards intend to meet again in July 2012 to address some final remaining issues, such as presentation and disclosure, before they prepare a revised exposure draft. The revised exposure draft is expected towards the end of this year.
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).
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