In this Point of view on the leasing proposal, we recommend an alternative approach, based on indicators of effective ownership, for income statement recognition.
The FASB and IASB’s lease proposal requires substantially all leases to be reported on a company’s balance sheet. In the income statement, the results of the lease transaction would be recognized under a dual model. We support the principle that a company should recognize the right to use an asset along with the contractual liability on its balance sheet. And, since not all leases are economically similar, we support a dual model for income statement recognition. However, we recommend an alternative approach that is based on whether the lease, in effect, transfers the risks and rewards of ownership such that the company that is leasing the asset has, in substance, purchased the asset. Our alternative eliminates the quantitative bright-lines in existing U.S. lease accounting standards, is familiar to those accustomed to the international lease accounting standards, better reflects the economics of the arrangement, and provides more transparency to users of financial statements.