Lease accounting has received a lot of attention recently, given the fairly substantial changes being proposed by the FASB and the IASB in their joint project on lease accounting. One area of lease accounting that hasn’t raised as much discussion is how to account for short-term leases (i.e., leases with terms of less than one year).

The proposal in the boards proposed ASU on lease accounting would have allowed lessees to book the right of use asset and the associated lease obligation at the undiscounted amount of the lease payments (which is different than what would be required for long-term leases) or to book nothing at all. Either way, the income statement effect would be similar to what we have today for typical operating leases, but the balance sheet would look different depending on which of the three methods a company chose to adopt. Moreover, this option would exist at the individual lease level, rather than at the level of the reporting entity.

In my opinion, the point of representational faithfulness and comparability is to get the underlying economics correct so that users can identify true similarities and differences across firms (or for the same firm across time). Personally, I don’t see a clear benefit from allowing firms discretion over how to account for short-term leases on their balance sheets, especially on a lease-by-lease basis.

During redeliberations, the boards have shifted position slightly. According to a recent update on the joint project (available here),

The boards tentatively decided that, for short-term leases, a lessee need not recognise lease assets or lease liabilities. For those leases, the lessee should recognise lease payments in profit or loss on a straight-line basis over the lease term, unless another systematic and rational basis is more
representative of the time pattern in which use is derived from the underlying asset. Nine IASB members and six FASB members agreed.

The boards also tentatively decided that a lessee may elect to apply the recognition and measurement requirements in the leases guidance to short-term leases. Twelve IASB members and five FASB members agreed.

If I understand this correctly, it seems the boards have moved from three options back to two – either measure all lease assets/obligations the same or treat a short-term lease like a current operating lease. Seems like a step in the right direction, especially if the latter option is available more for practicability than for conceptual soundness.