Introducing “Approach Y”: A Better Lease-Accounting Model for Lessees (Part 1)
To date, the Financial Accounting Standards Board (FASB), the International Accounting Standards Board (IASB), and the Boards’ constituents have not reached a consensus on how lessees should account for leases. Several approaches to lessee accounting have been identified and debated, but so far none of them has been widely embraced as the clear solution to the problem that the Boards have been trying to solve. In this blog post, I will introduce “Approach Y”—a different approach to lessee accounting that has significant potential to break through the present impasse.
The FASB and the IASB face many challenges in developing improved lease-accounting standards for entities that are lessees. Three issues in particular have stood out:
- How should the lessee’s right-of-use (RoU) asset be measured?
- How should the effects of lease transactions and events on the lessee’s financial performance be presented/disclosed?
- Are multiple lease-accounting models needed for different types of leases?
The optimal lease-accounting model for lessees would address these issues better than alternative models would address them. Specifically, the optimal model would measure the lessee’s RoU assets and lease-payment liabilities in a manner that:
- Faithfully represents the economics of lease arrangements
- Is consistent with the Boards’ Conceptual Frameworks
- Is readily executed in practice by financial-statement preparers and auditors
The optimal model would also maximize:
- The usefulness of information provided to users of the lessee’s financial statements
- The number of users to whom the information is useful
- The kinds of lease arrangements to which the model can be applied usefully
What Is Approach Y?
Approach Y is a lease-accounting model for entities that are lessees. It combines traditional accounting concepts and methods in a novel, integrated way. And it is designed to serve as a key component of the improved lease-accounting standards that the FASB and the IASB are developing.
There are some similarities between Approach Y and other approaches that the Boards and their constituents have considered. But Approach Y differs from other approaches in several ways. One of the most significant differences is that Approach Y has greater explanatory value.
In short, Approach Y distinguishes itself by clearly conveying how and why it faithfully represents the economics of virtually all true leasing arrangements. It also readily conveys how and why it would be easy for financial-statement preparers to implement and auditors to audit. And serendipitously, Approach Y produces accounting outcomes that are well aligned with stakeholders’ expectations for understandable, useful information. For all of these reasons, Approach Y is a compelling, unifying solution worth considering.
I am in the process of preparing a series of working papers to explain Approach Y and its advantages in detail. The first of the working papers, dealing specifically with the issue of measurement, is attached. Also attached is the Excel file to which the working paper refers.
I welcome your feedback on the working paper and Excel file. I also invite you to watch for my additional working papers on presentation/disclosure and the scope of Approach Y’s applicability to different kinds of leases, which will follow shortly.