The IASB and FASB Decide on Lease Accounting
The IASB and FASB are meeting in London this week where leases is on the agenda. At the meeting, the Boards proposed a standards update that will require all leases with a term in excess of one year to be capitalized on the balance sheet. No surprise there; that has been the Boards’ position since it released the Exposure Draft on leases in 2010, and they haven’t ever shown signs of deviating from that position.
What is newsworthy, however, after much deliberation over the past several months on how the income statement will be impacted, the Boards have decided on two types of leases. Some leases will be accounted for using an approach similar to what was proposed in the 2010 Exposure Draft. This approach results in front-loading the expense over the life of the lease. The second approach will result in a straight-line expense over the lease term, similar to what is realized today under an operating lease.
The criteria to determine the accounting will also look similar to what we have today in distinguishing between operating and financing leases. That is, leases that convey a relatively small part of the leased asset’s useful life or value will be expensed evenly over the lease term. The result is that the balance sheet will reflect the rights and obligations of all leases while the income statement is not likely to change significantly from what firms recognize today.