The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have been working together to develop a new approach to lease accounting. Potential changes to lease accounting have been debated for years and to-date these changes remain undecided (see summary timeline below):
In efforts to communicate with the public and gather information, there have been questionnaires, workshops, public roundtable meetings, joint working group meetings, webcasts and more.
As it currently stands, lease accounting (Codification Topic 840) calls for the lessee to classify their leases as either capital or operating. Operating leases are accounted for in the income statement over the life of the lease with the assumption that there is a significant portion of useful life remaining for the underlying asset at the end of the lease term. On the other hand, capital leases are accounted for in the balance sheet and treated as assets and liabilities as the expectation is that majority of the useful life of the underlying asset will be consumed over the life of the lease. The current classifications and accounting methods have been criticized for failing to provide information about rights and obligations of a lease that meet the definitions of assets and liabilities. Additionally, there is a lack of comparability for the users of the financial statements.
The expression that “possession is 9/10ths of the law” would appear to be true as far as accounting is concerned with regard to the proposed new lease standards. In the Leases Exposure Draft, there is a right-of-use model for all lease agreements in which a lessee would recognize an asset (representing the right to use an underlying asset) and a liability (representing the obligation to make lease payments) during the lease term.
Leases of buildings, equipment, vehicles, etc. are common to most businesses, but particularly so to the real estate industry. As such, awareness of these widespread potential changes is key to planning for your business. The proposed changes not only affect the accounting for leases, but also the definition, terminology, presentation and disclosures related to leases. These changes (when required to be implemented) have the potential to be very complex and may require additional assistance from your accountant and/or tax advisor to compute.
The Boards are currently working on a revised Exposure Draft. After the public release of the revised draft (which is expected by the end of this year), there will be a comment period of 120 days. Although these changes are still quite a ways down the road from being finalized, now is the time to consider what impact these proposed changes may have on your business because although delayed, these new standards will be here eventually.
For more detailed information about the proposed changes, go to the FASB website at www.fasb.org, click on the Projects tab and select the Leases link under Active Joint FASB/IASB Projects.