The Financial Accounting Standards Board (FASB) remains unwavering in its support of a dual-model approach to bringing leases onto corporate balance sheets, despite its UK-based counterpart saying last week that it decided “tentatively” to back a single-lessee model.
“We don’t anticipate any changes in our approach to the leasing standard at this time,” FASB spokesman Robert Stewart told AccountingWEB on Tuesday.
In an August 7 update to its project document on leases, the London-based International Accounting Standards Board (IASB) noted that it favored a single-model approach that would require the recognition of interest and amortization for all leases recognized on a lessee’s balance sheet.
This differs from the proposed dual-model approach that the IASB and the FASB supported in a revised exposure draft issued in 2013. That model retains the existing distinction between capital leases and operating leases.
But the IASB said the main feedback the two boards received on the 2013 exposure draft was that the dual model was too complex. The IASB also noted that it could be seen as codifying best practice by requiring leases to be recognized on a lessee's balance sheet and interest expense to be recognized in the income statement.
“On the basis of feedback received, the IASB concluded that a model that separately presents interest and amortization for all leases recognized on the balance sheet would provide information that is useful to the broadest range of investors and analysts,” the IASB wrote in its project update. “This is because most investors and analysts consulted think that leases create assets and debt-like liabilities for a lessee.”
The IASB also noted that the single-lessee model is “easy to understand – a lessee recognizes fixed assets and financial liabilities, and corresponding amounts of amortization and interest. It also avoids any restructuring that might arise from having different accounting for different leases, which was a concern expressed by some investors and analysts.”
“The IASB is of the view that all leases result in a lessee obtaining the right to use an asset and the provision of financing, regardless of the nature or remaining life of the underlying asset,” the IASB continued in the project update. “Accordingly, the IASB concluded that all leases should be accounted for in the same way.”
However, the disagreement between the two standard-setting boards is expected to result in little difference for many lessees for portfolios of leases, the IASB added. Nigel Sleigh-Johnson, PhD, head of the financial reporting faculty for the Institute of Chartered Accountants in England and Wales (ICAEW), agrees.
“While it looks like we won’t have one complete joint solution in the end, the actual impact of the differing models over time may not be as dramatic as one might first think,” he said, according to an Economia article.
Differences Had Been Building
The FASB and the IASB have worked for several years on developing a converged lease accounting standard that would ensure greater transparency in financial reporting under US Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).
The two boards originally proposed a single-lessee model in their 2009 and 2010 exposure drafts, but in response to some stakeholders’ requests, they decided to propose a dual-model approach to better reflect the economic differences between different leases.
Under the dual approach proposed in the 2013 exposure draft, Proposed Accounting Standards Update - Leases (Topic 842), a lessee would account for most existing capital leases as Type A leases and most existing operating leases as Type B leases.
For both type A and B leases, a lessee would recognize a right-of-use asset and a lease liability, initially measured at the present value of lease payments. However, under Type A leases, the lessee would recognize and present the interest on the lease liability separately from the amortization of the right-of-use asset. Under Type B leases, a lessee would recognize a single lease cost, combining the interest on the lease liability with the amortization of the right-of-use asset, on a straight-line basis.
But the FASB and the IASB returned to the drawing board after the 2013 proposal was widely criticized by the business community. At a meeting held last March, the FASB continued to back the dual model, but the IASB opted for a single model based on the Type A approach.
“Some would say that the two standard-setters’ convergence efforts have floundered in this core area of financial reporting, but it is important to remember that they agree on many very important things, such as how leases should be defined and the basic premise that assets and liabilities should be recognized for major leases,” Sleigh-Johnson said, according to the Economia article. “That in itself is no small achievement.”
In the project update, the IASB said the two standard-setting boards will continue to discuss lessee disclosures and transition requirements. The boards will reconsider opportunities to reduce the cost and complexity of the requirements.
The IASB and the FASB also will continue to discuss the project jointly, with the goal of minimizing any differences between IFRS and US GAAP. The IASB expects to issue a new leases standard in 2015, according to the document.