Joint Accounting Rule on Leases May Not Happen in 2014

The chairman of the Financial Accounting Standards Board (FASB) hinted this week that a converged lease accounting standard with the International Accounting Standards Board (IASB) will probably not be issued this year.

During a speech at the Institute of Management Accountants’ 95th Annual Conference and Exposition in Minneapolis on Monday morning, Russell Golden said he did not expect the leases standard to be finished this year and added, “It probably won’t be done until the latter half of 2015.”

In 2005, the US Securities and Exchange Commission (SEC) issued a report on off-balance-sheet activities and recommended that changes be made to the existing lease accounting requirements to ensure greater transparency in financial reporting.

The FASB and the IASB have worked for several years to develop a global rule that would bring leases onto corporate balance sheets in both US Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).

Under a reproposed exposure draft released by the FASB and the IASB in 2013, Proposed Accounting Standards Update - Leases (Topic 842), a dual approach (types A and B) to the recognition, measurement, and presentation of expenses and cash flows arising from a lease was proposed.

For Type A leases (most leases of assets other than land or buildings), the lessee would measure the right-of-use (ROU) asset at amortized cost and would typically amortize the ROU asset on a straight-line basis, according to a June 20 analysis of the proposed lease accounting rule from KPMG LLP. The lessee would recognize amortization of the ROU asset and interest expense on the lease separately in profit or loss.

For Type B leases (most leases of land and buildings), the lessee would recognize total noncontingent lease expense generally on a straight-line basis over the lease term and present this as a single expense in profit or loss. To achieve this accounting outcome, the lessee would plug the measurement of the ROU asset.

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 in March, the FASB continued to back the dual approach but decided to replace the exposure draft’s proposed lease classification approach for all types of underlying assets with a classification test similar to that of IAS 17, Leases, according to KPMG. The IASB opted for a single model based on the Type A approach.

While the two boards have agreed on many aspects of the proposed lease standard, such as lease modifications and contract combinations, separating lease and nonlease components, initial direct costs, and financial statement presentation, they remain apart on two other aspects: variable lease payments and subleases.

The FASB and the IASB agreed that only variable lease payments that a) are in-substance fixed payments, or b) depend on an index or rate would be included in the initial measurement of lease assets and liabilities, which is consistent with the exposure draft’s proposals. However, the boards disagree about the circumstances that would require a lessee to reassess the measurement of those payments, according to KPMG.

For subleases, the boards agreed on the presentation of lease assets and liabilities and income and expense related to a head lease and a sublease. But the boards do not agree on how a sublessor would determine the classification of a sublease.

During a speech at the IFRS Conference Singapore on May 29, IASB Chairman Hans Hoogervorst noted that fewer than 10 percent of listed companies would be affected by the leases standard, according to an effect analysis conducted by the IASB among 12,000 listed companies in Europe, Asia, and North America.

Despite their differences, Hoogervorst was a little more optimistic that the two boards could hammer out a final converged standard by the end of the year.

“While we have reached agreement with the FASB that most leases need to be put on the balance sheet, we have less agreement about how the lease liability should be run off in the income statement,” he said. “More work needs to be done. In the next couple of months, we should be able to finalize our work.”

Related articles:

Called to Account: Preparing for Upcoming FASB Changes to Lease Accounting and Reporting
Feedback Sought for FASB/IASB Lease Accounting Proposal

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