In August 2010, the International Accounting Standards Board (“IASB”) and Financial Accounting Standards Board (“FASB”), collectively called “the Boards,” issued an exposure draft on the new lease accounting standards. Discussions on the feedback the Boards received have been ongoing since February 2011. While the Boards have agreed that leases should be recorded on the balance sheet, the issue has been the method to use for expense recognition. The wide scope of the project, due to the pervasive existence of leases throughout all industries, resulted in a lengthy deliberation and “outreach process” to a variety of industries to avoid any unintentional consequences of a too hasty standard update issuance. On June 13, 2012, the IASB and FASB agreed on the approach for lease accounting. The decisions reached follow.
Leases under an initial one year term are not recorded on the balance sheet. They remain expensed monthly as present US GAAP operating lease accounting provides.
The Boards voted and agreed to a dual expense-recognition approach for lessees and lessors and the following two options:
- Determination of the expense recognition approach is based on whether the right-of-use (“ROU”) asset represents more than an insignificant portion of the underlying asset
- Determination based on the nature of the underlying asset
Equipment Leases
The lease is a non-financial asset and measured at cost, less accumulated amortization. The combination of the amortization charge on the financial asset and the interest expense on the lease liability would result in a total lease expense that decreases over the term of the lease. This has been referred to as a “front-loaded” expense pattern. The assumption is the lease is an ROU lease for lessees and a receivable and residual asset for lessors unless the lease term is an insignificant portion of the economic life of the leased asset, or the present value of the fixed lease payments is insignificant compared to the fair value of the leased asset.
Real Estate Leases
These leases are accounted for using a straight-line expense recognition in the income statement unless the lease term is for the major part of the economic life of the underlying asset or the present value of fixed lease payments accounts for substantially all of the fair value of the underlying asset.
The joint exposure draft will be released in the fourth quarter of 2012 with the intention of completing this project during 2013.
