Change on Horizon for Lease Accounting
The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued Exposure Drafts on Leases earlier this year that could dramatically change the way leases are recorded on the financial statements of both lessees and lessors. The Exposure Drafts are part of the FASB and the IASB’s convergence project to create a more unified set of accounting standards. The following discussion of the proposed new guidance on lease accounting is based on the FASB Exposure Draft.
The scope of the proposed new lease guidance will apply to all leases except the following:
- Leases of intangible assets
- Leases to explore the use of minerals, oil, natural gas, and similar non-regenerative resources
- Leases of biological assets
Changes for the Lessee
The proposed new guidance would classify all leases as a right-of-use asset, rather than a operating lease or capital lease. Lessees will be most affected if they have a significant number of operating leases. The lessee would have to recognize the asset and liability related to the lease on the balance sheet rather than just recognizing the lease payments as they are paid. For lessees with capital leases, the change comes in the way the asset and liability are measured and the income and expense are recognized.
Changes for the Lessor
The proposed new guidance would require the lessor to recognize a lease under one of two approaches: the performance obligation approach or the derecognition approach. If the lessor retains significant risks and benefits associated with the leased asset, the lessor uses the performance obligation approach and continues to recognize the leased asset in the financial statements. If the lessor does not retain significant risks associated with the leased asset, the lessor would use the use the derecognition approach which is similar to the current guidance on capital leases. However, there would be changes in how to measure the right to receive lease payments, recognize income, and measure and recognize the leased asset.
Look for further discussion on lessee and lessor accounting in future posts.