It’s Coming! Major Changes to Lease Accounting
You’ve been waiting for it and it’s finally here…the revised exposure draft on lease accounting. Over the past several years, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have been working on a converged standard for lease accounting. The main reason for the new standard is to recognize the majority of leases on the balance sheet. Under the current standards only capital leases are recognized on the balance sheet and it’s been argued that by not requiring operating leases to be recognized on the balance sheet, the full economic effects of those transactions are not truly presented to users of the financial statements.
The main difference between the original exposure draft issued in August 2010 and the revised exposure draft is the distinction between two different types of leases, property and other than property leases. The original exposure draft treated all leases the same. In the new draft, the determination of the type of lease is based on the expected economic benefit of the leased asset. Property leases will generally be for real estate type assets and other than property leases will generally be for equipment type assets.
Lessee Recognition and Presentation
For most property leases, a lessee would recognize a right-of-use asset and a lease liability on the balance sheet and a single lease cost on the income statement consisting of interest expense incurred from the lease liability and the amortization of the right-of-use asset measured on a straight-line basis. For other than property leases, a lessee would have the same recognition on the balance sheet but on the income statement interest and amortization would be presented separately.
Lessor Recognition and Presentation
A property lease would require the lessor to continue to recognize the underlying asset on the balance sheet and lease income on a straight-line basis over the term of the lease. For other than property leases, the lessor would derecognize the underlying asset and recognize a lease receivable and a residual asset on the balance sheet. On the income statement, the lessor would recognize amortization of the lease receivable and residual asset as interest income over the term of the lease and any profit from the lease on the commencement date.
Leases of intangible assets, leases to explore or use minerals, oil, natural gas, and similar nonregenerative resources, and leases of biological assets are excluded from the scope of the new standard. A lessee and lessor may also elect not to apply the new standard for leases of 12 months or less. The new standards would require application to all existing leases as of the effective date and the effective date of the new standards will be determined after the boards have reviewed feedback on the revised exposure draft. The deadline for public comment is September 13, 2013 and the boards hope to have a final standard in 2014.