Standard setters agree to a two model approach to accounting for lease expenses on the balance sheet
AFTER MONTHS of wrangling, US and international accounting standard setters reluctantly agreed on a two-model approach for accounting for lease expenses on the balance sheet.
The International Accounting Standards Board and its US equivalent, the FASB, have been wrestling with how to recognise lease liabilities since 2006, but finally agreed to allow companies to use one of two methods.
The boards undertook the leases project to address the widespread concern that many lease obligations are not recorded on the balance sheet and that the current accounting for lease transactions does not represent the economics of all lease transactions.
Under the two-model approach, one method will require leases to be accounted for using a straight-line expense method, while the second will allow lease contracts to be accounted for using an approach similar to that proposed in the 2010 leases exposure draft, in which lease expenses can be recognised evenly in the income statement over the course of the lease term.
The two boards last year discounted two-model approach, believing it to be too complicated. However, the about-turn has quashed concerns that the rule-makers’ initial proposal to bring all leases on the balance would front-load expenses.
“The boards carefully considered the diverse views of stakeholders about whether the income statement profile of all leases should be the same. On balance, we decided that leases that convey a relatively small percentage of the life or value of the leased asset should be recognised evenly over the lease term,” said FASB chairman Leslie Seidman.
Decisions on the leasing project reached to date are preliminary. The boards plan to release a joint exposure draft in the fourth quarter of this year.
Hans Hoogervorst [pictured], chairman of the IASB, said: “We will publish our proposals for public comment, with a view to completing this important convergence project during 2013.”