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IASB and FASB propose dual approach to lease accounting

ACCOUNTING RULEMAKERS have put forward plans to overhaul lease accounting that will require companies to account for all but the shortest leases on their balance sheet.

The IASB and its US equivalent, the FASB, today published proposals that will result in an increase in reported assets and liabilities associated with the cost of leasing everything from manufacturing facilities and aircraft to cars and computers.

Under existing accounting standards, a majority of leases are not reported on balance sheets and that approach has been criticised for failing to provide a faithful representation of leasing transactions.

Hans Hoogervorst [pictured], chairman of the IASB, said the proposals go a “great distance” to improving the quality and comparability of financial reporting.

“At present, investors must take an educated guess to determine the hidden leverage from leasing by using basic disclosures in financial statements and applying arbitrary multiples. It is clearly not in the best interests of investors to expect analysts and others to guess the liabilities associated with leases,” Hoogervorst said.

In addition to bringing most leases on-balance sheet for lessees, the new standard will apply a dual approach to the recognition, measurement and presentation of expenses and cash flows arising from a lease.

This will preserve straight-line expense recognition for most real estate leases in the income statement. For most other leases, there would be interest and amortisation expense recognition asset separately from interest on the lease liability.

Brian O’Donovan, partner in KPMG’s International Standards Group, said the dual model is inconsistent with the boards’ initial objective of introducing a single lease accounting model. “This is a major compromise by the boards, designed to make the proposals more palatable when applied to leases of property,” he said.

According to O’Donovan, the transition to the new proposals will require all existing leases and potential lease contracts to be re-analysed and will a company’s ability to accurately predict and forecast assets and liabilities.

“Implementing these proposals would be a real challenge for many organisations, as they would need to identify all their leases, extract key data, make new estimates and judgements, and perform new calculations,” he said.

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