IASB scraps dual lease accounting model

THE IASB has reversed its position on lease accounting in a decision that signifies yet another blow to the chances of convergence between US and global accounting standards.

In a document, the global standard setter said it has “tentatively” decided to adopt a single model for lease expenses, scrapping the dual approach agreed with US counterpart FASB last year.

Under the new approach, the IASB is reverting to a simplified version of the model first proposed in 2010 that would require the recognition of interest and amortisation for all leases recognised on a lessee’s balance sheet. FASB, on the other hand, has retained the dual model which distingishes between operating and finance leases.

The project was launched back in 2006 when convergence was still a buzzword. A discussion paper was released in 2009 and two exposure drafts followed in 2010 – in which both boards proposed a single lessee model – and 2013 when the dual model was proposed. The majority of leases are not reported on balance sheets under existing rules and that approach has been criticised for failing to provide a faithful representation of leasing transactions.

On the basis of feedback received, the IASB said it concluded that a model that separately presents interest and amortisation for all leases would provide “information that is useful to the broadest range of investors and analysts”.

“The model is easy to understand – a lessee recognises fixed assets and financial liabilities, and corresponding amounts of amortisation and interest. It also avoids any structuring that might arise from having different accounting for different leases,” the IASB said.

But the change in direction means that the IASB and FASB have drifted even further apart on their joint attempts to converge IFRS and US GAAP. Last month, the two boards revealed they had failed to find a converged solution for how financial instruments should be accounted for.

In the case of leases, the IASB said the difference between it and the FASB’s position will result in “little difference” for many lessees for portfolios of leases.

“Some would claim that the two standard setters’ convergence efforts have floundered in this core area of financial reporting, but it is important to also remember that they agree on many very important things, such as how leases should be defined and the basic premise that assets and liabilities should be recognised for major leases. That in itself is no small an achievement,” said Nigel Sleigh-Johnson, head of ICAEW’s financial reporting faculty.

“The most important thing is that the new IFRS standard, when it is completed – possibly as early as next year – should help investors and analysts by removing the need for them to guesstimate the extent of a company’s lease liabilities based on the disclosures it provides in the notes to the financial statements. It will also aid comparison between companies’ reported numbers.”

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Fiona Westwood of Smith and Williamson.