Compromise reached in joint lease project
The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (jointly, the Boards) have been working together on a project to revise and converge the lease accounting models under U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards. Previously, the Boards agreed that leases with a term longer than one year would be recorded on the balance sheet by lessees. In recent deliberations, the Boards have had difficulty reaching agreement on the pattern of expense recognition for these leases when recorded on the balance sheet and the classification of the related expense in the income statement. On June 13, 2012, the Boards reached agreement on an expense recognition and classification approach that they believe puts the project on track for issuance of revised exposure drafts in the fourth quarter of 2012 and final standards in 2013.
The agreed-upon approach would provide for one of the following two models to be used by a lessee to account for a lease recorded on its balance sheet:
The decision on which model to use would be based on a determination of: (a) whether the right-of-use asset represents the acquisition of a more-than-insignificant portion of the underlying asset (based on both value and remaining life) and (b) the nature of the underlying asset.
In general, equipment leases would be expected to be accounted for under the right-of-use model, unless the lease term represents an insignificant portion of the equipment's economic life or the present value of the fixed lease payments was insignificant compared to the equipment's fair value. In contrast, real estate leases would be expected to be accounted for using the straight-line model, unless the lease term was for a major part of the underlying real estate's economic life or the present value of the fixed lease payments represented substantially all of the real estate's fair value.
The Boards also tentatively concluded that a lessor's determination of whether it should account for a lease using the receivable and residual method or the straight-line (operating lease) method would be aligned with the lessee model described above.
While these tentative conclusions represent a significant step by the Boards in their efforts to issue revised exposure drafts in the fourth quarter of 2012, the Boards still need to deliberate and reach conclusions on other important topics, such as:
The Boards expect to address these issues and complete deliberations on the revised exposure drafts at their joint meeting in July 2012.
For the current status of the Boards’ leases project, refer to the FASB Leases Project Update.
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