Standard Setters Outline Possible Lease Accounting Approach

FASB and the International Accounting Standards Board (IASB) released a paper on a possible new approach to lease accounting.

The paper Leases: Preliminary Views responds to concerns raised by investors and other financial statements users about the treatment of lease contracts under IFRS and U.S. GAAP. In the paper, the boards propose that lease accounting should be based on the principle that all leases give rise to liabilities for future rental payments and assets—the right to use the leased asset—that should be recognized in an entity’s statement of financial position. The approach is aimed at ensuring that leases are accounted for consistently across sectors and industries, the boards said in a press release.

Many lease contracts don’t appear on a balance sheet because IFRS and GAAP split leases into two categories—finance leases (capital leases under GAAP) and operating leases—and only assets and liabilities arising from finance leases are recognized in the statement of financial position. For an operating lease, the lessee simply recognizes lease payments as an expense over the lease term.

The different accounting treatment of finance and operating leases has resulted in various problems, the standard setters say. For example, the split between finance leases and operating leases can result in similar transactions being accounted for very differently, reducing comparability. The difference in the accounting treatment of finance and operating leases also provides opportunities to structure transactions to achieve a particular lease classification, they say.

Because the boards previously decided to defer taking up lessor accounting in order to resolve the problems associated with lessee accounting as quickly as possible, the discussion paper deals mainly with lessee accounting. However, it describes some of the issues that must be addressed in a future proposed standard on lessor accounting.

The discussion paper is open for comment until July 17.