International Accounting Standards | Lease accounting

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Lease accounting: New International Accounting Standards

Two and a half years after the last publication of its proposals on the subject, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have finally issued a revised draft accounting standard with regards to lease accounting, for public comment. It will inevitably take a little time to digest and assess the detail of the new proposals but, at first glance, whilst it is apparent that some of the initial feedback has been taken on board and the proposals have been simplified, there still remains some unnecessary complexity which will inevitably be expensive and onerous to implement for businesses who use leasing.

Update Feb 2016: New lease accounting standard has been formally published – read our new article here

Why are the current standards being changed

According to the IASB:

The objective of the project

[to revise lease accounting standards] is to develop a standard that establishes the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing and uncertainty of cash flows arising from a lease. To meet that objective, an entity shall recognise assets and liabilities arising from a lease.

So, in a nutshell, the intention is to attempt to increase the transparency of financial reporting with regards to leasing and treat all leases as a form of  ‘on balance sheet’ financing, thus ensuring that users of a set of financial statements are more informed of the benefits and obligations of any leases in force. Currently leases are classified as either a capital (typically a finance lease) or an operating lease, with the latter not being required to be shown on a lessees’ balance sheet. The IASB and FASB argue that this fails to give an overall, accurate and comparable picture of the economics of lease transactions.

Concerns with the proposed changes

Whilst it generally accepted that some changes are required with regards to lease accounting, a number of concerns have been expressed about the changes previously proposed. These largely centred around the complexity of the proposals, the level of subjectivity required, the proposed lessee expense profiles, the concepts of ‘excessive burden’, ‘contingent rentals’ and ‘term options’, and even the definition of a lease itself.  Put simply, the proposals were considered to be conceptually flawed, subjective and onerous and expensive for businesses to implement.

Industry bodies from around the World, including the Finance and Leasing Association and BVRLA in the UK, have lobbied vociferously against large elements of the proposed changes. As the new proposed standard is absorbed and assessed in more detail over the coming weeks, the extent to which the standard setters have taken note, will begin to become clearer. Initial reactions suggest that whilst they have taken on board some of the issues raised, there still remain a number of concerns that still need to be addressed.

One Comment

  1. Robert Eggleston May 17, 2013 at 6:57 am

    Bank Revolving Credit Facilities (RCFs) often contain a restriction on third party borrowing which then drives corporates down the operating lease route (as it is not classed as borrowing as such). It will be interesting to see how banks react to this. Whilst I beleive the change to be sensible it will make for some interesting reading of restated accounts when, and if, this change is implemented.

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