On May 16, 2013, the FASB (Financial Accounting Standards Board) and IASB (International Accounting Standards Board) issued a revised joint exposure draft (ED) on leases that, if adopted, would pose significant changes for both lessees and lessors. As we informed our readers in December in our Accounting Insights Newsletter, the FASB was working on a revised ED on accounting for leases that was originally published in August 2010.
The primary difference between the original release in 2010 and the proposed ED released in May of this year is that the joint ED proposes a dual approach to the recognition, measurement, and presentation of expenses and cash flows arising from a lease for both lessees and lessors. The new proposal suggests the following:
- Lessees would report lease expense on a straight-line basis in their income statement for leases under which they are not consuming a “more than significant” portion of the economic life of the asset. Typically, this would include most leases of real property.
- Lessees would report the amortization of a “right of use” asset if they are to use a “more than significant” portion of the economic life of the asset being leased. The right of use asset, under this type of lease would be measured at cost, less amortization. The amortization of this asset would be recorded separately from interest on the lease liability. This would result in a total lease expense that generally would decrease over the lease term, similar to the manner in which a note would be amortized (i.e. more interest expense in the earlier years of the note and a greater reduction of principal as the note gets closer to maturity). This approach would be used for most leases of tangible personal property such as equipment and vehicles.
Lessors of tangible personal property would account for leases in such a manner that would provide more transparency about their exposure to credit risk and asset risk.
As with most accounting rules, the new proposal requires judgment with regard to what is considered “more than significant”. For example, a 30-year lease on real property with an economic life of 40 years may be subject to the reporting entities’ interpretation and either approach (straight-line expensing or capitalization and amortization of right of use asset) could be applied.
Investors and stakeholders are not necessarily pleased with the dual-recognition approach, as it causes concerns that the reporting becomes more complex (i.e. entities may have financial statements that disclose lease information in multiple places).
As with our previous communications to our readers regarding this topic, the dual ED is still a proposal, and the FASB and IASB are seeking comments from the professional community of CPA’s through September 13th of this year.
It seems certain that there will be some changes in accounting for leases, but precisely what those changes are remains to be seen, so stay tuned.
Fore more information about our Cleveland Accounting Firm services, contact Jim Suttie by leaving a comment below or by calling 440-449-6800.