On May 17, 2013, the FASB and the IASB published revised Exposure Drafts outlining proposed changes to the accounting for leases. The leases project is a converged effort between the FASB and the IASB—the revised Exposure Drafts for both organizations are nearly identical.
This project’s intent is to address widespread concern that many lease obligations are not recorded on the balance sheet and that the current accounting for leases does not represent the economics of all lease transactions.
The Boards have developed an approach to lease accounting that would require a lessee to recognize assets and liabilities for the rights and obligations created by leases. A lessee would recognize assets and liabilities for leases of more than 12 months.
The revised Exposure Drafts propose a dual approach to the recognition, measurement, and presentation of expenses and cash flows arising from a lease. For most real estate leases, a lessee would report a straight-line lease expense in its income statement. For most other leases, such as equipment or vehicles, a lessee would report amortization of the right-of-use asset separately from interest on the lease liability.
The comment deadline on the revised Exposure Drafts was September 13, 2013. In response to the comments received, the FASB decided that a lessee would account for most existing capital/finance leases by recognizing amortization of the right-to-use asset separately from interest on the lease liability and most existing operating leases as a single total lease expense. The IASB decided on an approach for lessee accounting under which all leases would be accounted for by recognizing amortization of the right-to-use asset separately from interest on the lease liability.
For lessors, the Boards decided that a lease should be classified on the basis of whether the lease is effectively a financing or a sale, rather than an operating lease. That determination would be made by assessing whether the lease transfers substantially all the risks and rewards incidental to ownership of the underlying asset. In addition, the FASB decided that a lessor should be precluded from recognizing selling profit and revenue at lease commencement for leases that do not transfer control of the underlying asset to the lessee.
The Boards are continuing to redeliberate the proposals in the revised Exposure Drafts.