Last August, the IASB and FASB issued an exposure draft (ED) on lease accounting under which all leases would be brought onto the balance sheet of lessees. However, following significant criticism, the Boards have tentatively decided to revise many of the ED’s proposals. There are no changes to the core principle of bringing all leases on balance sheet, other than for short-term leases, and lessor accounting has yet to be discussed in any detail. There is, however, a reduction in much of the complexity and the resulting accounting will, in many areas, be more in line with existing accounting. In particular:
- Extension periods are to be included only where there is a significant economic incentive to renew the lease, rather than being the longest term that is more likely than not, and so for many vehicle leases the lease term will be the primary terms.
- Only those contingent rentals based on an index or rate (and in-substance minimum lease payments) would be recognised in the lease liability, meaning that items such as excess mileage charges would not need to be estimated at the outset.
- Bargain purchase options are to be included in lease accounting rather than omitted as previously proposed.
- Where the maximum possible lease term is less than twelve months, it is suggested that lessees would have an option not to recognise such leases on balance sheet.
It is now suggested that, rather than the single model proposed in the ED, leases be classified as either finance leases or other-than-finance leases. Both would be on balance sheet but the pattern of expense for other-than-finance leases would be similar to existing operating lease accounting. Whilst this revised pattern of expense may be welcomed, this will reintroduce the complexity and subjectivity of current lease classification.
Overall, it appears that the Boards have listened to the comments made and are now making good progress dealing with the comment letters. However there is still some distance to travel. The Boards are aiming to issue a new standard in 2011 but, given the extensive changes, the leasing associations have suggested that the proposals be further exposed before a new standard is issued.
Peter Lomax - senior manager - KPMG