Just when it looked like there was clarity over how lease costs should be dealt with under proposed international accounting standards, further revisions have been announced.

The International Accounting Standards Board (IASB) has reversed its position on lease accounting and decided to adopt a single model for lease expenses, scrapping the dual approach agreed with its US counterpart, the Financial Accounting Standards Board (FASB), last year.

Alastair Kendrick, tax director at MHA MacIntyre Hudson, said: “The previous set of proposed revisions in relation to leases was issued in May 2013, including the proposed reporting by category of asset that was being leased.
“We now find that this proposal is no longer acceptable to the IASB, which proposes that the reporting is based on its original suggested approach that was issued back in 2010.”

The decision is at odds with the FASB, which is standing by the 2013 proposal, and the original plan of one global standard accounting policy now seems unlikely to be achieved.

The IASB said the feedback the two boards had received on the 2013 proposal from businesses was that the dual model was far too complex.

It said in a project update published this month: “On the basis of feedback received, the IASB concluded that a model that separately presents interest and amortisation for all leases recognised on the balance sheet would provide information that is useful to the broadest range of investors and analysts. This is because most investors and analysts consulted think that leases create assets and debt-like liabilities for a lessee.”

The IASB also noted that the single-lessee model is “easy to understand – a lessee recognises fixed assets and financial liabilities, and corresponding amounts of amortisation and interest.

“It also avoids any restructuring that might arise from having different accounting for different leases, which was a concern expressed by some investors and analysts.”

It continued: “The IASB is of the view that all leases result in a lessee obtaining the right to use an asset and the provision of financing, regardless of the nature or remaining life of the underlying asset.

“Accordingly, the IASB concluded that all leases should be accounted for in the same way.”

Kendrick said: “Essentially, we are back where we were in 2010 and on this basis those who lease cars on contract hire will need to recognise all leases on their balance sheets with an entry in respect of interest and repayment of the lease. This will clearly impact on the shape of corporates’ balance sheets and their gearing for funding in the City.

“It is vitally important that this fact is now appreciated and steps are taken to measure the potential impact.”

The project to converge accounting standards was launched in 2006 and a discussion paper was released in 2009. Two exposure drafts followed in 2010 – in which both boards proposed a single lessee model – and 2013 when the dual model was proposed.

Vehicle leasing represents less than 5% of the total value of leased assets by large UK companies with the vast majority being property, according to the British Vehicle Rental and Leasing Association (BVRLA).

But it argued that the dual model suggested last year would impose significant additional cost and administrative burdens on businesses, while not giving the benefits envisaged throughout this long, drawn-out process.

In the project update, the IASB said the two standard-setting boards will now continue to discuss lessee disclosures and transition requirements, and will reconsider opportunities to reduce the cost and complexity of the requirements.

The IASB and the FASB also will continue to discuss the project jointly, with the goal of minimising any differences between US Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).

Kendrick added: “The IASB expects to issue a new leases standard in 2015.”