FASB and IASB narrow lessee accounting model options

FASB and the International Accounting Standards Board (IASB) have narrowed their focus in anticipation of a vote next month on a lessee accounting model in their joint convergence project on leases.

During deliberation last week, the boards ceased consideration of two of the four lessee accounting models that had been proposed.

FASB Chairman Leslie Seidman said that the vote in June should consider the models known as “Approach A” and “Approach D,” with an allowance for some combination of the two, depending on the circumstances, also to be considered. IASB Chairman Hans Hoogervorst said he also is open to some combination of those approaches.

A vote is expected during joint board meetings June 12–14.

Both approaches involve recognising the lease liability on the balance sheet, except for leases of less than 12 months.

In Approach A, the right-of-use (ROU) asset is accounted for as a non-financial asset and measured at cost less accumulated amortisation. The combination of the amortization charge on the ROU asset and the interest expense on the lease liability results in a total lease expense that would generally decrease over the term of the lease.

Approach D was developed by the FASB and IASB staffs following a February meeting during which the boards requested that outreach to stakeholders be performed on different expense patterns for lease contracts. The staff presented Approach D to financial statement users, lessees, lessors, and auditors from diverse geographic regions during outreach in April and May.

In Approach D, the lessee would allocate the total lease payments evenly over the lease term, resulting in straight-line total lease expense. This would occur even if the pattern of lease payments is not equal throughout the lease term. The lessee would present the total payments as lease expense. In this approach, the ROU asset and the lease liability are considered one unit of account when initially and subsequently measuring those balances.

During last week’s board deliberations, Approach A was the most popular, and board members seemed split on the importance of having just one approach. They recognised the idea, advanced by users of financial statements, that consistency is important. At the same time, many of them said the great variety in leases might make uniform treatment undesirable.

IASB member Patricia McConnell said all leases have similar characteristics and that preparers should be accounting for the transaction accordingly. She favoured Approach A.

“I don’t accept this notion that we should be trying to find a model that reflects the underlying motivation of the lessee for entering into the lease,” McConnell said. “I think we should be accounting for the lease.”

Some others said certain leases are fundamentally different. FASB member Russell Golden cited his participation in outreach with members of the airline industry as an example.

He said the airline experts said airplane leases are best reported on the balance sheet as described in Approach A, but the real estate leases should be on the balance sheet under Approach D.

Seidman also said leases vary substantially.

“I have been convinced that just because you write ‘Lease’ at the top of the paper does not mean that they all convey the same rights and obligations,” she said.

The leases project is an ongoing convergence project undertaken jointly by FASB and the IASB that has been highly scrutinised because of its scope, as a high percentage of companies are involved in leases of some form or another.

The initial ED was published in August 2010, and the standard is scheduled to be re-exposed in the second half of this year, according to the current technical plan.

—Ken Tysiac ( is a CGMA senior editor.