New proposal in lease project narrowly advances

The US Financial Accounting Standards Board (FASB) decided Wednesday to move forward with a re-proposal on financial reporting for leases that will be converged with that of the International Accounting Standards Board (IASB).

FASB Chairman Leslie Seidman cast the deciding vote in a 4–3 decision. Board members Tom Linsmeier, Marc Siegel and R. Harold Schroeder dissented.

The lease proposal, which is scheduled to be released for public comment by FASB in May, would put all leases on the balance sheet. It would require a dual expense-recognition approach for lessees (excluding short-term leases), depending on whether significant consumption occurs during the lease period.

So in general, equipment and vehicle leases that tend to depreciate significantly during the life of a lease would be accounted for differently from property leases, in which the asset usually does not depreciate and sometimes increases in value over the lease period.

In some cases, the dividing line between the two types of leases can be murky. And the very idea of having two models for accounting for leases is troubling for some because it can create complexity for users.

“Many people think that there should be one model here,” Seidman said. “That is not universal. But they do not agree about which model. So we’ve done our best to try and articulate a distinction that reflects what some perceive as the economics of the difference between what I’ll call ‘rentals’ and what I’ll call ‘finance-type leases.’ ”

During Wednesday’s meeting, FASB’s staff asked board members to address the effects the proposal would have on financial reporting complexity. Linsmeier said the proposal introduces significant complexity for users because it divulges lease information in multiple places in the financial statements without bringing it all together in one footnote.

“If [users] are trying to bring all that information that’s spread throughout the financial statements together to understand what the rights and obligations are under a lease, and what the related income statement and cash flows effects are, we did not provide them sufficient information to do so,” Linsmeier said.

The leases project has been watched carefully by various constituents because of its breadth, as many organisations are parties to lease contracts. Because of the extent to which leases are used, arriving at a converged standard could bring significant global comparability to financial statements.

The IASB plans to release its exposure draft by June 30th.

“We have worked tirelessly with the IASB on this proposal, and we are going out with a converged proposal, which I think is a significant accomplishment,” Seidman said. “I would like to try to end up with a converged improvement on the accounting for leases, and so on that basis, I’d like to move forward with this exposure draft.”

—Ken Tysiac (ktysiac@aicpa.org) is a CGMA Magazine senior editor.