How the lease accounting proposal may change
Acknowledging that the converged leases project poses difficulties for standard-setters, International Accounting Standards Board (IASB) Chairman Hans Hoogervorst described some possible solutions Wednesday during a speech in Tokyo.
The IASB and the US Financial Accounting Standards Board (FASB) are involved in new deliberations on their converged leases project after receiving feedback from financial statement preparers that said implementation costs would be high and benefits would be low if a proposal released in May is approved.
“We take these concerns very seriously,” Hoogervorst said. “As we take our final decision in the next couple of months, you can rest assured that we will do our utmost to keep these costs at a minimum.”
Hoogervorst said the boards may make the following changes to the proposal:
- Excluding small-ticket items. One possibility is permitting requirements to be applied to a portfolio of leases, Hoogervorst said. For example, if a business leases 100 photocopiers, they could be accounted for as one item.
- Limiting the changes to lessor accounting. Many stakeholders do not consider lessor accounting to be broken, Hoogervorst said.
- Simplifying the distinction between Type A and Type B leases. The current proposal classifies leases as Type A when a more-than-insignificant amount of the value of the asset is consumed during the lease period. These include most equipment and vehicle leases. Type B leases under the proposal have an insignificant amount of the value of the asset consumed during the lease. Most property leases would be considered Type B leases.
A committee of the American Institute of CPAs recommended a dividing line that it said would be simpler. In its comment letter, the Financial Reporting Executive Committee (FinREC) said leases consistent with in-substance finance purchases should be accounted for as Type A leases, and other leases should be accounted for as Type B.
Hoogervorst said the overwhelming majority of financial statement users have said they agree with the boards’ conclusion that leases contain a heavy amount of financing.
“They do not like the present situation, in which they have to make their own estimates of the hidden leverage underlying lease contracts,” Hoogervorst said. “They simply want to see leases on the balance sheet and want the rigour and comparability that only an accounting standard can offer.”
In addition, Hoogervorst said, the boards have found that many investors, when making their adjustments to balance sheets, actually exaggerate the implicit leverage in leases. So the leases standard could make many companies look better in the eyes of investors, he said.
Hoogervorst also predicted that the leases standard will be similar to standards that brought pensions onto balance sheets, providing transparency that changed business practices.
“I expect that more than a few executives are not fully aware of the implicit leverage caused by leases,” Hoogervorst said. “The leases standard will help them to make better-reasoned decisions between purchasing and leasing.”
—Ken Tysiac (firstname.lastname@example.org) is a CGMA Magazine senior editor.