No easy answers in key leases standard debate

The US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are struggling to find common ground in their efforts to create a converged standard for financial reporting on leases.

While meeting together Tuesday at FASB’s headquarters in Norwalk, Connecticut, the two boards came to different conclusions in preliminary votes on financial reporting guidance for lessees and for lessors.

The boards will meet again Wednesday in an effort to resolve their differences and move forward together with the difficult project, which was first placed on their agendas in 2006. They are trying to create international comparability on financial statements by placing leases on the balance sheet.

“We have been struggling with this standard for many years, for two reasons, I think,” IASB Chairman Hans Hoogervorst said. “First of all, because it’s very controversial. Many companies simply don’t like this stuff on the balance sheet. And secondly, because it’s also intellectually challenging. And I agree with all those who say there is no simple answer, and it’s a unique asset and liability that we’re talking about. It’s not easy to find the right answer.”

The boards did not come to the same answer on either lessee or lessor accounting Tuesday.

Lessee accounting

FASB and the IASB issued their second exposure draft in 2013. That document proposed a dual-reporting model for lessees. The proposal would have required lessees to classify their leases as Type A when a more-than-insignificant amount of the value of the asset is consumed during the lease period. That would have included most equipment and vehicle leases. Type B leases would have been those during which an insignificant amount of the value of the asset is consumed, such as most property leases.

But the 2013 exposure draft received overwhelmingly negative responses from preparers and questions from some financial statement users about the relevance of the information the proposed standard would produce. So FASB and the IASB are reconsidering their options.

With regard to lessee accounting, IASB members on Tuesday favoured requiring lessees to account for all leases as Type A leases – recognising amortisation of the right-of-use asset separately from the interest on the lease liability.

FASB members supported a dual approach that would determine lease classification in accordance with the principle in existing lease requirements, which hinge on whether a lease is effectively an installment purchase by the lessee. Under this approach, the vast majority of capital leases for US GAAP preparers and finance leases for IFRS preparers would be accounted for as Type A leases by lessees. The vast majority of existing operating leases would be Type B leases.

FASB member Daryl Buck said that approach is the simplest and most direct answer to the project objective of recording lease liabilities in the least disruptive way possible.

But Hoogervorst said the all-Type A approach is the most conceptually sound model.

“When we made the suboptimal choice of the dual model in the previous exposure draft, all the people who didn’t like the standard immediately started swarming to the conceptual weakness of this dual model,” Hoogervorst said. “I have come to the conclusion that if we want to get this through, we have to be as conceptually sound as possible.”

Lessor accounting

With regard to lessor accounting, the IASB members supported “Approach 1,” which would require lessors to classify leases as Type A or Type B based on whether the lease is effectively a financing or a sale. The lessor would make that determination by assessing whether the lessor transfers substantially all the risks and rewards incidental to ownership of the underlying asset.

FASB members supported “Approach 2,” which would use the same criteria as Approach 1 to distinguish between Type A and Type B leases, but would preclude recognition of selling profit and revenue at lease commencement for any Type A lease that does not transfer control of the underlying asset to the lessee, consistent with the requirements for a sale in the boards’ soon-to-be issued, converged revenue recognition standard.

Despite the disagreement, the boards will try again to find a common answer.

“I wanted to have a dialogue again about the difference on lessee accounting, to see if we can build some solutions,” FASB Chairman Russell Golden said after the boards failed to agree on lessor accounting. “It sounds like we can bring this up … as well to see if there’s any ability to move to come to a converged solution.”

Ken Tysiac ( is a CGMA Magazine senior editor.