The International Accounting Standards Board (IASB) issued a much-anticipated new accounting standard Tuesday that will require all leases to be reported on a company’s balance sheet as assets and liabilities.
For the IASB, the issuance of IFRS 16, Leases, completes a convergence project that resulted in similar conclusions in some areas of lease accounting, but some differences in accounting for lessees. The US Financial Accounting Standards Board’s (FASB’s) leases standard also is complete and is in production, with publication expected in February.
Both boards agreed to substantially carry forward the existing accounting requirements for lessors. But for lessees, the IASB decided on a single model for all lease recognition, while FASB has decided on a dual model.
Under FASB’s model, lessees will account for most existing capital leases as finance leases (recognising amortisation of the right-of-use asset separately from interest on the lease liability), while most existing operating leases will be accounted for by lessees as operating leases (recognising a single total lease expense).
The IASB’s model requires lessees to account for all leases as finance leases, with amortisation of the right-of-use asset recognised separately from interest on the lease liability.
FASB and the IASB agreed on the key issue of bringing leases onto balance sheets, on the definition of a lease, and how lease liabilities should be measured. The boards initiated the project to improve lease accounting in response to concerns about a lack of transparency about companies’ lease obligations.
In 2005, the US Securities and Exchange Commission estimated that US public companies may have had approximately $1.25 trillion of off-balance-sheet leases.
“These new accounting requirements bring lease accounting into the 21st century, ending the guesswork involved when calculating a company’s often-substantial lease obligations,” IASB Chairman Hans Hoogervorst said. “The new standard will provide much-needed transparency on companies’ lease assets and liabilities, meaning that off-balance-sheet lease financing is no longer lurking in the shadows. It will also improve comparability between companies that lease and those that borrow to buy.”
IFRS 16 will take effect January 1st 2019.
FASB’s leases standard will take effect for public companies for fiscal years (and interim periods within those fiscal years) beginning after December 15th 2018. For private companies, FASB’s standard will take effect for annual periods beginning after December 15th 2019.
—Ken Tysiac (firstname.lastname@example.org) is a CGMA Magazine editorial director.