August 2010

Proposal Would Require Most Leases to Appear on the Balance Sheet

From Journal of Accountancy.

FASB and the International Accounting Standards Board (IASB) today unveiled a joint proposal to revamp lease accounting.

The proposal would result in a single “right-of-use” approach applied consistently to lease accounting for lessees and lessors. Among other changes, the approach would result in the liability for payments under all lease contracts within the scope of the standard and the right to use the underlying asset being included on the lessee’s balance sheet. The standard setters say the changes would improve the information available to investors and other financial statement users about the economics surrounding lease contracts.

“The leasing industry plays an important role in many economies by helping companies manage cash flow and working capital,” IASB Chairman Sir David Tweedie said in a press release. “However, much of the estimated annual $640 billion of lease commitments fails to appear on the balance sheet of lessees, thereby giving a false impression of companies’ liabilities and gearing.”

Unlike their discussion paper, Leases: Preliminary Views, published in March 2009, which focused primarily on lessee accounting, the exposure draft, Leases, would result in changes on both sides of a lease transaction. The proposal includes simplified accounting for short-term leases—leases having a maximum term of 12 months or less. The simplified accounting would allow lessees to ignore the effects of interest on the recorded assets and liabilities and allow the lessee to record the liability for lease payments at the undiscounted amount for lease payments.

Read more.