Lease accounting rules converge

The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have released an exposure draft that outlines proposed changes to the accounting for leases. 

Under existing accounting standards, a majority of leases are not reported on a lessee’s balance sheet, which critics say reduces transparency about an issuer’s assets and liabilities. 

“The development of an improved standard for leasing is vital,” said in a statement IASB chairman Hans Hoogervorst. “At present, investors must take an educated guess to determine the hidden leverage from leasing by using basic disclosures in financial statements and applying arbitrary multiples.”

The proposals require lease obligations to be recognized on an issuer’s balance sheet, and include “enhanced disclosures about leasing activities so users can understand the amount, timing, and uncertainty of cash flows arising from leases,” said in an email exchange a spokesperson for the Financial Accounting Foundation, which oversees the FASB.

The leases project is a converged effort between the FASB and the IASB, which for over a decade now have been working together to converge accounting standards. The goal of the project is to create a common financial reporting language that can be more seamlessly read across borders. 

The proposals offer a dual approach to the recognition, measurement, and presentation of expenses and cash flows arising from a lease. For most real estate leases, a lessee would report a straight-line lease expense in its income statement. For most other leases, such as equipment or vehicles, a lessee would report amortization of the asset separately from interest on the lease liability.

A lessee would only recognize assets and liabilities for leases of more than 12 months.

Stakeholders can provide feedback on the proposals until 13 September.