As part of their global convergences
process, the IASB and FASB (the Boards) have been working to put
together a single, comparable, worldwide lease standard. In March
2009, the Boards issued a joint discussion paper. They expect to
release an exposure draft in mid-2010 and a final standard in
mid-2011, which will require all leases to be reported on the
lessee’s balance sheet.
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This will have a substantial impact on
lessees’ financial statements, and importantly, the new standard
will also remove the distinction between operating and finance
leases.
Initially, lessor accounting was scoped out of
the project because of time pressures. However, in response to FASB
concerns, and responses to the discussion paper, it now seems
likely that the Exposure Draft will include lessor accounting.
At the November 2009 meeting of the Boards,
initial and subsequent measurement of the lessee’s obligation to
pay rentals and right-of-use asset was discussed, and certain
tentative decisions were reached. Initial measurement of the
lessee’s right-of-use asset would be at cost, which would then be
carried at amortised cost and charges described as amortisation
rather than rental expense.
For the lessee, initial measurement of the
lessee’s obligation to pay rentals will be based on the present
value of the lease payments, discounted at the incremental
borrowing rate. It could prove particularly difficult to calculate
an accurate incremental borrowing rate for existing operating
leases for the lessee, and this liability will then be held at
amortised cost.
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By GlobalDataAt the November meeting, there was continuing
discussion of lessor accounting, and under current proposals the
lessor will recognise the leased asset, a lease receivable and a
liability reflecting the performance obligation.
It was decided that initial measurement of the
lessor’s receivable would be at the present value of the lease
payments, discounted using the interest rate implicit in the lease,
plus any initial direct costs incurred by the lessor. Subsequent
measurement would be at amortised cost using the effective interest
method and it is likely that the information required to discount
the future payments will be much more readily available to the
lessor than lessee as part of their deal evaluation process.
Equal and opposite to the receivable is the
lessor’s performance obligation. The lessor’s performance
obligation would be at the transaction price with subsequent
measurement reflecting decreases in the obligation to permit the
lessee to use the leased item over the lease term. However, unless
some element of netting is allowed, the lessor may end up “double
counting” on its balance sheet, with both the receivable and the
performance obligation recorded gross, as well as the leased
asset.
In summary, although no final decision on
whether to include lessor accounting in the scope of the standard
has been made, it now seems likely that the exposure draft will
encompass both lessee and lessor accounting; although how and when
this will be included in the issued standard remains to be
seen.
The author is a senior manager
at PricewaterhouseCoopers LLP. The views expressed are the views of
the author and do not necessarily reflect the views of the
firm.
