Changes to LEASE Accounting, What Are the MAIN PROPOSALS?

As mentioned before in my post “Latest Changes for Lease Accounting”, on 16 May 2013, the IASB and the FASB published for public comment a revised ED outlining proposed changes to the accounting for LEASES. The proposal aims to improve the quality and comparability of financial reporting by providing greater transparency about leverage, the assets an organization uses in its operations and the risks to which it is exposed from entering into leasing transactions.

In detail, the core principle of the proposed requirements is that an entity should recognize assets and liabilities arising from a lease. This represents an improvement over existing leases requirements, which do not require lease assets and lease liabilities to be recognized by many lessees.

In accordance with that principle, a lessee would recognize assets and liabilities for leases with a maximum possible term of more than 12 months. A lessee would recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the leased asset (the underlying asset) for the lease term.

The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee would depend on whether the lessee is expected to consume more than an insignificant portion of the economic benefits embedded in the underlying asset. For practical purposes, this assessment would often depend on the nature of the underlying asset.

For most leases of assets other than property (for example, equipment, aircraft, cars, trucks), a lessee would classify the lease as a Type A lease and would do the following :

1. recognize a right-of-use asset and a lease liability, initially measured at the present value of lease payments; and
2. recognized the unwinding of the discount on the lease liability as interest separately from the amortization of the right-of-use asset.

For most leases of property (i.e land and/or a building or part of a building), a lessee would classify the lease as a Type B lease and would do the following :

1. recognize a right-of-use asset and a lease liability, initially measured at the present value of lease payments; and
2. recognize a single lease cost, combining the unwinding of the discount on the lease liability with the amortization of the right-of-use asset, on a straight-line basis.

Similarly, the accounting applied by a lessor would depend on whether the lessee is expected to consume more than an insignificant portion of the economic benefits embedded in the underlying asset. For practical purposes, this assessment would often depend on the nature of the underlying asset.

For most leases of assets other than property, a lessor would classify the lease as a Type A lease and would do the following :

1. derecognize the underlying asset and recognize a right to receive lease payments (the lease receivable) and a residual asset (representing the rights the lessor retains relating to the underlying asset);
2. recognize the unwinding of the discount on both the lease receivable and the residual asset as interest income over the lease term; and
3. recognize any profit relating to the lease at the commencement date.

For most leases of property, a lessor would classify the lease a a Type B lease and would apply an approach similar to existing operating lease accounting in which the lessor would do the following :

1. continue to recognize the underlying asset; and
2. recognize lease income over the lease term, typically on a straight-line basis.

When measuring assets and liabilities arising from a lease, a lessee and a lessor would exclude most variable lease payments. In addition, a lessee and a lessor would include payments to be made in optional periods only if the lessee has a significant economic incentive to exercise an option to extend the lease, or not to exercise an option to terminate the lease.

For leases with a maximum possible term (including any options to extend) of 12 months or less, a lessee and a lessor would be permitted to make an accounting policy election, by class of underlying assets, to apply simplified requirements that would be similar to existing operating lease accounting.

An entity would provide disclosures to meet the objective of enabling users of financial statements to understand the amount, timing and uncertainty of cash flows arising from leases.

On transition, a lessee and a lessor would recognize and measure leases at the beginning of the earliest period presented using either a modified retrospective approach or a full retrospective approach (HRD).

Read Also :

1. FASB-IASB Propose Major Changes to Lease Accounting
2. New Accounting Proposal on Leasing Portends Big Changes