On 17 August 2010, The IASB and US FASB published for public comment joint proposals to improve the financial reporting of lease contracts. As mentioned in the press release, the proposals are one of the main project included in the board's MoU. The proposals, if adopted, will greatly improve the financial reporting information available to investors about the financial effects of lease contracts. The proposed requirements would supersede IAS 17 Leases in IFRSs and the guidance in Topic 840 on leases in US GAAP.
The exposure draft (ED) is open for public comment until 15 December 2010.
In the ED, the boards propose to define a lease as a contract in which the right to use a specified asset is conveyed, for a period of time, in exchange for consideration. In the boards' view, this definition retains the principle in the definition of a lease in both IFRSs and US GAAP.
Current IAS 17 Leases defines a lease as an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for a agreed period of time. A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset. Title may or may not eventually be transferred. An operating lease is a lease other than a finance lease.
IFRSs and US GAAP classify leases into two categories : finance leases (called capital leases under US GAAP) and operating leases. Categorisation is based on various factors. If a lease is classified as a finance lease, assets and liabilities are shown on the lessee's balance sheet. However, for an operating lease the lessee does not show any assets or liabilities on the balance sheet. The lessee simply accounts for the lease payments as an expense over the lease term. Hence, investors have to estimate the effect of operating leases on financial leverage and earnings, and routinely have to adjust the financial statements of lessees for the effects of operating leases. Such adjustments are either arbitrary or based on estimates.
As the solution, the proposed model of lease accounting would reflect assets and liabilities arising from all lease contracts. All leases have to be recorded on the balance sheet. So, investors would no longer need to adjust the amounts presented in the balance sheet and the income statement to reflect the assets, liabilities and finance costs arising from lessees' operating leases.
In the ED, the boards also proposing a 'right-of-use' model in accounting for all leases (including leases of right-of-use assets in a sublease) where both lessees and lessors record assets and liabilities arising from lease contract. The assets and liabilities are recorded at the present value of the lease payments, and subsequently measured using a cost-based method.
In conjunction with revaluation issue, the ED proposes the approaches to the revaluation of right-of-use assets as follows :
(a) lessees using IFRSs would have the option to revalue right-of-use assets
(b) lessees using US GAAP would not be permitted to revalue right-of-use assets unless required to do so to recognise an impairment loss.
The ED proposes that if an entity applying IFRSs revalues a right-of-use asset, it should revalue the entire class of asset (ie the entire class of assets comprising all owned and leased assets) to which the underlying asset belongs.
The IASB Press Release and Exposure Draft are available to download in here : Exposure Draft and Comment Letter
Read also (updated December 2, 2010) :
