FASB and IASB Resolve Disagreement on Lease Expenses

The Financial Accounting Standards Board and the International Accounting Standards Board said Wednesday they have agreed on an approach for accounting for lease expenses.

The two boards had favored differing approaches on income statements for lessees during a tense meeting in London at the end of February (see FASB and IASB Part Ways on Leasing). The majority of FASB members favored an “interest-based amortization method” under which leases that transfer substantially all of the risks and rewards of a risked asset would be accounted for under a right of use model. The IASB favored an approach in which the right of use asset would be amortized based on the estimated consumption of the value of the underlying lease asset. The two boards agreed at the time to do further outreach with their constituents and reconvene later.

The boards had originally undertaken the leases project to address the widespread concern that many lease obligations currently are not recorded on the balance sheet and that the current accounting for lease transactions does not represent the economics of all lease transaction. So far, any decisions on the leasing project reached to date are preliminary. The boards said they plan to release a joint exposure draft in the fourth quarter of this year.

The boards had previously agreed that leases should be recorded on the balance sheet, but have continued to discuss their disagreement over the classification and pattern of expenses in the income statement. In the decision reached Wednesday, the boards decided upon an approach in which some lease contracts would be accounted for using an approach similar to that proposed in the 2010 exposure draft on lease accounting, and some leases would be accounted for using an approach that results in a straight-line lease expense.

“The boards carefully considered the diverse views of stakeholders about whether the income statement profile of all leases should be the same,” said FASB chair Leslie F. Seidman in a statement.  “On balance, we decided that leases that convey a relatively small percentage of the life or value of the leased asset should be recognised evenly over the lease term.”

Now that the two boards have resolved the issue, they plan to re-expose the latest version of the revised lease accounting proposals.

“The boards have reached agreement on a proposed approach to put leases over one year on the balance sheet,” said IASB chairman Hans Hoogervorst. “We will publish our proposals for public comment, with a view to completing this important convergence project during 2013.”