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FASB, IASB Differ on Accounting Model for Leasing

Tammy Whitehouse | March 20, 2014

A converged standard on lease accounting is still a distant vision on the horizon, but rule makers in the United States and overseas say they are committed to the continued effort to achieve it.

The Financial Accounting Standards Board and the International Accounting Standards Board began the arduous task of working through a mountain of criticism and other feedback to their May 2013 joint proposals for how to bring leases on to corporate balance sheets in both U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards. After two days of joint meetings, the board arrived at some common conclusions about how to address short-term leases and the terms associated with lease contracts.

Still elusive, however, is agreement on how to recognize the expense associated with leased assets. “While differences remain, most notably in their preferred approaches to expense recognition, the boards are committed to working together to minimize these differences and to creating greater transparency around lease transactions for the benefit of investors worldwide,” FASB and IASB said in a joint statement. FASB recently published a summary of tentative decisions reached by the two boards.

In straw votes during their meetings, FASB Chairman Russell Golden counted a majority of FASB members in agreement with retaining the approach recommended in the proposed standard that leases would be classified based on asset type, with differences established for equipment leases as compared to property or real estate leases. A majority of IASB members, however, favored doing away with classification and treating all leases like the financed acquisition of an asset. “Each board has relatively strong feelings on the issue,” says Rich Stuart, a partner with McGladrey who observed the discussions. “There is still agreement that an asset and a liability should be on the balance sheet. By itself, that's a big step. Nobody seems to be fighting that anymore.”

FASB and IASB staffs were instructed to perform more research and recommend a possible path forward that would bring the different board views into closer alignment. 

As for the accounting for lessors, Stuart says, the boards are slightly more aligned. FASB favors a method in which lessors would not be abel to recognize profit on a lease contract unless they transfer control of a leased asset to the lessee. They like that idea because is consistent in concept with new requirements for recognizing revenue that are expected to be finalized at some point in 2014. The IASB, however, does not want to establish a control concept for lessors in the leasing standard, says Stuart. “They are closer on the lessor side, but not exactly there.”

The boards also debated whether to grant an exemption for “small ticket” items, so that companies will be spared detailed lease accounting calculations for every minor piece of office equipment, says Stuart. IASB is in favor of such an exemption while FASB is not.

The boards expect to convene again to resume discussion on the leasing standard, perhaps in April or May, Golden said at the conclusion of the joint sessions.