The International Accounting Standards Board has issued its long-awaited accounting standard requiring assets and liabilities associated with leases to be added to corporate balance sheets. The Financial Accounting Standards Board is expected to follow suit with its similar but not identical standard in a matter of weeks.
The IASB is giving companies that follow International Financial Reporting Standards until 2019 to adopt the standard. The FASB has set a similar time line for public companies that follow U.S. Generally Accepted Accounting Principles, both boards allowing companies first to get through the monumental task of adopting massive new standards on revenue recognition.
“It’s been a long road getting to this event,” says Sean Torr, a director at Deloitte Advisory. “New accounting standards for leasing are going to impact many or most companies in the United States and across the globe. This is a significant just because it is changing a large accounting area, but also because of the way it is bringing everything on to balance sheets where before it was all disclosed in footnotes.”
The IASB and FASB are aligned in their requirement for companies to reflect the assets and liabilities arising from leases on corporate balance sheets. They are aligned in how they will define a lease and how it will be measured as well.
The standards will differ, however, in how the financial obligations associated with leasing will be reflected in income statements. The IASB’s standard will establish a single model for all leases to be added to balance sheet. Companies will account for all leases as finance leases, recognizing amortization of the asset separate from interest on the lease liability, with an exception provided for “small ticket” and short-term leases of less than 12 months.
In terms of the income statement effect, FASB has decided to retain a dual approach similar to what exists in current GAAP. All leases will be reflected on the balance sheet under the new standard, but the effect on the income statement will differ depending on how leases are classified under the dual model. FASB says companies will account for most existing capital leases as finance leases, amortizing the asset separate from the lease liability, while most operating leases today will be recognized as a single total lease expense.
“The biggest difference in the two standards will be the expense pattern,” says Torr. “This was a topic where the two boards were trying to converge but ultimately ended up where they didn’t get convergence.”
Companies under both IFRS and US GAAP will face significant adoption efforts primarily in gathering data on their lease obligations and developing methods to track them over time and run calculations necessary to produce the accounting results, says Torr. “Many leases might still be manual in nature,” he says. “They may be scattered across the organization, and they may be in foreign languages and different currencies. The data gathering exercise is a long lead time activity. Then to take that information and bring it into an electronic format to do the necessary calculations -- that will be one of the longest lead time activities for most companies.”
The IASB is hosting webcasts on Wednesday to coincide with its release of the final standard.