The new leasing standard expected soon from the International Accounting Standards Board will take effect on Jan. 1, 2019, for companies following International Financial Reporting Standards.
The IASB is wrapping up its effort to rewrite the accounting rules in International Financial Reporting Standards for how companies should reflect leases in their financial statements, most notably to bring them on to corporate balance sheets. An IASB spokesman says the board decided this week to require entities to apply the new standard for periods beginning on or after Jan. 1, 2019. The board is also expected to allow early adoption.
The Financial Accounting Standards Board also is expected to issue its new leasing standard by the end of the year, but the board has not yet settled on an intended effective date. FASB is scheduled to discuss that issue at its Nov. 11 meeting, although a spokesman says FASB’s meeting schedule is always subject to change.
FASB and IASB have already set companies out on massive undertaking to overhaul their method of recognizing revenue in financial statements, with those standards taking effect in 2018. Both boards initially scheduled implementation for 2017 but provided an extra year after an outcry that companies needed more time, especially as both boards considered modifications to the standard to address implementation questions.
FASB and IASB worked for years to produce new rules for lease accounting that would lead to the same accounting outcomes under U.S. GAAP and IFRS. Ultimately, the boards agreed on how to define a lease and how leased assets and liabilities will be recognized on the balance sheet, but could not agree on how to reflect all lease obligations in the income statement.
FASB is proceeding with a two-lease model similar to the way today’s leases are classified as either capital or operating. FASB will require companies to amortize leased assets at a slower rate in the earlier years of a lease compared with the IASB approach, where amortization will occur more on a straight-line basis.
Bill Bosco, a lease consultant and a member of the Equipment Leasing Finance Association’s accounting committee, says FASB is likely to set the same effective date for its leasing standard as IASB has selected. It would give companies a year beyond the revenue recognition effective date to finalize their adoption of the new leasing standard, and it would set a consistent timeline with implementation under IFRS, he says. “Many large companies could not handle two major rules changes,” he says.
To illustrate the enormity of the task ahead, Bosco says major retailers like CVS or Walgreens with thousands of leased properties will have to examine each lease contract to extract rents, variable rent clauses, and the details of gross billed services that may have to be separated and analyzed further. “In one day, one person may be able to read eight leases, extract the information, spread the numbers for the retroactive reporting requirements, get decisions on renewals, and input the data in a system,” he says. And that doesn’t include equipment leases, he says.