As the International Accounting Standards Board releases its final standard on leasing, U.S. rule makers are advising companies to get busy preparing to transition to a new standard under U.S. rules as well.
The IASB issued its long-awaited leasing standard requiring all companies following International Financial Reporting Standards to reflect assets and liabilities associated with lease obligations on their balance sheets. The IASB says listed companies following either IFRS or U.S. Generally Accepted Accounting Principles have an estimated $3.3 trillion in lease obligations that do not appear in financial statements except through footnote disclosures.
The new requirements bring lease accounting into the 21st century, said IASB Chairman Hans Hoogervorst in a statement. “The new standard will provide much-needed transparency on companies’ lease assets and liabilities, meaning that off-balance-sheet lease financing is no longer lurking in the shadows,” he said. “It will also improve comparability between companies that lease and those that borrow to buy.”
The Financial Accounting Standards Board says it will issue its own standard with similar requirements during the first quarter of 2016, but it is urging companies to begin planning to adopt the standard now. “As soon as possible -- even prior to the issuance of the new leases standard -- preparers should consider creating a transition timeline and action plan,” FASB says in an alert on its website targeted to companies that lease property and equipment.
While the IASB is requiring companies to recognize leases like the financed purchase of an asset, the FASB is retaining an accounting model that contemplates two types of leases similar to the way they are categorized in GAAP currently. Finance leases will be treated much like today’s capital leases. Operating leases will be accounted for both in the income statement and the statement of cash flows similar to the way operating leases are treated today. On the balance sheet, however, companies will recognize a lease liability for operating leases based on the present value of remaining lease payments along with a corresponding lease asset.
The new standard also will require new disclosures, both quantitative and qualitative, to help users of financial statements better understand the amount, timing, and uncertainty of cash flows arising from leases, FASB says.
The board is advising preparers to think of the new standard as simply moving today’s operating lease obligations from the footnotes to the balance sheet -- “basically a change in display.” The board says its outreaching during the long road to deliberating a new lease standard suggests most entities should be able to meet the new reporting and disclosure requirements using existing systems and processes.
Still, FASB says entities can expect “some level of effort” with initial implementation to identify all leases under the standard’s new definition of leases, evaluate each lease to determine whether it is a financing lease or an operating lease under the new standard, and then apply the proper accounting and assure the necessary disclosures.
“As part of transition planning, organizations may want to form a transition team that includes individuals from departments other than accounting and external reporting,” FASB says. “It may be wise to include treasury, legal departments, and others.” Companies also should plan to explain the effects of the changes in accounting for leases in financial statements before adoption, FASB says.