The International Standards Board (IASB) and the Financial Accounting Standards Board (FASB
), have announced that the final leases standard will be finalised before the end of the year.
This will be the culmination of nearly a decade’s work on this joint project to introduce new accounting leases standards. To reach this point, there have been many different phases and work undertaken, including the publishing of discussion papers, two exposure drafts, and public consultation analysis.
We are now nearing the end of the journey to create and finalise the new leases standard.
The two bodies are re-deliberating the most substantial changes, with the goal of bringing transparency, accountability, comparability and efficiency to the accounting models for leases.
They have provided an overview of several key elements or “tentative decisions” that have been decided. These outline what we could expect the final leases standard to be as well as some relevant effects of the lease accounting changes
Potential Changes With New Leases Standard
- A proposed new definition, more elaborated, emphasizing the fact of controlling the right to use an identified asset and the decision of how to use it.
- All financial leases and operating leases have to be recognized in the balance sheet, with the exception of short-term leases and small leases assets. It will depend on the number of the operating leases each company has, but the increase of the total assets and liabilities is guaranteed. Therefore, each company will need to keep under control the different ratios as high debt ratio or equity, just to name a few.
- Income statement recognition profile, depending on the type of the lease (A or B). This is the point where the divergences of criteria between the Boards have become more tangible.
- New model for lessor accounting. The “receivable and residual” approach would be eliminated in this new document, with all financial leases tentatively being treated as a sale.
- More disclosure within the financial statements. For example, the Lease ROU (Right-of-use) Asset information will have to be included.
- We will have to wait to finally know what retroactive transition approach will use for lessees and lessors. They agreed to have a transition relief provision, but it is not that certain what kind of reassessments will be applicable.