The efforts of the IASB to change lease accounting have stretched over a number of years. Their 2010 exposure draft received considerable criticism and since then a great deal of work has been done to refine the detail of how a new model might work, while keeping the overarching principle of having all leases included on the balance sheet. In May the IASB and the US Financial Accounting Standards Board (FASB) published an exposure draft of their revised proposals.
The fundamental principle of bringing what are currently classified as operating leases onto the balance sheet remains. The key changes in the new exposure draft are as follows:
- a lessee will not be required to recognise assets and liabilities for leases with a maximum lease term of no more than 12 months
- leases will be split into 'Type A' and 'Type
B'. A Type A lease is one where the lessee consumes "more
than an insignificant portion" of the asset over the lease
term, i.e. most equipment and vehicle leases. A Type B lease is one
where the lessee only consumes an insignificant portion of the
asset over the lease term, i.e. most property leases.
- Lessees under Type A leases would present amortisation and interest separately in the income statement, and principal paid and interest paid separately in the cash flow statement. Under Type B leases, a single straight- line lease expense and a single cash outflow would be presented.
- Lessors of Type A leases would derecognise the underlying asset and instead recognise a lease receivable and a retained interest in the underlying asset in the balance sheet. Interest income on both the lease receivable and the residual asset would be recognised over the lease term. For Type B leases, a lessor would continue to report the asset being leased in the balance sheet and recognise rental income in the income statement.
- the guidance on how to apply the definition of a lease has been changed with the intention that fewer contracts (such as certain types of service contracts) will be classified as leases
- variable lease payments (unless fixed in substance or linked to an index or rate) and payments in optional renewal periods (unless the lessee has a significant economic incentive to renew) will now be excluded from the measurement of lease assets and liabilities.
The comment deadline is 13 September 2013, after which the boards "expect to have received sufficient information to proceed with and finalise the standard". The effective date of the new standard has yet to be decided.
Smith & Williamson commentary
The proposals set out in the new exposure draft represent a significant improvement, addressing many of the issues raised in the feedback on the original version. The removal of much of the complexity in measurement contained in the earlier proposals is particularly welcome. Nearly all entities have leases and many are currently classified as operating. In spite of the proposed improvements and simplifications, this will still be a significant change in accounting for a large proportion of IFRS preparers.
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