The Financial Accounting Standards Board (FASB) has issued its second Exposure Draft as part of its project to change the manner in which entities account for lease transactions. The first Exposure Draft was issued in August 2010 and generated over 800 comment letters. The FASB conducted extensive redeliberations on this topic prior to releasing the second Exposure Draft. The International Accounting Standards Board (IASB) issued its proposal simultaneously with the FASB's action. The revised Exposure Drafts for both organizations are nearly identical.
The Exposure Draft outlines an approach to lease accounting that would require a lessee to recognize assets and liabilities for the rights and obligations created by leases with a maximum possible term of more than 12 months. The asset would represent the lessee's right to use the underlying asset, and the liability would recognize the lessee's obligation to make lease payments. The right-of-use asset and lease liability would initially be measured at the present value of lease payments.
The recognition, measurement and presentation of expenses and cash flows would depend on whether the lessee consumes more than an insignificant portion of the asset. For most real estate leases, a lessee would report a straight-line lease expense in its income statement. For most other leases, such as equipment or vehicles, a lessee would report amortization of the asset separately from interest on the lease liability.
The accounting applied by a lessor would also depend on whether or not the lessee consumes more than an insignificant portion of the asset. The lessor would account for most real estate leases in a manner similar to existing operating leases. The lessor would continue to recognize the underlying asset and would recognize lease income over the lease term. Such income would typically be recognized on a straight-line basis. For most leases of assets other than property, the lessor would derecognize the underlying asset and recognize a receivable representing the right to receive lease payments and a residual asset which represents the rights relating to the underlying asset that are retained by the lessor. Any profit relating to the lease would be recognized at the commencement date while interest income would be recognized over the lease term.
In making the calculations referenced above, both the lessee and the lessor would exclude most variable lease payments. Payments to be made in optional periods would be included if the lessee has a significant economic incentive to exercise an extension or not to exercise a termination option.
For leases that have a maximum possible term, including any optional extensions, of 12 months or less, an accounting policy election could be made which would allow an entity to account for the lease in a manner that is similar to the current accounting for operating leases.
Disclosures that provide additional information regarding the amount, timing, and uncertainty of cash flows arising from leases would be required. Transition guidance indicates that all leases (including pre-existing leases) would need to be recognized and measured at the beginning of the earliest period presented.
The Exposure Draft does not specify a proposed effective date. Both the FASB and the IASB recognize that these changes to lease accounting will affect the financial statements of a vast majority of entities. This, along with other relevant factors, will be considered when determining an effective date.
Comments related to this Exposure Draft are due on September 13, 2013. It is currently anticipated that a final standard will be issued during 2014.
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