Monitor - March/April 2012

INDUSTRY NEWS

FASB, IASB VOTE DIFFERING APPROACHES FOR LESSEES

ACCOUNTING TODAY REPORTED AT A RECENT MEETING that the boards of the FASB and IASB voted for differing approaches on the leasing standards project involving income statement changes for lessees.

However, the article noted that since the leasing standards are expected to be re-exposed for further comment, the two boards hope to eventually issue a converged standard for U.S. GAAP and IFRS standards once they hear feedback on their differing approaches from constituents and reconvene in April.

In a conference call with reporters, FASB chair Leslie Seidman noted that the focus of the joint board meeting “was entirely on addressing some recurring feedback we have been getting about the effect on the income statement of the model for right of use that we have been developing on certain types of leases,” Accounting Today said.

The following was excerpted from the February 28, 2012 FASB/IASB Joint Board Meeting on Leases:

The FASB and the IASB discussed lessee accounting and, in particular, different methods of amortizing the right-of-use asset. They also discussed any consequences that a change to the lessee accounting model would have on the tentative decisions for lessor accounting. The boards were not asked to make any decisions.

More specifically, the boards discussed the following two approaches to amortizing the right-of-use asset:

1.) The underlying asset approach described in agenda paper 2C/227. Under this approach, the lessee would amortize the right-of-use asset based on the estimated consumption of the underlying leased asset over the lease term. Consequently, the higher the consumption rate, the more the income statement effects would resemble those that would arise from purchasing the underlying asset and financing it separately. The lower the rate of consumption, the more the income statement effects would resemble the rental expense pattern under current operating lease accounting. Although the boards did not make any formal decision, the IASB indicated an initial leaning toward this approach, if it is confirmed that it is operational and decision useful.

2.) The interest-based amortization approach described in agenda paper 2C/227. Under this approach, the lessee would amortize the right-of-use asset on a systematic basis that reflects the pattern of consumption of expected future economic benefits (consistent with the 2010 Leases Exposure Draft) for those leases for which substantially all of the risks and rewards of the underlying leased asset have been transferred to the lessee. For leases that do not transfer substantially all of the risks and rewards of the underlying leased asset, the lessee would use an amortization approach that would result in recognizing total lease expense in a pattern that would typically resemble the rental expense pattern under current operating lease accounting. Although the boards did not make any formal decision, the FASB indicated an initial leaning toward this approach.

The boards directed the staff to undertake further outreach and research on those two approaches before they reach a tentative decision on which approach to propose in the re-exposure document. n

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