The Joint Project on Lease Accounting initiated by the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”), collectively (“the Boards”) has certainly been ongoing for a significant amount of time. However, progress was made during 2014 and it appears as if the Boards are ready to finalize their deliberations. Let’s review the significant tentative conclusions that were reached during 2014, as they pertain to lessees, and look at the discussion topics that are still outstanding.
Convergence was a key objective of the Joint Project and, for the most part, that objective has been achieved. In what is the key consideration of the Joint Project, the Boards have reiterated that all leases (except short-term leases, as defined) should be recognized on the balance sheet of the lessee with an offsetting Right of Use asset.
The Boards have agreed upon the definition of a lease as a contract that provides the lessee use of an identified asset and gives the lessee the right to control the use of that identified asset. This sounds straight forward enough but, in certain instances, it will be difficult to determine whether a contract meets all the requirements of the definition. Hopefully, the Boards will provide further guidance on this issue in the form of specific examples.
In other areas designed to eliminate complexity, the Boards provided (a) flexibility in not having to separate lease and non-lease components of the lease contract; (b) a simplified alternative in determining the discount rate used to calculate the present value of the lease payments and (c) agreed that, where certain criteria exists, two or more leases entered into at or near the same time could be accounted for together.
In the major area of non-convergence, the IASB has concluded upon a single accounting model for all lease contracts that provides for accelerated expense recognition. The FASB, however, has adopted an accounting model that provides for two types of leases depending upon the nature of the asset being leased and the extent of the lease term. The FASB approach will result in different expense recognition models, one straight-line and the other accelerated. Entities that must report using both US GAAP and IFRS will find this divergence to be especially confusing and time consuming.
As one can see, progress has been made in eliminating some of the complexities contained in the original proposed standard while maintaining the primary objective of balance sheet recognition of the liability for lease obligations.
What is left to deliberate before issuing a final standard? The most important topics that that the Boards still must discuss are lessee reporting disclosure requirements and the all important issue of transition and effective date. Because of the controversy surrounding this project, we would expect to see an extended period prior to effective date to allow users sufficient time for preparation. Also, we would expect that nonpublic entities would be given additional latitude on the effective date implementation and the extent of the disclosure requirements. The Boards should conclude deliberations early in 2015 with a final standard issued in the second half of 2015. We will be following the discussions in 2015 and provide periodic updates. If not already started, now is the time to start to prepare for the impact of the proposed standard and determine what changes will be needed to technology systems and operating policies.