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LEASES - A PROJECT UPDATE
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INTRODUCTION
This publication sets out key proposals about the future of lease accounting, based on the most recent discussions of the
IASB and the FASB during their joint project to revise the accounting requirements. If, as appears likely, the proposals are
finalised on the basis of decisions taken to date, a wide range of entities will be affected. In summary:
Lessees
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Lessees would record assets and liabilities for a wide range of leases that are currently not recognised on balance sheet
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For leases of items that are currently accounted for as operating leases, except for leases of real estate, the single amount
currently included within operating results in the income statement will be split into operating and finance components
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For leases of real estate, although assets and liabilities will be recognised on balance sheet, the lease expense recognised
in profit or loss will continue to be on the same basis as under IAS 17 Leases, in most cases resulting in a constant expense
over the lease term.
Lessors
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For many leases except most leases of real estate, lessors would adopt a ‘receivable and residual’ approach, with the leased
asset being partially derecognised and a separate lease receivable being recognised
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For leases of real estate, in many cases an approach similar to operating lease accounting in accordance with IAS 17 would
be retained.
For some entities, the effect on their financial statements will be very significant, with this extending to include not only the
statement of financial position (or balance sheet) but also their comprehensive income and cash flow statements. Although
a finalised accounting standard is not expected to be effective on a mandatory basis before 2015, we now know enough
about the IASB’s tentative decisions to have a fairly clear picture of the revised proposals. Given the extent of outreach and
discussion with constituents, it appears likely that the revised exposure draft will contain many proposals that will be taken
forward.
Consequently, entities should start to assess the effect of the proposals on their financial statements, and in particular the
consequent effect on related arrangements including:
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Lending agreements, including key ratios and covenants
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Employee remuneration arrangements, including bonus schemes linked to reported profits and share-based payments; and
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Investor communications.
The revised exposure draft is expected to be issued before the end of 2012, with a comment period of 120 days.