Lease accounting overview

What is happening?

Members can accessed specific information from the quick links on the right.

The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) are working on a common standard for accounting for leases which will ensure that the assets and liabilities arising from lease contracts are recognised in financial accounts. Historically, financial leases have had to be reported on the balance sheet, but not operating leases. The new approach to lease accounting, referred to as the right of use approach, differs substantially from today’s standard which is based on an analysis of the risks and rewards inherent in the lease. Under the right of use model, a lessee would always recognise an asset, (the right to use the leased item), and a corresponding liability on its balance sheet, whereas under the current standard, a lessee recognises the leased asset only under so-called finance leases.

When?

The boards plan to publish the exposure draft in 2010. The project’s estimated completion date is 2011.

How will this impact your business?

Publicly listed companies already have to make a note to the annual report, which reflects any operating lease rentals payable.

Businesses will need to ensure they report on their liabilities (payment arising under the lease) and their asset (the right to use the leased asset). This is relatively straightforward if you are able to measure these two values and account for them in a consistent and simple manner.

It is possible that matters could get complicated if these values are treated differently or if businesses are required to make minor re-forecasting adjustments for every leased item during a financial year. It is precisely for this reason the BVRLA is calling for the IASB to ensure the reporting burden stays simple.