Companies dealing with leases will finally receive guidance on how the accounting for these leases will be implemented in the future, with the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) announcing a revised proposal of financial reporting standards for leases.

In August 2010, FASB and IASB proposed several new accounting standards in line with the goal of converging U.S. and international accounting rules. The boards believe that U.S. generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS) can be improved by developing one global standard on revenue recognition. U.S. GAAP comprises broad revenue recognition concepts and numerous requirements for particular industries or transactions, which can result in different treatment of economically similar transactions. FASB and IASB have called for nearly identical treatment in regards to the approach, measurement and presentation of expenses and cash flow as a result of lease activity. Lessees would recognize assets and liabilities for leases exceeding 12 months.

  • The main difference in the proposal was the switch from a single approach to dual-approach accounting. Other changes include:
  • Recognition of assets and liabilities for leases exceeding 12 months.
  • Use of a straight-line lease expense method in income statements for leases that are only paid for the use of the asset. Most real estate properties fall into this category of recognition.
  • Reporting of amortization of assets separately from interest on the lease liability during the time period when consumption is a significant portion of the asset. Additionally, this type of lease would be recognized as a nonfinancial asset measured at cost, less amortization. Typically equipment and vehicle leases will need to follow this method.
  • Lessors will need to account for equipment and vehicle leases that are categorized as “off-balance sheet” for the lessees to provide more transparency related to the lessors’ credit and asset risk. Most commonly this is related to operating leases.

Due to the varied nature of leases, it was difficult to develop one approach to financial reporting that applies to all of them, hence the dual approach. This approach will help provide transparency for businesses with investors since leases will be recognized as liabilities on the balance sheet with disclosures related to them.

An effective date has not yet been set by the boards, but it is anticipated to go into effect in 2014. Comments are due by Sept. 13.

For more information on the changes and how to prepare, contact Doeren Mayhew’s Accounting, Audit and Assurance Group, with CPAs in Michigan, Houston and Ft. Lauderdale.