FASB, IASB Issue Lease Draft

As part of their ongoing convergence project, aimed at bringing U.S. and international accounting standards into alignment, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have published joint exposure drafts that propose how financial reporting of leases can be improved.

The current model splits up leases into either short-term operating leases or more long-term capital leases, with both being subject to different sets of accounting rules. According to a joint news release by the two standards boards, though, this arrangement has excluded relevant information about the rights and obligations that come with a lease, which are comparable to assets and liabilities. This can lead to a lack of comparability and undue complexity, as investors will adjust financial statements lacking this information to account for assets and liabilities arising from operating leases.

The exposure draft proposes a new model based on right-of-use, meaning that lessees would treat the right to use something they’ve leased as an asset and the payments of the lease as a liability. Conversely, the lessor would recognize the right to receive lease payments as an asset; if leasing out the asset also came with exposure or risk, the lessor would either take a performance obligation approach and recognize a lease liability while continuing to also recognize the underlying asset, or derecognize the lease rights in the underlying asset that it transfers to the lessee while continuing to recognize a residual asset representing the rights to that same asset at the end of the lease term.

Comments about the new exposure draft are being accepted until Dec. 15 this year.