G4+1 Study Title: Accounting for Leases: A New Approach
Published: July 1996

and

Title: Leases: Implementation of a New Approach
Published: February 2000

Conclusions:

The G4+1 has published two discussion papers on leases, one in 1996 and another last year that builds on the 1996 recommendations.

The 1996 study concluded that the distinction between operating leases and finance leases that is required by existing accounting standards is arbitrary and unsatisfactory because lessees' balance sheets omit material assets and liabilities arising from operating leases. This affects, for example, reported levels of indebtedness, debt-to-equity ratios, return on assets employed, and interest coverage. The 1996 Discussion Paper suggested that the comparability (and hence usefulness) of financial statements would be enhanced if the present treatment of operating leases and finance leases were replaced by an approach that applied the same requirements to all leases.

Taken together, the two studies propose the following:

• For lessees, the objective should be to record, at the beginning of the lease term, the fair value of the rights and obligations that are conveyed by the lease.
• Leases that are at present characterised as operating leases (and therefore not included in the lessee's balance sheet) would give rise to assets and liabilities - but only to the extent of the fair values of the rights and obligations that are conveyed by the lease. Thus if a lease is for a small part of an asset's economic life, only that part would be reflected in the lessee's balance sheet.
• The fair value of the rights obtained by a lessee would in general be measured as the present value of the minimum payments required by the lease, plus any other liabilities incurred.
• Lessors should report financial assets (representing amounts receivable from the lessee) and residual interests as separate assets, since they are subject to quite different risks. The amounts reported as financial assets by lessors would, in general, be the converse of the amounts reported as liabilities by lessees.

Related IASB Agenda Project: Research Agenda: Leases