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Journal entry — FASB and IASB make more decisions on lease accounting

Published on: Mar 25, 2010

The FASB and IASB continue to make decisions on their joint lease accounting project. Over the last two weeks, the Boards met and reached tentative decisions on the following topics:

  • Lessee disclosure requirements — The list of disclosures includes, among others, a reconciliation of opening and closing balances of the right-of-use asset and the obligation to pay rentals, a maturity analysis of the obligation to pay rentals, and an analysis of cash flow uncertainty arising from lease contracts.
  • Lessor transitional provisions — The Boards tentatively agreed to a simplified retrospective approach in which the original rate the lessor is charging the lessee is used to measure the lessor’s receivable and performance obligation at the present value of the remaining lease payments. This would also require lessors to reinstate previously derecognized leased assets at depreciated cost, adjusted for impairment.
  • Accounting treatment of residual value guarantees — The Boards tentatively decided to treat residual value guarantees in the same manner as contingent rentals, with the exception of guarantees from unrelated third parties, which would be accounted for in accordance with the requirements for other guarantees.
  • Cross-cutting issues — The Boards tentatively decided how an entity should evaluate and account for arrangements that contain both service components (which are within the scope of the revenue recognition project) and lease components. Separation and allocation of these components would be subject to the proposed revenue recognition project.
  • Lessee presentation — The Boards tentatively agreed to require lessees to present the right-of-use asset, and the obligation to pay rentals separately, on the face of the statement of financial position. Amortization expense and interest expense would be presented separately either on the face of the statement of comprehensive income or in the notes to the financial statements. Cash repayments and interest payments would be classified as financing activities separately in the statement of cash flows.
  • Lessor presentation — The Boards tentatively agreed to require lessors to present separately on the statement of financial position the total of the leased asset, the lease receivable, and the performance obligation as a net lease asset or net lease liability. While the IASB tentatively agreed to present lease income, interest income, and depreciation expense separately on the statement of comprehensive income, the FASB tentatively decided to allow a total net lease income or net lease expense for these items. Both Boards tentatively agreed that repayment of the lease receivable and interest income from the lease would be classified as operating activities in the statement of cash flows.
  • Reconsideration of lessor model — The IASB also indicated that it will reconsider the derecognition approach as an accounting model for lessors.

For more information see the Summary of Board Decisions on the FASB’s Web site for the March 17 and the March 22–23 meetings. In addition, on Wednesday, March 31, 2010, at 2:00 p.m. (EDT) and at 8:00 p.m. (EDT), the IASB staff will present a live webcast on accounting for lease contracts and the next steps in the project.

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