FASB and IASB Reverse Key Decision on Straight-Line P&L Recognition

Published on: 19 May 2011

At their meetings on May 17 and 19, the FASB and IASB (the “boards”) reached several tentative decisions related to their leases project, the most significant of which was to reverse an earlier decision that would have resulted in the recognition of lease expense in profit and loss (P&L) on a straight-line basis.

A concern raised in the comment letters and roundtables on the boards’ exposure draft (ED) on leases was that the income statement recognition pattern proposed in the ED would result in (1) higher expenses in earlier periods of the lease and (2) further divergence from the cash payments made in lease contracts. At their meetings in February and April, the boards tentatively decided that there should be two types of leases for income statement recognition: finance and other-than-finance leases. They also discussed possible methods that would result in straight-line P&L recognition for leases classified as other than finance, including an annuity method of amortizing the asset or using other comprehensive income.

However, after further deliberation, the boards concluded that they had too many concerns about this approach, including (1) making the right cut between the two types of leases, (2) the added complexity of having two types of leases and the methods used to get a straight-line expense, and (3) the fact that different methods of P&L recognition would not improve the leasing model. They therefore reversed their previous decision and decided to revert back to the proposed guidance in the ED. Accordingly, entities will amortize the liability by using the interest method and will typically amortize the right-of-use asset on a straight-line basis.

Watch for an upcoming article on the boards' other decisions.

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