IASB, FASB Differ on Lease Expense Rule

NORWALK, CT—The long and winding road to a converged lease accounting standard has taken yet another twist: the International Accounting Standards Board has published an update in which it says is leaning towards proposing a single model for lease expensing. The US Financial Accounting Standards Board, for its part, favors the dual model.

Mike McLain, Transwestern's chief accounting officer, explains the issue involved an article in the to the third quarter edition of "Ask the Expert," published shortly before the IASB issued its update.

As McLain explains it:

"A "Type B" lease is defined as a lease of an asset that doesn't consume a significant portion of the asset's useful life or the rental payments do not amount to a substantial portion of the fair value of the asset. Most traditional real estate leases would meet the criteria for a Type B lease. Based upon the latest exposure draft, accountants are expected to default to current guidance of 75% of "useful life" and 90 percent of "fair value" when assessing this criteria. This represents the biggest divergence between the US and international standard setters, with the FASB in favor of separate treatment and the international board favoring one set of rules for all leases."

What IASB is proposing is a single lessee model that would require interest and amortization for all leases to be recognized on a lessee's balance sheet.

FASB wants to keep the current distinction between finance leases and operating leases. This approach would not change the lessee's income statement, while all leases would be recognized on the balance sheet.

The difference will be more significant for investors than for most lesees, IASB says.

"In practice, the difference in the IASB and FASB positions is expected to result in little difference for many lessees for portfolios of leases," it said. "On the basis of feedback received, the IASB concluded that a model that separately presents interest and amortization for all leases recognized on the balance sheet would provide information that is useful to the broadest range of investors and analysts. This is because most investors and analysts consulted think that leases create assets and debt-like liabilities for a lessee."