IASB and FASB Agree to a Two Model Approach for Lease Accounting

After having fought with each other for months, the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) finally agreed to a two model approach for accounting for lease related expenses in the balance sheet.

Both FASB and IASB have been debating on the issue of recognizing lease expenses since the year 2006 and finally agreed to let companies use one of the two ways of accounting.

Both the boards had undertaken the project on leases in order to address the concern that several lease obligations go unrecorded in the balance sheet and the existing accounting for lease related transactions do not represent all the lease transactions economics.

In one of the methods of the two model approach, the leases will be accounted for with the help of straight line depreciation method, whereas the second will permit lease contracts to be accounted for using an approach that is similar to the one proposed in the 2010 leases exposure draft, in which the lease expenses can be recognized evenly in the income statement over the entire period till which the lease lasts.

Both IASB and FASB had discounted the two model approach last year, thinking that it was way too complicated. But their decision to come to a settlement has also put an end to the concerns that the rule makers’ initial proposal to put all leases on the balance would result in front loading expenses.

Leslie Seidman, Chairman, FASB noted that the boards had carefully considered the diverse views of stakeholders about whether the income statement profile of all the leases should be the same. On balance, they decided that leases that convey a relatively small percentage of the life or value of the leased asset should be recognized evenly over the lease term.

However, the decisions on the lease related projects that have been taken at present are preliminary. The boards intend to issue a joint exposure draft in the fourth quarter of 2012.

IASB’s Chariman, Hans Hoogervorst, stated that they would publish their proposals for public comment, with a view to completing this important convergence project during 2013.