This article was first published in the September 2013 International edition of Accounting and Business magazine.
The latest proposals on leasing, issued in May 2013, follow an earlier draft and discussion paper, and take account of respondents’ previous concerns.
The latest draft covers leases of tangible assets, and a lease is still defined in terms of a right of use. The distinction between finance and operating leases will, however, be replaced with ‘type A’ and ‘type B’ leases. The former cover most of the economic life and fair value of an asset, so property leases will mainly be type B. Importantly, both types will now be reflected on the balance sheet of the lessee as well as the lessor.
A lessee accounts for a ‘right-of-use’ asset (based on lease commitments) and a lease liability (based on lease payments). Alternatively, the revaluation/fair value methods of IAS 16, Property, Plant and Equipment, or IAS 40, Investment Property, can be used for applicable leased assets. The asset is amortised while the liability reduces due to lease payments (net of the unwinding of discount).
For lessors, type A assets are derecognised and replaced with an asset for the present value of the lease payments (reducing as for the lease liability above) and the residual asset (as defined in the draft), with any resulting difference recognised in profit or loss. Type B assets are not derecognised, and lease receipts are posted to profit or loss.
Profit or loss accounting reflects the lease type, but additionally, type B lessees will amortise the asset in a way that produces an even straight-line cost when combined with the unwinding of the discount on the lease liability. Type B lease costs will therefore appear quite similar, over time, to current operating lease costs.
Where an arrangement does not entail controlling a specific asset, there is no lease. Basic examples of this situation would be equipment that can be substituted at any time for something similar, or where related essential consumables must also be bought from the supplier. Not all cases may be clear-cut.
Lease payments can simply be posted to profit or loss if a lease is short-term (one year or less including any option to extend, and with no purchase option).
For other lease terms, optional extensions are taken into account, and options to cancel ignored, if it is realistic to do so due to the ‘significant economic incentive’ provided.
The latest draft is open for comment until 13 September 2013, and is a joint project with the Financial Accounting Standards Board (FASB) in the US. Businesses will need time to prepare, and this will be reflected in the setting of the implementation date.
Paul Cooper is corporate reporting manager at ACCA