New Leasing Standard Update
Posted 5-18-2011 | By Brian Sweeney | Download Article
Earlier this year the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) tentatively agreed to some significant changes to the leasing standard exposure draft.
The original exposure draft, issued in 2010, eliminated the distinction between a capital and operating lease. The standard required all leases to be put on the balance sheet. Under the new guidance, a “right of use” asset needs to appear on the balance sheet with a corresponding liability equal to the present value of the future lease payments. This newly created asset would then be amortized over the lesser of the useful life of the asset or the lease term.
The basic framework of the original proposed standard has not changed and the Boards are still committed to eliminating off balance sheet accounting for leases; however some significant changes to note are as follows:
1) FASB and IASB agreed to consider a standard to treat “finance” leases like a purchase of an asset. Similar to the current capital lease rules.
2) The Boards also discussed the issue of how to account for renewal options. The original exposure draft required the “right of use” asset and liability to be recorded based upon the longest possible term that is “more likely than not to occur.” The changes being considered suggest the lease be recognized at the contractual minimum period plus any optional renewal periods for which an exercise of the renewal option is reasonably certain.
Guidance is expected to be finalized at the end of the second quarter 2011. The exact schedule for adoption has not been finalized; however an estimation at this point is most likely 2013 or 2014. The Boards agreed they need to clarify the effective dates as soon as possible. We will keep you updated as we learn more. Please contact Brian Sweeney, CPA, at bsweeney@hlbtr.com with any questions.