OUR THOUGHTS ON:

Two Methods For Reporting Leases on the Balance Sheet

Audit

By Donald Applegarth

The Financial Accounting Standards Board and the International Accounting Standards Board have decided that a choice of using either of two methods to account for leases on the balance sheet will be permitted. The two methods are the “right of use” approach and the “whole contract method.”

The right of use approach takes the underlying asset of a lease and amortizes it in what’s considered a “straight-line” fashion. The whole contract method lets the lessee allocate the lease payments evenly throughout the lease. The joint decision clarifies how to account for equipment leases and real estate leases: equipment leases should fall under the right of use approach, and real estate leases should fall under the whole contract method. The two-lease model is aimed at better reflecting to the economics of leases in that some leases transfer ownership rights [for which the whole contract method is best], while others merely transfer a right of use.

Even with the decision, Companies need to prepare for the pending changes in lease accounting. More monitoring and resources will be necessary.

FASB and the IASB will publish a joint exposure draft on the topic in the fourth quarter of 2012.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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