OUR THOUGHTS ON:

FASB and IASB to Re-expose Proposed Leasing Standard

Audit

By Charles Oshurak

The Financial Accounting Standards Board and the International Accounting Standards Board (Collectively, the "boards") met once again on July 21, 2011 and agreed to re-expose the currently proposed leasing standard for comment. A revised exposure draft (ED) for public comment is expected to be released in the fourth quarter of this year with a finalization of the standard by mid-2012. The boards intend to complete redeliberations during the third quarter of 2011, and publish a revised exposure draft shortly thereafter. Re-exposure will provide interested parties with an opportunity to comment on the revised proposals (including all the changes the boards have made since the publication of their original ED in August 2010).

In addition, the boards also reached decisions on a single lessor accounting model, the accounting for variable lease payments, and several presentation and disclosure issues. The boards’ decisions are currently considered tentative and subject to change based upon feedback received from the revised exposure draft.

Regarding to the single lessor accounting model, the boards agreed that lessors should account for leases using a "receivable and residual" approach (previously called the "derecognition" approach). This would cause the lessor to derecognize the underlying asset and record a lease receivable and residual asset. The lessor would then allocate the carrying value of the leased asset between the portion related to the lessee's right-of-use asset and the portion retained by the lessor (the residual), which would permit a lessor to recognize profit on the leased asset at lease commencement if "reasonably assured."

The boards agreed to retain the proposal to allow lessors to account for short-term leases (a maximum lease term of 12 months or less) similar to current operating lease accounting and agreed to retain the scope exemption for investment property if it is measured at fair value.

The boards also agreed that the accounting for variable lease payments that are based on a rate or index should be initially measured at the rate that exists at lease commencement. This would mean that leases with payments based on LIBOR would use a current spot rate, while payments based on a CPI index would use the absolute index at the time of commencement and not the expected rate of change. Thus, a lease with fixed annual increases will include such adjustments in the initial measurement, while a lease with rental increases based on changes to CPI will not. Finally, variable payments will require a reassessment as the applicable rates change. Lessees would account for this reassessment within their periodic profit or loss when it relates to a current or prior accounting period or as an adjustment to the right-of-use asset when it relates to a future period.

For more information, please contact Charles A. Oshurak, Audit Advisory Senior Manager, within Audit and Assurance practice.

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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