The cost. The costs in the income statement

The International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) and issued the new lease accounting standard.

The new standards will change the way leases are accounted for by lessees. The IASB and FASB will issue separate standards with major differences in lessee accounting but with lessor accounting substantially converged, as they adopted existing Generally Accepted Accounting Principles (GAAP) for lessors with few changes. One difference in the versions of lessor accounting between FASB and IASB is the decision by FASB to incorporate concepts from the new revenue recognition standard for determining when a sale takes place in sale-leasebacks and sales-type leases, whereas the IASB did not.  The FASB has agreed with the position of many users and prepares on critical recognition and financial reporting matters. They are maintaining a two-lease model where some leases are classified as operating leases when they merely are the acquisition of a temporary right to use an asset for a part of its useful life while others are classified as financed purchases of the underlying asset.

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The IASB decided on a single-model approach. In this approach, lessees would account for all leases other than short-term leases and small value asset leases as finance leases that feature a front-loaded expense profile due to the combination of the imputed interest component and straight-line asset amortization components of the lease cost. The costs in the income statement will be presented as amortization expense and interest expense.As for lessor classification, IASB and FASB agreed to retain their respective lessor models. IASB lessors will look to the International Accounting Standard 17 Leases (IAS 17) model for classification while the FASB will retain their Financial Accounting Standards 13 Accounting for Leases (FAS 13) model with minor changes while the lessors can continue to use their current lessor accounting systems. If lessees have large operating lease portfolios, they should read the outlines posted on the Boards’ websites, as capturing the data will be a large undertaking under the new rules.

Lessees with many leases will need to acquire a system to account for their capitalized operating leases. They will need to capture information for all leases existing on the transition date and load the information to produce the necessary comparative statements. In the United States, these companies should begin the project to extract necessary lease data as soon as possible. Lessees will have to develop internal controls on a process for accounting for new leases.

Existing processes are inadequate because operating lease obligations were only reported in the footnotes. More information will be required regarding the determination of the lease payments and lease term. Lessees will need to evaluate renewal and purchase options to determine if any are reasonably assured of exercise. They will need to determine if any payment is likely under residual guarantees it is providing to lessors. They will need to track variable rents based on a rate or an index and possible payments under residual guarantees.


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