FASB, IASB release Exposure Draft on lease accounting.

• Author: Heffes, Ellen M.
• Position: FINANCIAL REPORTING - Financial Accounting Standards Board - International Accounting Standards Board

On May 16, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) published for public comment by Sept. 13 a revised Exposure Draft outlining proposed changes to the accounting for leases.

According to the press release: "The proposal aims to improve the quality and comparability of financial reporting by providing greater transparency about leverage, the assets an organization uses in its operations and the risks to which it is exposed from entering into leasing transactions."

In addition, the release acknowledges that leasing is an important activity for many organizations. Under existing accounting standards, a majority of leases are not reported on a lessee's balance sheet. The amounts involved can be substantial. Additionally, the existing accounting models for leases require lesses and lessors to classify their leases as either capital leases (for example, a lease of equipment for nearly all of its economic life) or operating leases (for example, a lease of office space for 10 years) and to account for those leases differently.

The existing standards have been criticized for failing to meet the needs of users of financial statements because they do not always provide a faithful representation of leasing transactions.

In response to the criticism, in 2006 the IASB and FASB initiated a joint project to improve the financial reporting of leasing activities under International Financial Reporting Standards (IFRS) and U.S. generally accepted accounting principles (U.S. GAAP), which would require a lessee to recognize assets and liabilities for the rights and obligations created by leases. A lessee would recognize assets and liabilities for leases of more than 12 months.

Stakeholders have informed the boards that there are a wide variety of lease transactions with different economics. To better reflect those differing economies, the revised exposure draft proposes a...