Authored by George Tonks
The lengthy discussions of the accounting standards setters on lease accounting have continued to generate confusion over recent months. Despite the intended timetable of issuing final proposals before the end of this month, the two bodies that set accounting standards for large companies, the IASB and FASB, still seem to have a long way to go to reach a conclusion on some aspects of lessor accounting. It now seems likely that there will be some slippage in the Boards’ timetable, but proposals are still expected during the summer, with a view to finalisation by mid 2011. Consequently adoption being required from 2012 still remains likely.
Alongside this, the continued failure to engage with lessor organisations has generated further frustration within the leasing community, as shown by the press release issued by Leaseurope towards the end of May. It is to be hoped that the Boards accept the comments now being made, have a sensible discussion before making any definitive proposals and allow proper public discussion of their proposals before reaching a final position. However we should not be too optimistic of this happening, given the evidence of the last 12 months.
In brief, the new accounting proposals will ensure that lessees have to include all leases on their balance sheets, so removing the current “off-balance sheet finance” of operating leases, although it appears that leases which cannot exceed one year will be excluded from this requirement. However the lessee’s balance sheet value at the start of the lease will be the present value of the minimum lease payments, so that a lower rental commitment for the lessee will translate into a reduced balance sheet value for the lease. In addition, the detailed accounting requirements imposed on lessors will be changed, although exactly how is still to be determined and the outcome of the current deliberations will affect the recognition of profit by lessors. During 2009, the Boards had proposed that lessors’ balance sheets should show assets for both the physical leased asset and the financial asset of rentals due, together with a liability for the “performance obligation” to allow the lessee to use the asset during the term of the lease, but we now seem to be spared from this effective grossing up of balance sheets.
If you would like to discuss how the forthcoming changes in lease accounting will affect your business please contact George Tonks on +44 (0)845 003 1000 or e-mail george.tonks@invigors.com.