FASB and IASB Agree to Disagree on Lease Accounting StandardsMarch 24, 2015
Boards plan to publish leasing standards later this year.
Editor’s Note: On July 17th, 2019 the FASB proposed delaying effective dates for four key accounting standards (accounting for leases, credit losses, hedging and long duration insurance contracts). Check out our blog, FASB Proposes Delay in Major Accounting Standards for more information.
The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) have been working, with mixed success, on converging U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) for more than 10 years. In a meeting earlier this year on proposed accounting standards for businesses that lease assets, FASB and the IASB essentially agreed to disagree about how companies should disclose certain lease obligations in their footnotes.
Lack of Consensus
In response to criticism from investors that current accounting rules allow companies to keep leased assets and significant liabilities off their balance sheets, FASB and IASB attempted to converge standards to make lease reporting more transparent. However, after working on the project for years, no consensus has been reached.
The last lease proposals that the boards released, back in 2013, have faced significant opposition, especially from U.S. companies that are concerned about reporting more debt to stakeholders, as well as the burdens of changing long-established reporting practices. One criticism has been that the footnote disclosures requirements for lease obligations are overly detailed and complex. In the meeting earlier this year, the boards agreed:
- To retain the lease disclosure objective: “Enable users of financial statements to understand the amount, timing and uncertainty of cash flows arising from leases,”
- To require quantitative disclosure of various types of lease expenses,
- To recommended (but not require) the use of an investor-friendly tabular format for information such as expense for various types of leases and cash paid for amounts included in the measurement of lease liabilities, and
- To eliminate the requirement to disclose the reconciliations of opening and closing balances of lease liabilities and assets.
However, that’s all the boards were able to agree on. For example, FASB decided to move forward with its proposed requirement to disclose certain qualitative items (nature of leases, terms and conditions relating to payments, lease term, etc.), while the IASB decided to give businesses more leeway in disclosing sufficient additional information to satisfy the overall disclosure objectives. And the boards didn’t even try to engage in further debate on how to report lease expenses.
The boards plan to publish leasing standards later this year, but because there’s so much they’ve been unable to agree on, their goal now is to minimize the differences between GAAP and IFRS, not to produce identical standards. Lessees and lessors will be required to adopt the new FASB standard using a modified retrospective approach for comparative periods presented, with an option to use certain relief. If you have questions about how new lease reporting standards might affect your company, please contact us.