NORTH BAY -- The International Accounting Standards Board and the U.S. Financial Accounting Standards Board recently published proposals for public comment regarding financial reporting of lease contracts.
The intent of the proposals is to improve information available to investors about the financial impacts of lease contracts.
Currently, accounting requirements are dependent on the classification of a lease. Classification as an operating lease results in the lessee not recording any assets or liabilities on the balance sheet either for the International Financial Reporting Standards or United States GAAP.
IASB said the proposals would result in a “consistent approach to lease accounting for both lessees and lessors — a ‘right-of-use’ approach. Among other changes, this approach would result in the liability for payments arising under the lease contract and the right to use the underlying asset being included in the lessee’s statement of financial position, thus providing more complete and useful information to investors and other users of financial statements.”
David Tweedie, chairman of the IASB, said, “The leasing industry plays an important role in many economies by helping companies manage cash flow and working capital. However, much of the estimated annual $640 billion of lease commitments fail to appear on the balance sheet of lessees, thereby giving a false impression of companies’ liabilities. Our proposals would result in better and more complete financial reporting information about lease contracts being available to investors and others.”
Bob Herz, chairman of the FASB, said the “proposal continues the progress both boards are making to improve and converge our standards in significant areas of accounting. The proposal is intended to improve the transparency of lease accounting and also decrease its current complexity. I encourage all constituents that engage in leasing transactions to provide us with your views on this important proposal.”