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June 15, 2012 1:51:51 pm

FASB and IASB Agree on Lease Recognition

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have made an important step toward reaching their goal of a joint lease exposure draft later this year.


The standards boards had previously agreed that leases should be reported on the balance sheet, but had difficulty with the classification and pattern of expenses in the income statement.  This week’s vote resulted in a decision to adopt a dual expense-recognition approach in which different types of leases will have different lease-expense recognition patterns. 


Some leases will be treated as the purchase of a right-of-use (ROU) with separate financing.  This ROU approach is essentially a front-loaded expense pattern.  The total lease expense would be a combination of the amortization charge on the asset and the interest expense on the lease liability.  ROU leases would result in a total lease expense that decreases over the term of the lease.  Generally, equipment leases will fall under the ROU approach. 


Other leases will be treated as payment for access to and use of the asset over time, with the costs of the lease payments allocated evenly over the lease term.  The lessee would record the total of the lease payments as a lease expense.  Real estate leases will generally fall under this straight-line approach, although there are exceptions if the lease term is the major part of the economic life of the underlying asset, or if the present value of fixed lease payments is all of the fair value of the underlying asset. 


For more on the FASB and IASB joint decision, please visit the Journal of Accountancy.  To learn more about REDW’s services, please contact Chris Tyhurst or Steve Cogan. 


Tags: Accounting Standards


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