Defining Issues: Proposed Changes to Lease Accounting

Defining Issues 10-34 summarizes the FASB's and IASB's recently issued joint Exposure Draft on accounting for leases that, if finalized as proposed, would significantly change how lessees and lessors account for and report leasing arrangements in their financial statements.

The proposed guidance would affect almost every organization. Lessees would be required to recognize in their statements of financial position an asset representing the right to use the leased property over the estimated lease term (the right-of-use asset) and a liability to make estimated future lease payments for each lease under the proposed right-of-use model.

This would fundamentally change the accounting and reporting of leases currently classified as operating leases. Lessors would account for leases under two very different accounting models: the performance obligation approach, which would apply if the lessor retains significant risks and benefits associated with the underlying property; or the derecognition approach, which would apply to all other leases.

The timing of profit recognition by lessors would be accelerated under the derecognition approach as compared to the performance obligation approach. The proposed guidance would significantly affect disclosure requirements for both lessees and lessors. The comment period ends December 15.