Changes to lease accounting will affect US GAAP and IFRS reporting companies differently following the failure of IASB and FASB to agree a fully converged lease standard, reports Sara White
The global standard, IFRS 16 Leases, was released in January with the US standard setter, the Financial Accounting Standards Board (FASB), set to issue the US GAAP version - the final Accounting Standards Update (ASU) - by the end of February.
FASB voted to proceed with a new accounting standard that would require companies and other organisations to include lease obligations on their balance sheets last November. However, it has not adopted all the strands of the global standard with major differences in reporting requirements as it has taken a dual approach for lessee accounting.
Like the IFRS, the US version will put off-balance sheet leasing activities on to the balance sheet so that investors and other users of financial statements understand the long-term financial obligations associated with these transactions.
The FASB lessee accounting model will continue to account for two types of leases. One type of lease (the capital lease) will be accounted for in substantially the same manner as capital leases are accounted for under existing GAAP.
The other type of lease (the operating lease) will be accounted for in a manner similar to operating leases under existing GAAP, except that lessees will recognise a lease liability and a lease asset for all of those leases.
‘Particularly in the US for US GAAP reporters, the impact is less than expected,’ said Sheri Wyatt, managing director, PwC capital markets and advisory group. ‘Under the income statement, it is largely going to be the same as today for US GAAP reporters. But it is going to be challenging to access the data. Now the real focus is going to be on data and contracts.
‘In terms of the balance sheet, the US model and IFRS is the same, but it will drive amortisation expense in the international version.
‘You could have a contract that is written as a service contract, but maybe there will be a service element. The question is does it contain a lease as an underlying asset. This adds to complexity.
‘I do see it as an initial cost because today companies may not have robust schemes in place to monitor leases – for example, they may just record leases on Excel spreadsheets.
‘There will be costs in terms of getting new systems in place- and companies will need to extract the data. It is the same for any compliance requirement. You could reduce the costs by minimising the number of new vendors you use for example. You could get some economies of scale by consolidating leases.’
Wyatt added that the new standard ‘will increase leverage on the balance sheet. Companies may take a closer look at whether they should buy or lease’.
The ASU will not include the $5,000 small ticket item exemption as in IFRS 16.
‘The only ‘scoop’ exemption will be around short-term leases,’ added Wyatt.
For US public companies, the upcoming standard will be effective for fiscal years (and interim periods within those fiscal years) beginning after 15 December 2018; for private companies, the standard will be effective for annual periods beginning after 15 December 2019. Early adoption will be permitted for all companies and organisations upon issuance of the standard without a requirement to implement IFRS 15, Revenue from Contracts with Customers.
FASB is set to release the Leases ASU later this month.