FASB and IASB Continue Discussions on Leases

As you know the FASB and IASB have been working on a project to get leases onto corporate balance sheets. The two boards have decided that there may be some reason to create two categories of leases. The original proposal would establish a single accounting method for all leases. The boards are now considering a proposal in which leases would look a lot like today's operating leases and capital leases. They have agreed to consider a structure where “finance leases” would be treated like an installment purchase, putting an asset on the balance sheet as well as a liability to be paid down over time. “Other-than-finance” leases would also appear on the balance sheet, but would flow through the income statement like today's operating leases because the financing element would not be considered significant.

The boards have asked their staff to establish indicators that would be used to identify the difference between the two types of leases and do some outreach to see if that would quell the criticism of the original proposal. They have softened their views on how companies should account for renewal options and other factors that lead to variable lease payments when it's not clear at the outset of the lease when or whether such circumstances would ever come into play.

In addition the boards

• Decided to raise the threshold for deciding when lease renewal options should be included in the liability.
• Tentatively concluded that lessees and lessors should follow the same basic guidelines for deciding if an obligation tied to some kind of variability would be included in the liability or the receivable.

More details on this discussion may be found in the February 16, 2011 Summary of Board Decisions on the FASB website, www.fasb.org.

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