Never the Twain Shall Meet
Unfortunately FASB/IASB regulatory changes did not go away even after all these years of debate, resistance and delay. In fact, the final standards for lease accounting will soon be published (projected date last half of this year). However, one thing did not happen. They failed to come to terms on not only lease, but financial instruments, although they did manage to agree on revenue recognition.
One of the main reasons for the changes in the accounting standards was to have one set of global regulations. Now there will be no single global accounting language, this has many standard setters, CFOs and other corporate executives, auditors and investors believing that now “there can be no single correct way of accounting for corporate finance”. According to FASB Chairman, Russell Golden, this divergence “requires us to recognize that differences in the cultural, business, legal and regulatory environments in different jurisdictions inevitably will result in some differences in those standards.”
The divergence boiled down to a disagreement about whether there should be a single or dual approach to lease accounting. FASB decided on a dual approach and split it into two types of leases: Type A is for capital leases and Type B is for operating leases. Both would have to be recognized on company’s balance sheets the right to use the leased property or equipment and the interest on lease payments. The accounting difference between the two types of leases occurs on the income statement. Type A leases would have to be reported as amortized payments for the right to use the asset separately from the lease-liability interest payments. Type B leases would only have to be reported as a single total lease expense. IASB decided on a single approach, requiring lessees to account for all leases irregardless of type.
The last joint meeting of the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) was held on 21 January 2015 where they continued to deliberate their 2013 proposal to put most leases on an organization’s balance sheet. At that meeting, the two Boards reaffirmed their objectives stated in the 2013 document, but differed on the information that lessees would be required to provide. Whether this holds true in the final decision is yet unclear. The Boards still have remaining issues to settle, including transition and an effective date. We should see the final standards released in the second half of this year.
The key decisions coming out of this meeting were:
- Reaffirmation that the objective of lessee disclosures is to enable financial statement users to understand the amount, timing and uncertainty of cash flows arising from leases;
- Reaffirmation that lessees would exercise judgment to determine the appropriate level at which to aggregate, or disaggregate, disclosures;
- FASB and IASB differed on what information was necessary to disclose;
- Qualitative and Quantitative lessee disclosure requirements would apply to both public and non-public business entities;
- FASB will not require a reconciliation of the opening and closing balances of lease liabilities or a maturity analysis of commitments for the non-lease components of contracts under a lease;
- IASB also decided not to require a reconciliation of the opening and closing balances of lease liabilities.
- IASB did require disclosure of a maturity analysis of lease liabilities in accordance with IFRS7 (not what was proposed in 2013);
- IASB will not require a reconciliation of the opening and closing balances of right-of-use assets.
So, as you can see, these new regulations are not going away. Stay tuned for this blog and we will report after the next meeting.
 Katz, David. “The Split over Convergence,” CFO Magazine, 17 October 2014.
 For a detailed list see “Boards decide to require different lessee disclosures,” To the Point, No. 2015-5, 22 January 2015, Ernst&Young.