Grant Thornton has released a new paper calling for an overhaul in the current thinking of the Financial Accounting Standards Board and the International Accounting Standards Board on lease accounting standards, instead advocating the use of two different lease accounting models.

FASB and the IASB have tentatively decided on a single model for lessors—the receivable and residual model—although they continue to disagree on some elements of the proposed standards (see FASB and IASB Part Ways on Leasing Standards). In the new paper, the firm suggests the models need to be based on the lessor business model, not the nature of the underlying asset. Grant Thornton makes a case for the use of two models based on whether the lessor is managing financial assets or operating assets, and what types of risks are inherent in the lessor’s business model.

FASB and the IASB have made the changes in leasing accounting standards one of their four remaining priority convergence projects. However, the proposed standards have attracted controversy as they would require businesses around the world to include lease obligations on their balance sheets for the first time.

“We agree that the model needs updating; however, we respectfully disagree with the boards’ proposal to replace the current GAAP model with a single model for lessors and with somewhat arbitrary exceptions for investment property and leases of one year or less,” said Mark Scoles, partner-in-charge of Grant Thornton’s Accounting Principles Consultation Group, in a statement.

Grant Thornton suggests that the proposed exceptions to the model for investment property and short-term leases are indicators that there is a difference between the economic substance of certain leases that is not related to the term of the lease, the nature of the property, or whether the lessor accounts for the property at amortized cost or at fair value. The firm noted that the exceptions may reflect different lessor business models.

“As tempting as it is to search for a single model that will prevent structuring, we do not believe that a single model can provide relevant information that faithfully presents the underlying economics of all leasing transactions in the financial statements,” said John Hepp, a partner in the firm’s Accounting Principles Consultation Group.

Grant Thornton suggests that FASB and the IASB focus their future research on the business model of the lessor to determine the risks retained by the lessor and whether the lessor has retained substantive control over the underlying asset or has transferred that control to the lessee with the right of use.
“We believe that significant differences in the business models may warrant different measurement attributes, revenue recognition and, especially, disclosures,” said Scoles.

To download a copy of the paper, “Are all leases created equal?”, visit Grant Thornton’s Lease Accounting Resource Center at

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