The International Accounting Standards Board issued an overview of its upcoming lease accounting standard Monday, saying it plans to complete its deliberations on the long-awaited standard this month and to issue the standard later this year.
The standard will require many companies to bring leases onto their balance sheets for the first time, and the document describes the practical effects that will have. In addition, the document describes the differences between the IASB's leasing standard and the one that the U.S. Financial Accounting Standards Board is also expected to issue.
In response to calls for further information on the possible effects of the new standard, the IASB staff has developed the document comparing the new and current accounting requirements.
The IASB and FASB have been working jointly on the Leases project and have reached the same decisions in many areas, the IASB pointed out, including requiring leases to be shown on the balance sheet, how to define a lease and how lease liabilities should be measured. However, there are some differences between the two boards’ models and the document provides an overview of the likely practical effects of these differences.
“Our stakeholders have asked for more details on how the new leases standard will change things in practice,” said IASB chairman Hans Hoogervorst in a statement. “The most important difference is that the new standard will provide a richer set of information for investors than is available today, which, in turn, will aid their decision making. The main change that will be brought about by the new leases standard is an increase in assets and liabilities on the balance sheet for those companies that currently have a large amount of leases off balance sheet, thus improving the transparency of a company’s leverage and asset base.”
In addition to changes to the balance sheet, the new leases standard is likely to result in some important differences on the income statement, the IASB noted. Among those is the reporting of higher operating profit compared to the current requirements, and in comparison to FASB’s model. There will be no changes to total cash flows but, in the cash flow statement, the amount of operating cash will increase while the amount of financing cash will decrease.
The IASB's analysis concludes that the costs to companies of applying the new standard will be broadly similar for both the IASB's and FASB's model.
The document also examines other potential implications of the new lease accounting model, such as the possible impact on the cost of borrowing. It notes that the new standard will provide more transparent information about a company’s financial commitments, but does not change those commitments. Therefore, should the standard affect the cost of borrowing for a company, this will be because the improved reporting provides lenders with new information that is relevant and important to their decision making.
The effects of the new leases standard will also be discussed at the next Accounting Standards Advisory Forum meeting at the end of March.
The document will also be available on the Leases project page on the IFRS Foundation’s Web site, http://www.ifrs.org/Current-Projects/IASB-Projects/Leases/Pages/Leases.aspx.
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