iGAAP Alert: August 2010
IASB issues Exposure Draft on Lease Accounting
Under the proposals a lessee will need to record a lease asset (ie. right to use an asset) and a liability (ie. payment obligations) for all leases irrespective of whether it obtains significant risks and benefits of the underlying asset.
For leases currently classified as operating lease, rental expense will be replaced by asset amortisation and interest expense, which together are going to be higher in earlier years.
Lessors will have two models (performance obligation approach or derecognition approach) based on whether the lessor retains significant risks and benefits of the underlying asset. Under the first model a right to receive lease payments and a performance obligation to permit use of the underlying asset are recognised; under the second model a lease receivable asset is recognised and a portion of the underlying asset is derecognised as a partial sale.
Under the proposed models, for both lessees and lessors, the calculation of the lease term and lease payments will entail a significant degree of estimations, for example for lease renewal options (the term is that which is more-likely-than-not to occur), contingent rentals and residual value guarantees.
Lessees and lessors should begin to evaluate how the proposals would affect their financial statements including deferred tax consequences, the future structuring of lease contracts, performance metrics used debt covenants, accounting policies, and information systems.
For more information, read our iGAAP Alert: August 2010.