Accounting Alert - 29 October 2012
Staying on top of developments
On track for a revised exposure draft on leases
The International Accounting Standards Board (IASB) has substantially completed its redeliberations of the leases project in discussion with the US Standard Setter. Because of the significance of changes to the proposals from those outlined in the earlier exposure draft, the IASB has decided to re-expose the lease accounting proposals for comment with a revised exposure draft expected to be issued in the first quarter of 2013.
The forthcoming revised exposure draft on the leases project is expected to propose:
- Recognition of assets and liabilities by lessees for all leases other than short-term leases. The concept of an ‘operating lease’ would no longer exist. The proposals would increase the lease-related assets and liabilities in the statement of financial position, affecting financial ratios in debt covenants.
- Two approaches for lessee expense recognition resulting in straight-line expense recognition for many real estate leases and accelerated expense recognition for many equipment leases.
- A revision to the presentation of lease-related expenses in the statement of comprehensive income based on the type of lease. For some leases currently classified as operating leases, rent expense would be replaced with amortisation expense and interest expense, with total expense being recognised earlier in the lease term. Accordingly, financial metrics such as earnings before interest, taxes, depreciation and amortisation (‘EBITDA’) would be affected.
- A ‘dual’ model for lessors resulting in application of the ‘receivable and residual’ model or an operating lease model.
- A ‘lease classification’ test based on the extent of consumption of the underlying asset.
- Revisions to existing guidance in areas including identification of leases, lease term and variable lease payments.
- Extensive disclosure requirements for both lessees and lessors.
- Application of either a full retrospective or modified retrospective approach to existing operating leases; both requiring adjustment of comparative periods.
- Entities maintaining existing finance leases may elect to either carry forward the amounts recognised as at the date of initial application or to apply a full retrospective approach.
Deloitte’s global edition of IFRS in Focus compares the proposals expected to be included in the forthcoming revised exposure draft, based on Board redeliberations in 2011 and 2012, to that of the 2010 ED. The requirements in the new leasing standard will be dependent on the outcome of due process procedures.
IFRS in Focus: On track for a revised exposure draft on leases is available for download