International and American accounting standards boards have jointly proposed an overhaul of the current international lease accounting standard IAS 17 in their exposure draft \u2018ED 2010\/9 Leases\u2019. The proposals seek to significantly alter the way lease contracts are accounted for by both the lessees and lessors. The current distinction between \u2018operating leases\u2019 and \u2018financial leases\u2019 would go and the new accounting model will not allow \u2018leases\u2019 to be treated as an off-balance sheet item. Assets and liabilities of all leases as defined would be recognised by lessees.<\/p>\n
Certain contracts currently classified under \u2018leases\u2019 are likely to be scoped out to mean \u2018sale and purchase\u2019 transactions. Under the proposals a contract would be considered a purchase or a sale if at the end of the term the contract transfers:<\/p>\n
\u00b7 control of the underlying asset; and
\n\u00b7 all but a trivial amount of the risks and benefits associated with the entire underlying asset to another entity.<\/p>\n
The proposal then mentions a debatable explanation of how a contract would normally meet both these criteria i.e. when the contract automatically \u201ctransfers title\u201d to the underlying asset at the end of the contract or includes a bargain purchase option where it is reasonably certain, at the inception of the lease, that the lessee will exercise the option.<\/p>\n
For lessees: Currently a lessee accounts for its right to the use of the leased asset by recognising an asset and a liability (financial leases), and a liability for all the payment obligations in the case of an operating lease. Under the new model a lessee would account for all leases covered within the scope of the draft by recognising an asset reflecting the right to use of the asset and a liability for its obligation to pay rentals.<\/p>\n
For lessors: The draft proposes two accounting models for lessors; a \u2018performance obligation\u2019 approach where the lessor retains significant risks and benefits associated with the underlying asset, and a \u2018derecognition approach\u2019 in other cases. The lessor with an active portfolio of assets (and therefore retains significant risks associated with the assets) generating returns would apply the \u2018performance obligation\u2019 approach. Where the lessor appears to take merely a \u2018credit risk\u2019 (e.g. manufacturers selling products on deferred payments) through a lease contract, then the \u2018derecognition\u2019 approach apply.<\/p>\n
Accounting services will need to be geared up to meet the requirements of the new standard expected in June 2011. The deadline for public comments on the proposals closes on 15 December 2010.<\/p>\n","protected":false},"excerpt":{"rendered":"
International and American accounting standards boards have jointly proposed an overhaul of the current international lease accounting standard IAS 17 in their exposure draft \u2018ED 2010\/9 Leases\u2019. The proposals seek to significantly alter the way lease contracts are accounted for by both the lessees and lessors. The current distinction between \u2018operating leases\u2019 and \u2018financial leases\u2019 […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[56],"tags":[],"class_list":["post-534","post","type-post","status-publish","format-standard","hentry","category-news"],"yoast_head":"\n