The IASB Releases New Lease Standard, the FASB to Follow Soon

The long awaited new lease standard has arrived! The International Accounting Standards Board (IASB) released its version of the new lease standard last week with implementation scheduled for early 2019.  The US accounting standards board (FASB) is expected to release its version shortly with implementation to follow soon after IASB’s.

To recap, the new standards strive for greater transparency in financial reporting by putting all leases on the balance sheet as assets and corresponding liabilities. The IASB version differs from the US standard in one key respect and that is all leases are to be treated as capital leases, while the US standard will differentiate between capital leases (Type A) and Operating Leases (Type B) The latter will amortize leases using the straight line method whereas Type A will split out interest expense versus principle expense like a mortgage.

I have written extensively about the new standards and invite readers to review the following Blog postings on Visual Lease’s web site, under Bell’s Blog:

  • The Lease Accounting Tsunami; Are You Prepared to Weather the Storm?
  • Why Do We Need a New Lease Standard?
  • A Correction to the White Paper: “The Lease Accounting Tsunami; Are You Prepared to Weather the Storm?”
  • Update to the FASB Rulings on Lease Options
  • Lease Standard Update- Possible UnintendedConsequences

Here is the press release from the IASB regarding the new standard:

http://www.ifrs.org/Alerts/PressRelease/Pages/IASB-shines-light-on-leases-by-bringing-them-onto-the-balance-sheet.aspx

In a subsequent release the FASB offered guidance on implementing the new FASB lease standard last week:

http://www.fasb.org/cs/ContentServer?c=Page&pagename=FASB%2FPage%2FSectionPage&cid=1176167771931&mc_cid=6e3b4

These new lease standards will have a profound effect on capital structures and financial reporting. It is estimated that the new standards will add $3.5 Trillion in assets and liabilities onto company balance sheets. Certain industries will be impacted disproportionately because of their heavy use of leasing. These would include retailers, airlines, shipping companies and companies with large portfolios of leased properties such as restaurant chains.  Heavy users of IT assets which are typically leased like cloud computer entities will also be significantly impacted.

Both the IASB and FASB have encouraged companies to immediately begin the transition process to these new standards. In effect companies will most likely maintain two sets of books, one for their traditional lease portfolio and one reflecting the new standards. Perhaps the most urgent priority is to insure that their lease management system has upgrades to calculate the new asset and liability values as well as new performance measurements such as return on assets, and debt to equity ratios. Another urgent step is to coordinate with the company’s auditor to insure that the new lease standards are accurately reflected, once the lease portfolio is recalculated.

I will continue to monitor the IASB and FASB progress on the standards update, and will report any developments as they occur in Bell’s blog. Readers are encouraged to review Visual Lease’s offering in their new lease standard module.