Lease accounting overview

What is happening?

BVRLA members can attend a seminar to learn more about the changes to lease accounting, click here for more information.

The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) are working on a common standard for accounting for leases which will ensure that the assets and liabilities arising from lease contracts are recognised in financial accounts. The IASB have published its exposure draft for the new standard which is open for comment until 15 December 2010.

Historically, financial leases have had to be reported on the balance sheet, but not operating leases. The new approach to lease accounting, referred to as the right of use approach, differs substantially from today’s standard which is based on an analysis of the risks and rewards inherent in the lease. Under the right of use model, a lessee would always recognise an asset, (the right to use the leased item), and a corresponding liability on its balance sheet, whereas under the current standard, a lessee recognises the leased asset only under so-called finance leases.

When?

The exposure draft is open for comment until 15 December 2010 and the new standard is likely to be published in the first half of 2011.

How will this impact my business?

Publicly listed companies already have to make a note to the annual report, which reflects any operating lease rentals payable. The lease accounting rules only apply to publicly quoted firms that report to the International Financial Reporting Standards.

Businesses will need to ensure they report on their liabilities (rental payment arising under the lease) and their asset (the right to use the leased asset). This is relatively straightforward if you are able to measure these two values and account for them in a consistent and simple manner.

What does this change mean for leased assets?

Bringing these leased items onto a firm’s balance sheet will not in itself erode the commercial benefits of leasing. Leasing has already proven its value, sheltering companies from the risks associated with vehicle values and ensuring that more capital remains available than when assets are purchased outright. But it will inevitably impose a new reporting burden.

Further information

The following provide more detailed information and a background to the changes:

• A PDF download of this information is available by clicking here.
• The  exposure draft and other supporting documents can be accessed from the IASB's website.
• BVRLA response to IASB lease accounting discussion paper - our response to the original discussion paper in 2009.
• Leaseurope - For the European view of the changes.