The IASB and FASB’s November meeting
produced a clarification of the boards’ approach to accounting for
options, as the lease accounting project begins to pick up
speed.
The general approach to options set out in the
discussion paper – that the most likely lease term would be the one
accounted for – was reaffirmed, with a few changes.
Go deeper with GlobalData
The boards moved away from calling it the “most
likely lease term” to calling it instead the “longest possible
lease term that is more likely than not to occur”.
This does not mean much change from the discussion
paper proposals for a five-year lease with an option to extend for
a further three years, for example.
It will, however, mean change for leases of five
years with options to extend every five years, for example – as is
the case with many property leases.
On the lessor accounting side, meanwhile, it was
decided that the recognition of assets and liabilities would be
symmetrical, with recognition on the lessee’s side.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataWhen recognising a receivable in respect of rentals
due from a lessee, the lessor has to consider what the lease term
is going to be – so in the example of a five year lease with an
option to extend for an additional three years, the lessor would
recognise either a receivable for five years of rentals or eight
years of rentals.
The lessor and the lessee both have to make this
assessment, but based on the information open to them.
Using the five-year example again, the lessor may
judge that a five-year lease is the most likely outcome, whereas
the lessee’s internal plans might include expanding into a new
territory or something similar, and it can be fairly sure that it
will take up the three-year extension option, so will account for
an eight-year lease.
The general idea behind the boards’ thinking in
this area is that someone’s asset is someone else’s liability, but
inevitably parties will have different information on which they
base their accounting decisions.
Under the current requirements, options are only
considered when accounting for finance leases if a lessee is
reasonably certain they will be exercised. This means the threshold
for recognition is now much lower than under the existing
rules.
Jo Tacon
