At a joint-board meeting held on May 19, 2011, the IASB and FASB continued deliberations on a joint project to improve the accounting for leases. At this most recent meeting, the Boards reached a number of “tentative” decisions on topics that included: distinguishing between lease types, lessee/lessor accounting, options in a lease and discount rate.

Equipment leasing expert and industry consultant Bill Bosco provided monitordaily with in-depth commentary on these latest developments in the continuing debate on lease accounting standards.

Bosco notes in his summary that his read on the deliberations is “bad news for the leasing industry” and notes, for example, that short-term lease capitalization in “back on the table.”

In a postscript, Bosco said the FASB and IASB have chosen to ignore feedback from preparers and, more importantly users that said that the right answer for the P&L cost is straight line rent expense. The purpose of accounting rules is to give users information that they deem useful to make lending and investment decisions. The Boards’ reasoning is that there is an interest element to a lease where the payments are made over time and the theoretically correct answer is to front end the cost. Maybe the theoretical answer is not useful to readers of financials. It begs the question, why did they bother to ask for feedback?

In a related report that appears on the Deloitte IASPLUS website, the accounting firm notes that at this meeting, “The Boards reversed their previous tentative decision and tentatively decided there should be one type of lease for lessee accounting consistent with the exposure draft.”

As regarding next steps, the Deloitte report notes the Boards expect to issue a final standard in the second half of 2011. However, the timing may change depending on whether the Boards re-expose the draft standard. Deloitte said the Boards will not make this decision until they have substantially completed their redeliberations.

The following was excerpted from Bosco’s commentary on “Lessee Accounting Approach”:

The Boards tentatively decided there should be one type of lease for lessee accounting consistent with the exposure draft. The lessee would recognize a right-of-use asset and a liability to make lease payments at the present value of the lease payments. The right-of-use asset would be amortized/depreciated using a systematic and rational method and the liability to make lease payments would be amortized using the effective interest method. Therefore, the expense recognition pattern would be on an accelerated basis for all leases. The Boards asked the staffs to bring back analysis on relevant disclosures surrounding this tentative decision in a future meeting.

To read the full text of the Deloitte IASPLUS PDF report: click here.

To view Bill Bosco’s commentary, click here.