In an exposure draft (ED) issued last year, the FASB and IASB proposed a new lease accounting model that would have significantly changed current practice. Later redeliberations of the Boards led to tentative decisions that substantially revised the proposed model, and as a result, the ED will be reexposed for public comment, which is expected in early 2012. The effective date of a final lease standard is not likely to be earlier than 2015.
The proposed provisions may significantly increase the lease-related assets and liabilities on the balance sheet and will most likely affect recognition (both timing and classification) of lease-related income and expense in the income statement.
The ED proposed a single lessee model that would apply to all leases. Under this model, the lessee’s right-to-use asset would be amortized systematically (ordinarily straight-line) and entities would use the interest method to allocate lease payments between interest expense and a reduction of lease liability, which would result in higher interest expense in earlier periods. A single lessee model will result in accelerated recognition of lease costs and characterization of those costs as amortization and interest expense for all leases.
One concern about the proposed standard is the impact on debt covenants. The ability of companies to comply with their covenants may be jeopardized by the recording of substantial lease liabilities and the recognition of additional interest expense.
