Lease accounting has been a sticky issue for analysts, businesses and accounting rule makers for some time. Recently, the Financial Accounting Standards Board and the International Accounting Standards Board came to a conclusion that may appease all parties involved. The new rule is set to be implemented in 2013.
The new rule will shift the appearance of several corporations’ balance sheets. In the past, lease agreements were ways to own something without having to account for it. A company could own something without having to list it as an asset or list the payment as a liability.
For example, airline balance sheets were not true representations of the company’s actual debts and assets. The balance sheet showed an airline owned few planes and had very little debt. In actuality, they were leasing the planes.
Originally, there was a proposal for leases to be treated like a purchase and a loan. This outraged many corporations. When money is borrowed, more interest is paid upfront in the first stages of the loan. It was suggested that a lease be accounted for in the same way.
However, this was not always an accurate portrayal of what was actually paid on the lease each month. Instead, the boards have developed a method that treats the lease differently according to its purpose. If it leads to eventual ownership, it would then be treated as in the original proposal above.
On the other hand, if the lease conveys a small percentage of the life or value of the leased asset, it should be acknowledged evenly over the lease term. These more specified classifications for lease accounting helps corporations and analysts alike support this new accounting development.