Update On International Changes To Lease Accounting

Saturday, 14. May 2011

For those that are keen to learn about the latest developments in accounting rules applied to leases, you need to get out more! As an accountant myself I guess I’d better take a few lines to get you up to speed, I’m sure someone must be interested. The main change proposed by the two main accounting boards, the IASB and the FASB, is the recording of leases on the balance sheet. Contract Hire (technically called operating lease) has always been recorded off balance sheet whilst all other type of lease including HP and Lease Purchase (grouped together under the term finance lease) have all been shown on balance sheet.

As you tend to owe more than the asset is worth the gearing of the balance sheet normally presents a less favourable position if you have an on balance sheet arrangement rather than an off balance sheet arrangement, making operating lease more favourable.

However, this has always been a bit of a red herring as far as I’m concerned as all operating lease commitments are shown in the balance sheet notes so any accountant working out the true worth of a business would discount the cost of any operating leases.

This hasn’t stopped the accounting boards taking years now to come up with a proposal that will place all leases on the balance sheet, even when an operating lease is simply a rental and you don’t own the asset! Duh!

Anyway, the boards haven’t yet even considered the position of the leasing company but on the question of the lessee books they have made some decisions.

I won’t go into detail because this is seriously boring me but the main points of agreement are; in most cases lease extensions will be excluded, estimates for end of lease charges will be ignores, including excess mileage, bargain purchase options are to be included (don’t ask) and where the maximum lease term is less than 12 months it is suggested that lessees would have the option to leave them off.

I could go on, but I won’t. I’ll brief you further in a year’s time when maybe they have agreed another condition. Good grief! By Graham Hill