audit Participant 
of PRAXITY,  AISBL,
a Global Alliance
of Independent Firms
    ua  ru     Home Search Site map Send a message

26.07.2012: “More than insignificant” is key judgment in leases proposal

Accountants may have difficulty at times determining what constitutes “more than insignificant” consumption of a leased asset by a lessee under a proposed standard being jointly developed by the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), according to a webcast conducted by the boards on Thursday.

On rare occasions, a lessee and lessor may even reach different conclusions about which recognition model to use for the same asset as leases are placed on the balance sheet, according to the boards’ staff.

But the boards intend to provide significant guidance to minimize these application concerns when they issue a second exposure draft on leases in the fourth quarter of 2012.

“We will be including in the revised exposure draft a number of models,” said FASB Practice Fellow Cullen Walsh. “…Following the publishing of the exposure draft, the boards will continue to perform a significant amount of outreach to make sure the proposals are well understood.”

The proposed leases standard provides for two different ways for both lessors and lessees to recognize leases, depending on the characteristics of the lease. When the lessee consumes a more than insignificant portion of the asset, the lessee must recognize the lease as a non-financial asset measured at cost, less accumulated amortization. The combination of the amortization charge and the interest expense on the lease liability would result in a total lease expense that would generally decrease over the lease term.

But if the lessee is paying only for use of the asset and does not consume a more than insignificant portion of the asset, recognition can follow a straight-line pattern, with total lease payments allocated evenly over the lease term.

Meanwhile, the lessor accounts for the lease as a sale of a portion of the lease asset, recognizing a receivable and a retained interest in that residual asset, when the lessee consumes a more than insignificant portion of the leased asset. When a more than insignificant portion of the leased asset is not consumed, the lessor recognizes straight-line lease income.

The question, of course, is what constitutes a “more than insignificant” portion of the leased asset. FASB and IASB staff members provided examples. In general, equipment and vehicle leases tend to depreciate heavily during the life of a lease, so significant consumption occurs, staff members said.

In property leases, the asset usually does not depreciate - and sometimes can increase in value - over the lease period. So consumption of the asset by the lessor generally is considered to be insignificant.

A three-year real estate lease and a ten-year lease on commercial property with an assumed economic life of 40 years were listed as examples where insignificant consumption occurs. Examples of leases with more than insignificant value consumed by the lessee included:

A ten-year airplane lease.

A three-year lease on a car with an assumed economic life of six years.

A four-year lease on a truck with an economic life of ten years.

But two examples did not definitively fit into either category and would require judgment, according to the staff. The “more than insignificant” benchmark could be difficult to apply to a five-year lease on a vessel with an economic life of 40 years, and a 30-year lease on commercial property with an economic life of 40 years.

IASB Senior Technical Manager Patrina Buchanan said that in those cases, a broader set of circumstances would be needed to determine which recognition model to use.

She said the boards are unlikely to define “insignificant” using numbers, but plan to include application guidance and examples to be helpful in the re-exposure draft. She said it is possible that in rare instances a lessor and lessee could make different decisions on how to classify the same lease, even though they will be looking at the same wording and guidance within the standard.

“Depending on exactly how they apply those words, it may be possible that they might get to different conclusions”, - Buchanan said. - “I think we would expect the vast majority of the time that they reach the same conclusion, but each might be looking at the same words, maybe, in a slightly different way.”

Buchanan said it should be easy in most cases to decide which method to use.

“Deciding what side of the line you are on should be a pretty straightforward task, and really judgment should only need to be applied to relatively few leases,” Buchanan said. “However, in saying that, I think this will be an area where we will be particularly keen to hear from constituents in terms of the operationality of the proposal.”

 

Source: CGMA Magazine

Also in the news
[23.12.2024]
Season's greeting from Kyiv Audit Group!

[28.04.2023]
Kyiv Audit Group prepared The Transparency Report for 2022

[07.07.2022]
Praxity Global Alliance Awarded Highly Commended for Association of the Year 2022

[29.04.2022]
Kyiv Audit Group prepared The Transparency Report for 2021

[23.12.2021]
Season's greeting from Kyiv Audit Group!

[11.11.2021]
It's a hat-trick! Praxity Global Alliance has regained its crown as the Association of the Year and gets triple award

[17.09.2021]
Kyiv Audit Group awarded Leader of the Branch 2021

[16.07.2021]
Happy Accountant's and Auditor's Day

[12.05.2021]
Happy Birthday - Kyiv Audit Group - 25th Anniversary

[21.04.2021]
Kyiv Audit Group prepared The Transparency Report for 2020