The International Accounting Standards Board (IASB) is meeting today and tomorrow in Connecticut to discuss final decisions on the proposed new lease accounting standards. The objective of the board is to reach decisions on the lessee accounting model, the lessor accounting model, consideration of possible ways of providing cost relief for small-ticket leases, definition of lease term and the short-term lease exemption.
Click here for the agenda http://www.ifrs.org/Meetings/Pages/IASB-Mar-14.aspx
By way of background, the Lease Accounting Project from IASB and its US counterpart the Financial Accounting Standards Board (FASB) intends to bring all operating leases more than 12 months in length onto lessee balance sheets. This involves the creation of a new accounting standard that aims to capitalise all material leases on lessees’ books, where the lessee will account for the lease contract’s rights and obligations as assets and liabilities on its balance and on its income statement.
Ensuring lessees recognise all of their liabilities on their balance sheets is the driving force behind this change. However, for the sake of symmetry and consistency, the accounting boards have determined that “retaining the existing lease accounting models for lessors would be inconsistent with the proposed approach to lessee accounting and would result in additional complexity in financial reporting”.
Under the proposals, lessors will no longer show aircraft as an asset on their books; they will show lease receivables and an interest in the residual value of the aircraft.
The lessor community has studied in detail what the proposed changes will mean for lessors and for the wider industry and has determined almost unanimously that the new rules on the lessor side will make the information they provide on their balance sheets and income statements more complex and less useful for the users: investors, analysts and other stakeholders.
During the meetings held this week, the board has to choose between three alternative models for lessee accounting, although none of these are as were set out in the second Exposure Draft published last year. Some observers state that there is a chance that the Boards will agree to leave current finance/operating lease classification largely as it is for the new purpose of determining how lessees will expense leased assets in the profit and loss (P&L) account, which will mean that most finance or capital leases will remain with the current front-loaded expensing model (Type A); while current operating leases will come onto the balance sheet but retain their existing straight line model (Type B) with a single rental expense rather than a mixture of interest and amortization charges.
For the main lessor accounting model – the area of real contention for the aviation industry –the boards will decide to opt for Type A front-loaded income recognition as for current finance leases, and straight line (Type B) as with current operating leases.
Although major decisions will be made this week, the actual implementation of the new rules will take several years allowing plenty of time for the industry to adjust. There has been a determined lobbying effort by the aviation leasing community to convince the boards to abandon plans to change any of the lessor accounting proposals and restrict the changes to lessees only. Should the boards take the decision to press ahead with their proposed changes, it is unlikely that this effort to convince the boards of the differences of aviation leasing compared to retail or other forms of leasing will cease and may even intensify in an attempt to exempt aviation from the new rules.
For more background on this lobbying effort visit Airline Economics Issue 16 September/October 2013. Visitwww.airlineeconomics.co