Financial Accounting Standards Committee

The article revolves around the evaluation of the proposed lease accounting in the G4+1 special report. The evaluation has been conducted by the financial standards committee.

The committee supports the idea of having a single and conceptual approach when it comes to the accounting of leases. There is a need for the approach to have specific characteristics that include:

• Recognition that accounting for leases comprises a special case of accounting for contracts.
• Taking account of practical realities of the market, which makes the measuring of lease liabilities and assets difficult.
• Recognizing that all leases convey obligations and rights, making them to create assets and liabilities. This is regardless of the specific terms and conditions involved.
• Being robust to shifts involved with lease contractual details when the shifts do not have the ability to materially alter the economic substance of the arrangements.

The article also includes a review and discussion of empirical research that was involved in the evaluation. There is an indication that:

• There are mixed results with regards to recognition vs. disclosure of leases. However, there is a suggestion that the usefulness that lease information has on decision makers is not diminished and it may be improved through recognition of all leases the way it is proposed in the special report.
• There is a change of leasing behavior when the accounting rules change.
• There is a similarity between capital leases, operating leases and debt for risk assessment and valuation purposes.

The article has also included some conceptual issues that had been raised in the G4+1 special report. The committee seems to express a difference of opinions on these issues. They include:

• Lease assets and liabilities reflecting net or gross payments.
• Recognition of leases in the financial statements whether during delivery or lease signing.
• Whether accounting should be symmetric for lessors and lessees.
• Whether contingent or optional payments should yield recognized lease assets and liabilities.
• The desirability of the fair valuation of lease liabilities and receivables.
• Whether lease capitalization should be affected by the term of the lease or nature of the leased asset.

Questions

1. In your opinion, do you think there should be the development of a single, conceptually sound approach to accounting for all types of leases? Why?
2. In your opinion, do you believe whether leases should be recognized in financial statements during delivery or lease signing?
3. In your opinion, do you think whether accounting should be symmetric for lessors and lessees?

Answers

1. Yes. A single, conceptual approach provides a framework for the setting of standards. This is good for uniformity and comparability purposes. It makes it easier for individuals intending to use financial statements from different companies. This approach also gives a basis for resolving lease accounting disputes in case they arise without the presence of contradiction.
2. Leases should be recognized at signing. This is because the parties to a lease tend to sign with the objective of honoring it. There is no expectation that one of the parties will default.
3. No. Revenue recognition criteria tends to have differences across financial reporting jurisdictions hence enhancement of symmetry will bring undesirable interdependence between lessees and lessors with regards to revenue recognition.

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