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IASB and FASB fail to converge on lease accounting

Despite years of attempts, complete convergence on lease accounting has ultimately failed to materialise, as the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) prepare for their final meeting on lease accounting next month.

In a speech to the American Institute of Certified Public Accountants (AICPA) SEC conference on Monday, IASB deputy chair Ian Mackintosh said: "We have not reached agreement on every aspect, but we are 100 per cent converged on the fundamental issue, which is that leases are present obligations that need to be recognised as liabilities on the balance sheet."

"With the end of the leasing project we will reach the end of a decade of work on our convergence projects," he added, "In that decade, the bilateral relationship between the FASB and the IASB dominated much of our work programmes."

The accounting of leases remains a subject of controversy itself, with US Congressmen Brad Sherman and Peter King recently co-authoring a joint article that claimed changes to lease accounting rules could result in the loss of 3.3m jobs and $400bn worth of economic growth per year.

Speaking at the 2014 World Congress of Accountants (WCOA) IASB chairman Hans Hoogervorst replied by describing the congressmen's thesis as "complete nonsense".

Nonetheless, attempts to establish a common set of practices in lease accounting have long been beset by disagreement between the IASB and FASB.

An initial exposure draft on proposed lease accounting changes was released by the two bodies in 2010, followed by a further draft published in May last year.

Both encountered considerable criticism, with factors such as complexity, consistency and the wide variety of lease transactions themselves cited as unresolved issues in both drafts.

In March this year, hopes for a converged standard were further dashed when a meeting between the IASB and FASB revealed persisting differences in opinion concerning the question of how lessees should recognise expenses associated with leased assets.

While the IASB favoured a singular approach in lease accounting, FASB members preferred a dual model, with leases classified in a similar way to current leasing requirements.

A quarterly survey of 2,500 businesses across 34 economies by Grant Thornton International found that 68% of respondents agreed that the cost of most business leases longer than 12 months should be reported on the business balance sheet. This opinion was particularly popular in North America, where 71% of respondents agreed.

When asked whether there should be exemptions for "small-ticket" leases of items such as IT equipment, photocopiers and printers, regardless of whether they are longer than 12 months, 62% of respondents agreed. Among G7 countries the rate was 65% and 68% in North America.

While both the IASB and FASB are committed to the exclusion of leases under a year, the second issue remains a point of contention.

While the IASB has tentatively endorsed the exclusion of small ticket leases, the FASB continues to oppose it.

Despite the failure to achieve convergence, looking to the future Mackintosh said both bodies believe in the need to maintain the strength of the bilateral relationship between them.

"We have a joint responsibility to protect the body of convergence that has been reached and to minimise differences in the future," he said.

"Convergence was not a perfect process but it was a good one and we achieved a great deal. The similarities between the two sets of Standards are bigger than the differences," he added.

"We both work in the same public interest, serving the needs of investors in public capital markets. For all these reasons, the IASB looks forward to continue working closely with the FASB."


Related articles:

Joint lease accounting proposal issued

IASB and FASB fail to agree on lease accounting

Hoogervorst: US Congressmen's letter on lease accounting a "complete nonsense"

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