Lease Accounting May Go Back to Business As Usual. Sort Of.

WASHINGTON, DC-The US Financial Accounting Standards Board and the International Accounting Standards Board have resolved a key sticking point as they work to establish a converged standard for lease accounting: how to account for lease expenses. The boards have opted for a two-method strategy depending on the type of lease—whether, that is, the lease involves the transfer of ownership rights or the transfer of right-of-use.

In the right-of-use approach, which is now called Approach 1, explains Bill Bosco, a consultant for the Washington, DC-based Equipment Leasing and Finance Association, the lease is capitalized and the asset is amortized straight line and interest is imputed on the liability. The result is a front-ended expense pattern. A lease in which ownership is transferred, typically an equipment lease, will use the Whole Contract, or Approach 2, methodology. In that scenario, the asset and liability are capitalized then adjusted each month to equal the present value of the remaining payments.