The lessee would calculate the lease expense by taking into account the total lease payments divided by the lease term. Under Approach D, the ROU asset and the lease liability would be one unit of account (“inextricably linked” at lease commencement and throughout the lease term). The lessee would present the interest expense related to the lease liability and the amortization expense related to the ROU asset separately in the income statement. The lower the consumption, the more the agreement would resemble a service that would be accounted for as a straight-line total lease expense. The higher the consumption of the underlying asset, the more the agreement would resemble a purchase and thus be accounted for as such. Entities would amortize the ROU asset on the basis of their estimate of the consumption of the underlying leased asset over the lease term. The ROU asset is viewed as two different components under Approach C: (1) a portion of the underlying asset the lessee acquires and consumes and (2) the residual asset the lessee borrows over the lease term. The lessee would present the amortization expense and the interest expense together in the income statement as total lease expense. Because the amortization expense on the ROU asset would generally be lower in the early years, total expense may be closer to straight-line when combined with the interest expense. This is unlike typical amortization methods used for nonfinancial assets. Under Approach B, entities would amortize the ROU asset by using the interest-based amortization method (i.e., the carrying value of the ROU asset would be calculated each period at the present value of the future lease payments). Thus, total expense (amortization and interest) would typically be higher in the earlier years of a contract. Under this approach, the ROU asset is treated as though it is purchased, and amortization is consistent with other nonfinancial assets. The approaches differ, however, in how entities would amortize the right-of-use asset and present lease expense in the income statement.Īpproach A reflects the accounting model proposed in the boards’ 2010 EDs. In addition, under all the approaches, entities would subsequently measure the lease liability by using the effective interest method. Summary of ApproachesĪll four approaches are consistent with earlier decisions about initial measurement of the ROU asset and the lease liability. 1 On the basis of the summary, the boards directed the staffs to prepare recommendations for discussion at their June meeting that focus on approaches A, D, and a combination of the two (see discussion below). The boards’ staffs presented a summary of feedback received from outreach conducted with constituents on four approaches for lessees to measure their right-of-use (ROU) assets after initial recognition and the effect of amortizing those assets on the lease expense recognition pattern. For over a year, constituents have been consistently indicating to the boards that the accounting proposed in the EDs does not reflect the economics of all types of leases. At their joint board meeting last week, the FASB and IASB continued discussing the lease expense recognition pattern that would result from the lease accounting model proposed in their respective exposure drafts (EDs) (i.e., front-end loaded expense pattern).
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