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The basic lease accounting model has not changed for many years and has been the subject of significant criticism. The major criticism is that the rules that
determine lease classification may result in similar transactions being reported very differently, leading to lack of comparability and significant amounts of finance not
being recognized. The FASB and IASB are working to develop a common standard for lease accounting and they expect to release an Exposure Draft shortly. For
lessees, as outlined in their joint Discussion Paper and Exposure Draft (issued in March 2009 and August 2010 respectively), the Boards believe all lease contracts
should be treated in a manner similar to the treatment of finance leases. A single conceptual model for the recognition and measurement of all lease contracts is
proposed by removing the existing requirement for lessees to classify leases as finance or operating leases.
It is argued that the right obtained by the lessee in a lease contract is the right to use the leased asset during the lease term, and that this right meets the definition of
an asset. Additionally, the lessee incurs an obligation to pay rentals in a lease contract, and that this obligation meets the definition of a liability.
A lessee would recognize in its statement of financial position, an asset representing its right to use the leased item for the lease term and a corresponding liability for
its obligation to pay rentals. Under this approach, all leases would be accounted for in a similar manner and the classifications of finance and operating leases would be
eliminated. The Boards believe the right-of-use model is the most consistent with their conceptual frameworks and increases the transparency of lease accounting. As
leases are a form of financing, the obligations recognized under the right-of-use approach would be consistent with how businesses reflect other financing
arrangements.
Leases initially would be measured at cost, which is the present value of the lease payments, including initial direct costs incurred by the lessee. Present values
would be calculated using the lessee’s incremental borrowing rate as the discount rate. If the rate implicit in the lease is readily determinable, this rate can be used.
Lessees would not have to determine the lessor’s implicit rate as in most cases it will be difficult to identify. The implicit rate is more likely to be identifiable in leases
of plant and equipment, particularly when it also may be purchased outright. For other types of leases, including property leases with rents based on cost per square
meter, the lessee rarely knows the implicit rate.
The lease asset will be subsequently measured at amortized cost. The expense recorded would be presented as depreciation expense rather than rent expense. The
lessee’s obligation would be also subsequently measured at amortized cost using the effective interest rate method under which payments would be allocated between
principal and interest over the lease term. As a result the interest expense would be higher in the early years of a lease compared to the current straight-line treatment
for rent expense.
The IASB and FASB found it difficult to agree upon a single lessor accounting model and decided that concerns about the application of each of the two
approaches in certain fact patterns could only be addressed through a dual model.
• For leases where the lessor retains exposure to significant risks or benefits associated with the leased asset either during the term of the contract or subsequent to
the term of the contract, the “performance obligation” approach would be followed. The lessor recognizes the underlying asset and a lease receivable,
representing the right to receive rental payments from the lessee, with a corresponding performance obligation, representing the obligation to permit the lessee
to use the leased asset.
• For all other leases, the “derecognition approach” would be followed. The lessor recognizes a receivable, representing the right to receive rental payments from
the lessee and records revenue. In addition, a portion of the carrying value of the leased asset is viewed as having transferred to the lessee and is derecognized
and recorded as cost of sales. Lessors under either approach would also need to estimate the lease term and contingent payments and true-up these estimates as
facts and circumstances change.
Leases
Where a Group company is the lessee
EXTRACTS FROM PUBLISHED FINANCIAL STATEMENTS
STANDARD CHARTERED PLC – Annual Report, 2009
The leases entered into by the Group are primarily operating leases. The total payments made under operating leases are charged to the statement of
comprehensive income on a straight-line basis over the period of the lease.
When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognized as an
expense in the period in which termination takes place.
Where the Group is a lessee under finance leases, the leased assets are capitalized and included in “Property, plant, and equipment” with a corresponding
liability to the lessor recognized in “Other liabilities.” Finance charges payable are recognized over the period of the lease based on the interest rate implicit in
the lease to give a constant periodic rate of return.
Where a Group company is the lessor
When assets are leased to customers under finance leases, the present value of the lease payments is recognized as a receivable. The difference between the
gross receivable and the present value of the receivable is recognized as unearned finance income. Lease income is recognized over the term of the lease using
the net investment method (before tax), which reflects a constant periodic rate of return ignoring tax cash flows.
Assets leased to customers under operating leases are included within “Property, plant, and equipment” and depreciated over their useful lives. Rental income
on these leased assets is recognized in the statement of comprehensive income on a straight-line basis unless another systematic basis is more representative.