1.1 Background
Legacy lease accounting guidance under U.S. GAAP and IFRS® Accounting
Standards was often criticized as being too reliant on bright lines
and subjective judgments. Many believe that such reliance
historically led entities to account for economically similar
transactions differently and has presented opportunities for
entities to structure transactions to achieve a desired accounting
effect. Such criticism prompted the SEC — in its 2005 report on
off-balance-sheet arrangements — to recommend that the FASB
undertake a project on lease accounting. The FASB and International
Accounting Standards Board (IASB®) added lease accounting
to their agendas in 2006 as part of their Memorandum of
Understanding to work toward convergence.
The primary objective of the leases project was to address off-balance-sheet financing concerns related to lessees’ operating leases. However, it proved to be no small task to develop an approach under which all operating leases must be recorded on the balance sheet. During the process, the FASB and IASB had to grapple with questions such as (1) whether an arrangement is a service or a lease, (2) what amounts should be initially recorded on the lessee’s balance sheet for the arrangement, (3) how to reflect the effects of leases in the lessee’s statement of comprehensive income (a point on which the FASB and IASB were unable to converge), and (4) how to apply the resulting accounting in a cost-effective manner.
After working for more than a decade, in 2016, the FASB issued its standard on
accounting for leases, ASU 2016-02 (codified
as ASC 842) while the IASB issued its own leasing standard, IFRS 16.
The timeline below depicts the stages in the boards’ development of
their leasing guidance, beginning with the FASB’s issuance of
Statement 13 in 1976.
1.1.1 Lease Accounting Timeline
Although the project was initially a convergence effort
and the boards conducted joint deliberations, there are several
notable differences between ASC 842 and IFRS 16. We have highlighted
those differences throughout this publication.1
Footnotes
1
See Appendix B for a
summary of the differences between ASC 842 and IFRS
16.