Norton Rose’s Judy Harrison explains why it’s important
for lessees and financiers to act in anticipation of the proposed
changes to the lease accounting standard
A new exposure draft has been announced as part of the on-going
consultation into lease accounting. The International Accounting
Standards Board and the Financial Accounting Standards Board have
been consulting for a number of years to try and agree a revised
international leasing standard. It is likely that this will lead to
changes in UK accounting practice. More than 800 responses were
received regarding the initial exposure draft, and in response, the
Boards are considering some substantial changes to their
proposals.
Go deeper with GlobalData
Finance Act 2011 introduced legislation aimed
at ensuring that UK businesses that account for lease transactions
continue to be taxed in the same way as they are at present
following any change to the accounting standards. Readers will
recall that we wrote about these provisions when they were still in
draft form in the April 2011 issue. The new legislation has
recently been enacted.
It is worth noting that the new lease
accounting standard will increase the compliance cost of UK
resident companies. The Finance Act 2011 rules will require UK
resident companies to prepare two sets of accounts – the first set
will be prepared using whatever accounting standard is in force and
from time to time will be required to calculate accounting profits,
the second set which will be prepared using accounting standards in
force on 1 January 2011 will be required to calculate taxable
profits. In the April 2011 issue, we hoped that an alternative
long-term solution would be found. No such solution has yet
been announced.
It is anticipated that the revised exposure
draft will:
-Propose removing the distinction between
finance and operating leases for lessees
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataThis is a return to earlier proposals made by
the IASB and FASB. It is expected that lessees will recognise an
asset which represents the right to use each asset and a liability
for its obligation to make future lease payments for the asset.
This asset and liability will amortise over time. It is understood
that the effect of this is to generate a front loaded profit for
lessees.
– Consult upon the introduction of a single
accounting model for lessors
This is a significant change from the previous
exposure draft which suggested two different accounting models. It
is tentatively proposed that lessors should apply a “receivable and
residual” accounting model where the lessor recognises its right to
receive lease payments and the value of its residual interest in
the asset.
It is expected that certain leases of
investment property and short-term leases will be excluded from
this change.
It is also thought that the second exposure
draft will consult upon a revised definition of lease.
The new exposure draft is expected during the
final quarter of 2011. This will inevitably delay publication of
the revised leasing accounting standard.
Despite the delay, companies should be
preparing for changes to the rules. It is not anticipated that the
new accounting standard will grandfather existing leases. As a
result, lessees should be reviewing the effect of the changes on
their loan covenants. These covenants often restrict a company’s
borrowings based upon the amounts shown in a company’s
accounts. As proposed, the new standard seems likely to
increase the liabilities shown in an operating lessee’s accounts.
Lessees should be liaising with their financiers in anticipation of
the proposed changes.
