The International Accounting Standards Board and the Financial Accounting Standards Board have published new draft standards for lease accounting. The draft is out for consultation until 15 December 2010. The Boards intend to publish a final standard in 2011 and the changes may come into effect as early as 2012 (although 2013 is perhaps more likely).
Under current accounting rules leases are categorised as either operating leases or finance leases. Operating leases are not generally shown on the balance sheet whereas finance leases are. This can lead to similar transactions being accounted for differently and can make accurate financial assessments difficult for investors. It also creates potential for transactions to be deliberately structured so as to achieve a particular result.
Under the new proposals, assets (the right to use the property) and liabilities (the rent) would be recorded on the balance sheet for both operating and finance leases.
The proposals are likely to lead to tenants preferring shorter leases and may, in some cases, result in purchasing becoming more attractive than leasing.
It is important to note that no change is proposed in respect of investment properties currently accounted for under the separate standards contained in IAS 40 (which was considered .to provide for sufficient information in its current format) meaning no change will be required for the accounts of listed REITs or listed property companies.
The draft proposals are available from the IFRS Website here.