The accounting and investor world is preparing for tremendous changes in financial reporting over the horizon – a new rental accounting standard has been proposed and negotiations between the Financial Accounting Standards Committee and the International Accounting Standards Board have been conducted.
At present, when the lease becomes "operational", accounting guidance allows companies to keep them "off balance" – this obligation and asset does not appear in the bookkeeping. Operational leasing costs are accounted for over the duration of the contract in a straight line and are directly recognized through the income statement.
According to current guidance, leasing is "capital" if it contains any of the following criteria:
– More than 75% of the estimated economic life of the property.
-The opportunity to buy real estate is less than real market value.
– Transfer of ownership to the payer at the end of the term.
– The present value of the payments exceeds 90% of the real market value of the property.
The Capital Requirement Guidelines require companies to bill an asset for the property and the obligation on the balance sheet for lease payments and interest expense. Therefore, companies often negotiate their leases to ensure that they count as an operating lease and keep the balance.
The existing model has been criticized for failing to meet the needs of users of financial statements as it does not reliably lease transactions as they serve "rights and obligations" that technically meet the US GAAP conceptual framework for assets and liabilities. Additionally, users of financial statements do not have comparability due to differences in capital and operating leases.
According to the proposed "Legal Use" lease accounting model, the lessee must recognize an asset that represents the obligation to use ownership and lease payments obligations. The initial lease obligation is calculated as the present value of estimated future lease payments, while the asset of the right of use is calculated as the initial leasing liability and the lease incentives reduced by indirect costs. Initially, the boards suggested that all leases under the right to use would have been amortized by the 'real interest rate' method, ie the recognition of lease costs would be accelerated or 'overcharged' during the lease period. However, after a lot of concerns have arisen, the boards have decided to move forward with a "dual model" where some real estate leases are still placed on the balance sheet, but the expense is accounted for by the balance.
Businesses with more than one operating lease will need comprehensive planning and preparation to be ready for new leases under the "right to use" model. Accounting Firms and companies should also be aware that the new model may have a negative impact on financial and equity ratios when leases are transferred to the balance sheet.
Source by sbobet