The new accounting standard for leasing has hit a speed bump on the road to convergence, with U.S. and international rule makers disagreeing on how to treat the expense for rental-like leases.

The Financial Accounting Standards Board and the International Accounting Standards Board remain committed to getting all leases on the balance sheet, but they have come to a stalemate in trying to sort out how best to recognize lease obligations in the income statement for short-term arrangements like today's operating leases that are more akin to rentals than asset purchases. The approach contained in the existing proposal, which would treat all leases as if they were financed asset purchases, has been criticized as “front loading” the interest expense, or accelerating the lease cost at the early end of the contract in a way that doesn't match the actual cash flow associated with lease payments.

The two boards were working on a plan to modify the approach to result in a more straight-line recognition of lease expense over the life of a lease for rental-like leases, but the IASB has developed a new approach over the past few months that would try to match the expense with the rate of consumption of the leased asset. FASB, however, generally believes IASB's new idea is too complicated to be practical.

In a phone interview with a handful of reporters, FASB Chairman Leslie Seidman said FASB is concerned about the IASB approach for two reasons. First, “it represents a new theoretical approach to thinking about leases, which we did not think is warranted at this point to address the problems that have been raised,” she said. But on a more practical level, FASB members are concerned it may be too difficult to apply for the majority of leases, she said.

The method would require companies to estimate the fair value of the asset or the rate of consumption of the asset over the life of the lease. The variables in making those calculations could be complicated, she says. As an example, if a company needed to estimate the value of a rental unit in a building, it would need the value of the building and a way to apportion that value to its particular square footage. A rate-of-consumption estimate likely would hinge on many of the same variables, she says. For companies performing a lease-vs.-buy calculation, that data may be readily available, but for rental-like leases that the approach is meant to target, the data may be harder to find and to manage.

“There are many, many more leases that would not qualify for straight-line (recognition of expense in the income statement) under the IASB model,” says Seidman. “My sense is the math would be a lot simpler under our approach than the IASB approach.”

Seidman is hopeful the two boards can resolve their differences without a “material delay” to the issuance of a final standard. The boards directed their staff to reach out to preparers and investors for feedback on the approaches favored by each board and report back in April. Seidman is hopeful the boards can make a decision and move forward with a converged solution in a new exposure draft after that additional research is complete.

The Securities and Exchange Commission has said its pending decision on adopting International Financial Reporting Standards for use in the United States hinges significantly on the progress of the FASB and IASB in converging the leasing standard as well as standards on financial instruments, revenue recognition, and insurance contracts. Seidman declined to speculate how the setback on the path to a final standard for leasing might affect an SEC decision.

“When you look at the result, I don't know that we are that far apart, other than in our model there are more explicitly cases where you will have straight line and in their model, it depends,” she says.