The Financial Accounting Standards Board is inching closer to a final decision on how it will require companies to account for their leases in financial statements.

The FASB and the International Accounting Standards Board, which are working jointly on new rules both for U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards, recently made more tentative decisions on how to account for residual value guarantees, differences in foreign exchanges, and impairments. The boards determined earlier that they will stick with their original idea to account for all leases under a single model instead of trying to provide for different approaches for different types of leases.

In measuring residual value guarantees, except those provided by unrelated third parties, the boards determined that amounts expected to be payable and included in the initial measurement of a leased asset should be amortized or written down over the life of the lease or over the life of the useful asset, whichever is shorter. The idea is to match the write-down with the economic benefit or the consumption of the leased asset, the boards said.

The boards also decided that the amounts payable under residual value guarantees should be reassessed and adjusted if there's been a significant event or change in circumstances that would warrant such an adjustment. Any changes would be recognized in net income if they are tied to current or prior periods, the boards decided.

For foreign exchange differences, the boards tentatively determined that those differences related to the liability to make lease payments should be recognized through the income statement. For impairments, the boards also determined they will stick with their original idea to refer to existing guidance elsewhere in GAAP and IFRS for impairing or writing down the value of the leased asset.

FASB member Tom Linsmeier said the board decided to revert back to its original plan for a single model for measuring and recognizing leases because the ideas it was exploring for a two-model approach would introduce some noise into the financial statements. Some users and preparers asked the FASB to develop an approach that would look more like a straight-line rental agreement, especially for shorter-term leases that in essence were more like rental agreements than financing transactions. “The problem with straight-line rent expense is how do you get there, accounting-wise?” Linsmeier said.

The board considered one approach that would essentially establish an annuity-like amortization schedule for the liability that arises in a lease transaction, “but that would imply less benefit for the asset early” in the life of the lease agreement, he said. “Does that make sense?” The board also considered an approach where a company would amortize the asset according to the benefit it provides, but that led to a tilted recognition of total rent expense that also didn't reflect the economics. The board considered running the expense noise through other comprehensive income, “but what does that OCI number mean then?” Linsmeier asked.

Ultimately, the board decided it would address the concerns about short-term, rental-like arrangements by requiring disclosures that would give users of financial statements the net income and cash flow data they would need to do their own analysis of lease obligations, he said. “We'll make it transparent to allow them to do the adjustment,” he said.