The Financial Accounting Standards Board will resume talks next week with the International Accounting Standards Board to see if the two boards can come to some agreement on how to revise their joint standard on lease accounting.

The boards plan to focus on lease modifications, or accounting for changes to the contractual terms and conditions of a lease that were not part of the original terms and conditions, as well as contract combinations, such as when it is appropriate to combine two or more contracts when applying the lease guidance. Also on the agenda, the boards plan to discuss which variable lease payments should be included in the initial measurement of lease assets and liabilities and when an entity might reassess variable lease payments that rely on an index or a rate.

The boards also plan to address in-substance fixed payments, or when a variable lease payment that is essentially a fixed payment should be included within the definition of lease payments and whether an how to further clarify what constitutes such a payment. Finally, the boards will discuss the discount rate, especially how to determine it and when to reassess it.

The boards met in March to begin redeliberating their May 2013 proposal to bring all leases on to corporate balance sheets under a dual model approach where “Type A” leases, like equipment and vehicles, would result in an amortization of the asset based on its useful life or the lease term.  “Type B” leases, like buildings or land, would result in an expense recognition similar to today's operating leases. The approach drew heavy criticism for its complexity in determining how the expense would be recognized in the income statement.

Despite their efforts to come to a common agreement, the boards came to different conclusions on how to proceed. FASB decided it wants to retain for U.S. GAAP the dual model approach, while the IASB decided it wants to require all leases, except some short-term and small ticket leases, to be treated like a financed purchase. FASB determined it will follow the guidance contained in today's International Accounting Standard No. 17 to determine the dividing line between lease categories. Under IAS 17, a lease is considered a finance lease if the entity assume substantially all of the risks and rewards of ownership through the lease terms.

FASB and IASB have struggled significantly not with whether leases belong on the balance sheet, but with how to measure and recognize the expense. Marc A. Maiona, founder and principal with LeaseCalcs, which provides online lease analysis and accounting, says the firm recently provided analysis to FASB and IASB that shows the front-loading effect of finance-type leases that has been raised as a big objection to the proposed standard is not as dramatic as has been described or calculated by some observers, particularly with respect to real estate leases.

“When the income statement impact from a real world portfolio of Type A leases is viewed against the same group of leases classified as Type B leases, the annual profit and loss variance between the two portfolios of differently classified leases is minimal,” he says. “In some years Type A has a lesser impact than the Type B group, while in other years that relationship flips.” In addition, he says, the variance diminishes as number of leases in the portfolio rises.

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