Leases - It's The Wolf!


Partner in PwC's Accounting Consulting Services in the UK, Peter Hogarth, provides an update on the leasing project and tells of his hopes for things to come.

Once upon a time, a namesake of mine annoyed his village neighbours by repeatedly telling them that the wolf was here. It never was, and so nobody believed him. We all know what happened to him, so it is with some nervousness that I tell you that the revised leases exposure draft should be here soon.

The boards proudly announced in July that they had substantially completed their discussions and that a revised leases exposure draft would be published by the end of the year (It's the wolf!). It didn't take long for that deadline to slip to the first quarter of next year (I think I can see a wolf-like dot on the horizon), but nevertheless the boards do seem to be approaching the end of this phase of the project.

One of the principal criticisms of their 2010 proposals on expense recognition was that they would result in a front-loaded expense profile for lessees, regardless of the payment profile. The boards spent several fruitless months last year in search of a solution, but the issue refused to go away, even when the impact was reduced following decisions concerning lease terms and contingent rentals. The lobbying continued, and the boards have now agreed on an approach that will result in different expense recognition for different types of leases: some will apply the approach proposed in 2010, similar to today's finance lease accounting with its resultant expense front-loading; others will apply a straight-line expense recognition pattern, similar to current operating lease accounting.

Now, you might want to pause here and get yourself a strong cup of tea before reading on.

This might sound as if several years of debate have resulted in the status quo adjusted only for the capitalization of operating leases. Actually, that is not too far from the reality, but importantly the new model will include a different basis for determining when each type of lessee accounting should be applied. In principle, the new "bright-line" will depend on whether the lessee acquires or consumes...

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