Intermediate Accounting 2

Intermediate Accounting 2

16 October 2015

What are the major perceived deficiencies which the standards setters are seeking to address? Is there a difference in the perceptions of the lessees/users compared to primary lessors (banks, independent leasing companies, etc.)?  Why has this process taken so long?

The existing lease standards have faced a number of criticisms from many users of financial statements. The standard setters need to know these critics in order to address the deficiency in the current lease standards.

There are various critics of the current lease standards. First, the standards have been perceived to be old, since it was reviewed last in 2003, which renders it difficult and inappropriate in addressing the complexities and arrangements in current leasing activities (Dingli, par 2). Secondly, a good number of stakeholders argue that the standards’ main weakness lies in the off-balance sheet accounting for certain operating leases by lessees (Dingli, par 3). In addition, the existing standards have been criticized due to their failure to provide appropriate and comparable information to users of the statements.  Many users have viewed the transactions involving lease as a binding contract and should be reflected in financial statements just like other financial obligations. Lastly, there is a difficulty in knowing whether a lease transaction is operating one or capital. This has led to many similar transactions awarded different treatment in the financial statements.

Both of the lessors and lessees have no different perceptions, as they think that new standards will address their problems. Since May 2013 when the two boards i.e. FASB and IASB issued a draft of the proposed new model to replace the current, both the lessors and the lessees feel that will end their problems involving accounting for leases. This draft is known as the revised ED. Lessors and lessees believe that the proposal, just like the original exposure draft, will ensure fundamental change in accounting for leases and also to have significant impacts to every business entity. Under the new model, lessees will record every lease in the balance sheet. Lastly, the resultant dual model which was proposed will ensure income and expenses of both lessors and lessees are recognized based on the underlying asset nature. The difficulty is that lessors will recognize lease payment right and either derecognize underlying assets,  where the lessor no longer has exposure to risk or recognize right to receive payment (Power and Michael, 184).    

The process has taken long due to various reasons, among them being diverging views by the two bodies i.e. IASB and FASB. They have a difficulty in making decisions, whether accounting for leases should apply one or two methods, IASB prefers single method, which ensures leases come on balance sheet. The second one is the challenge for the preparers, many business companies face a number of challenges in trying to implement lease standards when they emerge finally, majorly because of the lease prevalence. Lastly is the analysts’ challenge, the difference under the new model under US GAAP and IFRS also perpetuates the challenge for analysts in trying to compare performance of the company. As a result implementation of the proposed standards has delayed (Imhof, Eugene, Thomas et al, 235).