Essay on Accounting For Leases : The New Approach
II. Accounting for Leases: The New Approach
Both the IASB and FASB versions of the leasing standard will bring leases onto company balance for the first time. The IASB’s version, known as IFRS 16 Leases, replaces accounting requirements introduced more than thirty years ago and is a major modification of the way in which companies account for leases (Cohn, 2016). FASB and IASB have been working in unison for over ten years toward congregating U.S. GAAP and IFRS into a single set of high-quality international accounting standards that companies worldwide would use for financial reporting (Garmong, 25).
Leasing provides a significant and flexible source of financing for many companies, the IASB noted. However, the old lease accounting Standard makes it challenging for investors and others to get a true picture of a company’s lease assets and liabilities, particularly for the airline, shipping, construction, and retail industries (Rappaport, 2013). Listing companies using IFRS or U.S. GAAP are estimated to have approximately $3.3 trillion of lease commitments, over eighty-five percent do not appear on their balance sheets. Leases to date have been categorized as either finance leases, which are reported on the balance sheet, or operating leases, which are only in the notes to the financial statements (Cohn, 2016).
This somewhat subjective distinction makes it difficult for investors to compare companies. It also meant that investors…