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Global Standard-Setters Dismayed by Convergence Breakdown in Lease Accounting

The FASB and IASB plan to publish their controversial standards on lease accounting in 2015. The boards spent several years working on a common standard, but they’ve known since 2014 that the converged approach was no longer possible. Now that it’s understood that U.S. GAAP and IFRS will have some important differences when it comes to reporting lease costs and liabilities, standard-setters from other markets want the FASB and IASB to explain what the differences mean.

Members of the IASB’s global advisory panel told the IASB and FASB they were disappointed the accounting boards won’t produce converged standards for lease accounting.

Given the breakdown in the convergence process, the panelists said the boards need to provide the public with an analysis of the differences between the standards and how those differences will affect financial reporting.

“Let the people know the real effect of the differences in the model,” said Yukio Ono, chairman of the Accounting Standards Board of Japan during a March 26, 2015, meeting of the IASB’s Accounting Standards Advisory Forum (ASAF) in London.

European Financial Reporting Advisory Group Chairman Francoise Flores said she wants an analysis that shows the costs of having “divergent models.”

FASB Chairman Russell Golden said the analysis should be in both the IASB’s and FASB’s final documents.

“Somewhere in the standard, talk about the differences, so whether you pick up IFRS or you pick up our document, you can understand what the difference is, the technical differences,” Golden said.

ASAF members said they wanted this information included in the IASB’s “effects analysis,” which it plans to publish side-by-side with the new lease accounting standard. The lease accounting standard is slated for publication by the end of the year, IASB staff members told the group. The FASB also plans to publish its lease standard in 2015.

The effects analysis will describe the changes to lease accounting requirements and the effect the changes will have on financial reporting. The analysis also is expected to include information on which industry sectors or which regions will be most affected, the expected benefits of the requirements, the costs of applying them, and the changes to key financial ratios. The board may also consider the effects on the costs of borrowing and debt covenants as well as regulatory capital requirements, according to a memo IASB staffers prepared for the ASAF meeting.

The IASB and FASB’s long-running and controversial lease accounting project aims to address a decades-old criticism that U.S. GAAP and IFRS let companies mask a substantial portion of their liabilities by keeping most lease-related expenses off their balance sheets. The proposals call for a sea change in current practice by requiring companies to consider leases for things such as office buildings, fleets of vehicles, machinery, and photocopiers as assets that they have the right to use and also liabilities for which they must make payments.

The boards in 2013 released largely converged draft proposals via the FASB’s Proposed Accounting Standards Update (ASU) No. 2013-270, Leases (Topic 842) , and the IASB’s Exposure Draft (ED) No. 2013-5, Leases.

But the converged approach soon broke down. During deliberations, the boards split on several aspects of the project and now expect to publish separate final standards.

Both standard-setters’ efforts have focused on the same central premise of forcing lease liabilities on company balance sheets.

“I still think that when you look at a company-wide population of leases… there’s very little difference,” Golden said.

The IASB formed the ASAF in 2013 after the IASB and FASB concluded that the goal of converging U.S. GAAP and IFRS would never be fulfilled. The panel includes representatives from standard-setting bodies in the UK, Germany, China, Japan, Latin America, and Africa, and it advises the IASB on its development of accounting standards.

Neither the IASB nor the FASB have decided when companies must comply with the planned lease accounting standards. Both boards said they wouldn’t set a date until they were close to publishing their respective standards.

Golden said the FASB learned a lesson from the controversy caused by the revenue recognition standard’s 2017 effective date. ASAF members also said they supported a delay in the 2017 effective, and the FASB plans to vote on a delay on April 1. An IASB spokeswoman said the international board will consider a delay later in April.

The FASB and IASB published sweeping, largely converged standards on revenue recognition in May 2014 with the FASB’s ASU No. 2014-09, Revenue from Contracts with Customers , and the IASB’s IFRS 15, Revenue from Contracts with Customers .

The standards aren’t effective until 2017, but companies had to start compiling information with them at the beginning of the year to have revenue results for 2015 and 2016 on hand as of the effective date. The compilation of the results for 2015, 2016, and 2017 is needed to let investors and analysts make year-to-year comparisons.

Many companies have told the FASB and IASB that compiling the two-year comparisons makes the 2017 effective date unrealistic. Also, they complain that the FASB and IASB settled on the effective date long before they finished writing the standards. If the boards published the standards in 2013, as planned, it would have given companies an extra year to prepare for the accounting change. (See International Pressure Mounts to Delay Revenue Standard Effective Date in this issue ofAccounting & Compliance Alert .)

The boards want to avoid that sort of criticism when the lease standards are published.

“We wanted to set the effective date closer to when we have a definitive time period as to when it would be issued so there would not be such a large push to consider changing the effective date after,” Golden said.

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