The Leases project, undertaken jointly with the US-based Financial Accounting Standards Board (FASB), aims to develop a new leases standard that establishes the principles that lessees and lessors should apply to report useful information to investors and analysts about the amount, timing and uncertainty of cash flows arising from a lease.

The report has found a substantial convergence with the FASB in the areas of balance sheet recognition of leases, the definition of a lease, the measurement of lease liabilities and lessor accounting.

With regard to leases reported on the balance sheet, the boards have both tentatively decided that a lessee would be required to recognise assets and liabilities arising from all leases, with some exemptions. One exemption is that a lessee is not required to recognise assets and liabilities for leases of 12 months or less. The IASB is also considering an exemption for leases of small assets.

The boards have made different tentative decisions regarding the recognition and presentation of lease expenses in a lessee’s income statement. The IASB has tentatively decided to propose a single lessee model that would require the recognition of interest and amortisation for all leases recognised on a lessee’s balance sheet while the FASB has tentatively decided to propose a dual model that retains the existing distinction between finance and operating leases. In practice, the difference in the positions is expected to result in little difference for many lessees for portfolios of leases.

On the proposed definition of a lease under the new Leases Standard, where the distinction between a lease and a service is critical, the boards agree that the objective is not to include service components in lease accounting. The distinction between a lease and a service is critical because it would determine whether a lessee recognises assets and liabilities. The boards would allow lessees to use estimates to separate payments between lease and service components in a contract

In response to concerns about cost and complexity, the boards have simplified both the measurement of lease assets and liabilities, and the reassessment requirements. In addition, the boards have clarified that a lessee can apply the requirements to a portfolio of similar leases, rather than to each individual lease.

Where cash flow presentation is concerned, a lessee would classify cash payments for the principal portion of the lease liability within financing activities and cash payments for the interest portion of the lease liability in accordance with the requirements relating to other interest paid.

The boards have tentatively decided that lessor accounting will remain unchanged.

In the second half of 2014, the boards will discuss lessee disclosures and transition requirements. The IASB expects to issue a new leases standard in 2015.

The report is available at http://www.ifrs.org/Current-Projects/IASB-Projects/Leases/Documents/Project-Update-Leases-August-2014.pdf