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FASB Joins IASB In Lease Accounting Reform

by Mike Godfrey,, Washington

01 March 2016

The Financial Accounting Standards Board (FASB), which is responsible for US Generally Accepted Accounting Principles (GAAP), has issued an Accounting Standards Update to require all lessees to report their current lease commitments on their balance sheets.

The new leasing provisions under US GAAP would therefore be aligned with the new Accounting Standard – IFRS 16 Leases – announced by the International Accounting Standards Board in January this year.

Currently, most leasing commitments are presently categorized as "operating leases," which are disclosed only in the notes to financial statements. Only the remaining "finance leases" are currently reported on the balance sheet. It has been found that the distinction between operating and finance leases has meant that investors and others have only been able to estimate the effects of a company's off-balance sheet lease obligations.

It is probable that almost half of listed companies using IFRS or US GAAP will be affected by the lease accounting changes, and some industry sectors will be more affected than others. For example, airlines, retailers, and travel/leisure services providers are expected to be most affected, as future payments of off-balance-sheet leases in these industry sectors equate to almost 30 percent of the total assets (on average).

FASB's new Accounting Standards Update will be effective from the fiscal years beginning after December 15, 2018. Early application is permitted for all entities.

TAGS: generally accepted accounting principles (GAAP) | compliance | business | accounting | international financial reporting standards (IFRS) | United States | financial reporting | Financial Accounting Standards Board (FASB) | standards | retail | services

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