The lessee would present the interest expense related to the lease liability and the amortization expense related to the ROU asset separately in the income statement. Thus, total expense (amortization and interest) would typically be higher in the earlier years of a contract. Under this approach, the ROU asset is treated as though it is purchased, and amortization is consistent with other nonfinancial assets. The approaches differ, however, in how entities would amortize the right-of-use asset and present lease expense in the income statement.Īpproach A reflects the accounting model proposed in the boards’ 2010 EDs. In addition, under all the approaches, entities would subsequently measure the lease liability by using the effective interest method. Summary of ApproachesĪll four approaches are consistent with earlier decisions about initial measurement of the ROU asset and the lease liability. 1 On the basis of the summary, the boards directed the staffs to prepare recommendations for discussion at their June meeting that focus on approaches A, D, and a combination of the two (see discussion below). The boards’ staffs presented a summary of feedback received from outreach conducted with constituents on four approaches for lessees to measure their right-of-use (ROU) assets after initial recognition and the effect of amortizing those assets on the lease expense recognition pattern. For over a year, constituents have been consistently indicating to the boards that the accounting proposed in the EDs does not reflect the economics of all types of leases. As the PIR of the revenue standard progresses, the Board and its staff may identify areas of improvement that could result in future standard setting.At their joint board meeting last week, the FASB and IASB continued discussing the lease expense recognition pattern that would result from the lease accounting model proposed in their respective exposure drafts (EDs) (i.e., front-end loaded expense pattern). The FASB staff will continue to monitor implementation of the revenue standard and provide updates to the Board on any emerging issues identified. The staff further observed that while many preparers noted significant one-time costs associated with implementation of the standard, they also highlighted that the standard has been beneficial in the long run. In the handouts prepared for the Board’s July 2021 and September 2022 meetings, the FASB staff noted that stakeholder feedback on the revenue standard was positive overall, particularly from users of financial statements since the standard results in more useful and transparent information, improved disclosures, and comparability across entities and industries. At its July 28, 2021, and September 21, 2022, meetings, the FASB discussed feedback received to date on the revenue standard as well as the results of research performed on certain revenue topics, including disclosures, short-cycle manufacturing, principal-versus-agent considerations, licensing, and variable consideration. This process enables the Board to solicit and consider stakeholder input and FASB staff research. After the FASB issues a major new accounting standard, it performs a postimplementation review (PIR) process to evaluate whether the standard is achieving its objective by providing users of financial statements with relevant information that justifies the costs of providing it.
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