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Financials Tip: How IFRS guideliness affect your leases

by Allison Martin

November 9, 2011

The following tip has been taken from Richard Cebula’s presentation “US GAAP and IFRS converge: Is your organization ready?” which took place at the Financials 2011 and GRC 2011 conferences in Las Vegas, March 8-11.

The FASB and the IASB are currently working on nearly a dozen projects with the objective of creating converged accounting standards between US GAAP and IFRS. One of the key areas affected is surrounding leases.  Check out the below tip for a quick look at how IFRS affects these.

Leasing: Effects on Current Practice
-Proposed rules will eliminate operating lease accounting by lessees
      - Balance sheet will be grossed up with an obligation and an asset
      - P&L geography changes
      - Expense recognition pattern will change and become front-end loaded

- Lease term, contingent rents, residual value guarantees will need to be estimated and subsequently re-measured

- Existing leases are not “grandfathered”

- Additional accounting processes, controls, and/or applications to prepare/maintain records to support estimates on lease commencement date and for the life of the lease

 

Leases: Systems Implications

- Process es and systems for both lessees and lessors will be impacted

- Systems will need to support reassessment of estimates

- Separate systems or information gathering streams may be needed for book
and tax

- More information will need to be captured in systems than today

- Comparative numbers will be required; there is no prospective treatment as
proposed

- Planning activities will need to include a revised mix between capital and
expense

- The ability and need to store and report against existing US GAAP and converged US GAAP from the data warehouse should be considered

- The need to store parallel valuations at the G/L level should be assessed

- The impact to cost center accounting and budgets will need to be determined and the internal cut-over point, as well as the external cut-over point will need to be determined

- All leased assets will be held as assets in the balance sheet

- All future lease rentals will be held as liabilities in the balance sheet

- The procurement process will need to be adjusted to allow for the initial acquisition and setup, and the periodic re-assessment of the future life of the lease 

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