The International Accounting Standards Board (IASB) just issued its new rules on lease accounting, and in the U.S., the Federal Accounting Standards Board (FASB) is about to do the same. The biggest change by IASB is for lessees, no more with there be operating leases separate from finance leases. All leases go on the balance sheet. But the definition of a lease (as opposed to a service contract) has changed. There are three key elements that must be in place for an agreement to be considered a lease:
– Is there an identified asset?
An asset can be explicitly identified in a contract, or it can be implicit at the time is is made available to the lessee.
– Does the lessee obtain the economic benefit?
Any economic benefit conveyed to the lessee must be defined in the scope of the lessee’s right to use the asset.
– Does the lessee direct its use?
Consideration must be given to the decision-making rights that are most relevant to use of the asset, including terms that convey ‘protective rights’ to the lessor.
Answering no to any of the above means it’s not a lease.
There are many other provisions within the IASB ruling. The above is just the starting point.
Just about every company has leases, so this ruling will have far-reaching implications. And it all starts with figuring out what is and what isn’t a “lease.”