Will Lease Accounting Remain a Controversial Area of Accounting?

Lisa Weaver, author of Managing your Transition to IFRS, this week looks at Hans Hoogervorst’s recent speech at the London School of Economics, which addressed some recent wins for the IASB and some mountains they still have to climb.

By Lisa Weaver

Recently Hans Hoogervorst, the IASB Chair, delivered a speech at the London School of Economics. He spent some time discussing some of the more controversial aspects of IFRS accounting, and highlighted how the IASB has made great strides in the last 10 years in pushing through some unpopular accounting treatments, despite a huge amount of lobbying. He cited the accounting treatment of stock options and pension plans as examples where the IASB battled against vested interests to create more transparency in financial reporting. Focussing on the US situation, he said that in the case of stock options, $70 million was spent lobbying US Congress against the new accounting rules, yet the standard setters ultimately won, stating that "it was the IASB that led the way, paving the way for the FASB to follow suit."

It will be interesting to see if a similar situation arises in the case of lease accounting. For several years, the IASB and FASB have worked on a project on lease accounting, with the aim of ensuring that all assets and liabilities arising under lease contracts are recognised in the balance sheet. A joint exposure draft was issued in August 2011, and a further one is due early in 2013, with a view to a new accounting standard being issued later that year. However, the US lobbyists are hard at work, criticising the proposed accounting treatment which will result in many more leased assets and associated liabilities appearing in the balance sheet. One report has claimed that recording leases on the balance sheet will result in the loss of 190,000 jobs in the US alone.

Given that in July the SEC issued a report which failed to set a deadline for US convergence with IFRS, and highlighted concerns with the use of IFRS and the governance of the IASB, there appears to be a distinct lack of enthusiasm in the US for IFRS-based reporting. This may play into the hands of the lobbyists, meaning that the project on lease accounting is stalled, and that lease accounting will remain a controversial area for the foreseeable future.