New approach to lease accounting: En teoretisk analyse af IASB´s / FASB´s konvergensprojekt for leasing i relation til indregning og måling samt en empirisk analyse af konsekvenserne ved implementering af nye principper - med afsæt i nuværende svagheder og mangler på standardniveau

René Hermann Rasmussen

Student thesis: Master thesis


Leasing is an important source of financing for entities and is being widely used as a flexible alternative to loan financing. The International Accounting Standard Board (IASB) and the Financial Accounting Standard Board (FASB) have jointly undertaken a convergence project on leases. In the middle of 2011 a final accounting standard has not yet been issued. The objective of initiating the project in late 2006 was mainly due to the lasting criticism of the current opportunity for off-balance sheet transactions and complexity of accounting treatment. The off-balance approach omits relevant information regarding rights and obligations which compromises the needs of users. Further a conceptual inconsistency exists between the underlying standards and the Board’s conceptual frameworks. The weaknesses and shortcomings relating to the dividing line between operational and financial (capital) lease emphasize the need for improvements. For that reason the boards have issued an Exposure Draft proposing a single Right-of-use model for lessees and a hybrid model for lessors containing the performance obligation and the derecognition approaches. This will eliminate all off-balance financing. Under the Right-of-use model lessee recognizes an asset representing the right to use the leased asset but not the asset itself and a corresponding liability for the making of lease payments. Lessors use the performance obligation approach then exposed to significant risks and benefits associated with the underlying asset. Along with the recognition of an asset and a receivable a liability is recognized. The liability represents the outstanding obligation as the right of use is satisfied during the lease term. The derecognition approach recognizes a receivable that equals the receivable in the performance obligation approach and residual asset due to the fact that not all risks and benefits have been transferred. The right of use has been satisfied on commencement. Therefore no liability is recognized and the revenue (receivable) and cost (partial derecognition of the underlying asset) from entering into the lease agreement is recognized earlier compared to the performance obligation model. This results in an increase in relevance and a decrease in the faithful representation. The analysis has shown that the performance obligation approach is inconsistent with lessees accounting for the right-of-use concept. Hence implementation of the performance obligation approach cannot be supported. The recognition and measurement methods for both lessees (right-of-use model) and lessors (derecognition approach) include variable payments. Those payments should not all be included in the single asset and liability recognized due to a conceptual difference between framework definitions and the characteristic of payments. Measurement methods are heavily based on judgmental assessments and subjectivity which negatively impact the usefulness of financial information to users. Based on the analysis and discussion of this thesis only a modified recognition and measurement method can be supported for variable payments as the current conceptual inconsistency has been replicated into the recognition of those payments. Further guidance and clarification is needed on key areas as important terms are undefined leading to different interpretations among reporting entities. In combination, faithful representation and relevance have not resulted in a profound improvement of information provided in financial statements to users. Nor have complexity and comparability turned out to be improved compared with current accounting literature.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
Publication date2011
Number of pages138