The proposal requires companies with equipment leases with terms longer than 12 months to account for interest and depreciation expenses. In the past, leases were normally recorded consistently throughout the lease term. The new “front-loading” method requires companies to records higher interest charges at the beginning of the lease term and lower charges at the end of the term.
The decision has the following implications for companies:
- Impact net income in the early years of leases and
- Impact reporting in the event of a termination of lease.
As a result, companies that lease equipment are fighting the proposal. A revised exposure draft is expected before the end of the year, but most expect few changes to the handling of equipment leases.