Differences between FAS 13 and IAS 17

Differences between FAS 13 and IAS 17

The Financial Accounting Standards Board (FASB) is responsible for setting Generally Accepted Accounting Principles for corporations in the United States (including foreign companies that raise funds in U.S. capital markets). The same function for the European Union and a number of other countries is held by the International Accounting Standards Board (IASB).

The primary lease accounting regulation promulgated by the FASB is FAS 13, Accounting for Leases. The IASB's primary lease accounting regulation is IAS 17, Leases.

The IASB and FASB currently have substantial differences in their treatment of leases; particularly notable is that the “bright line” tests of FAS 13 (whether the lease term is 75% or more of the economic life, and whether the present value of the rents is 90% or more of the fair value) are not used by the IASB, which prefers a “facts and circumstances” approach that entails more judgment calls. Both, however, have the concept of capital (or finance) and operating leases, however the dividing line is drawn between such leases.

Both boards announced in 2006 the beginning of a project to revise lease accounting, with the intention of promulgating a common standard in 2011 in which all leases will be treated as capital/finance. Read more about this project and how it may affect you.

The following is a list of significant variations between FAS 13 and IAS 17 (those dealing only with lessors are omitted; all quotations are from IAS 17, with the paragraph number indicated):

1.	Incremental borrowing rate under IAS 17 is preferably “the rate of interest the lessee would have to pay on a similar lease” (¶3); only if that is not determinable is one to use the lessee’s interest rate to borrow funds over a similar period of time (the standard for FAS 13).
2.	Contingent rent under IAS 17 explicitly includes rent changes based on “price indices [and] market rates of interest” (¶3). In FAS 13, such rent changes are to be included in the minimum rents based on the rate in effect at the inception of the lease, with variances up or down becoming contingent rents.
3.	Initial direct costs for a lessee in IAS 17 “are included as part of the amount recognised as an asset under the lease” (¶16).
4.	A lease that transfers “substantially all the risks and rewards incident to ownership” (6) is called a capital lease by FAS 13, a finance lease by IAS 17.
5.	The ownership transfer/bargain purchase option tests are identical. But FAS 13 uses two “bright line” tests for determining if a lease is capital: if the lease term is 75% or more of the economic life, and if the present value of the rents is 90% or more of the fair value. IAS 17 avoids bright lines, with the related tests being:
	• ¶8(c): the lease term is for the major part of the economic life of the asset even if title is not transferred;
	• ¶8(d): at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset.
6.	IAS 17 adds a fifth test for a finance lease:
	• ¶8(e): the leased assets are of a specialised nature such that only the lessee can use them without major modifications being made.
7.	The present value of the rents in FAS 13 is determined using the lower of the implicit or incremental rates; in IAS 17, the implicit rate is always used if known.
8.	For a lease that does not have ownership transfer/BPO, FAS 13 always depreciates over the lease term. IAS 17 depreciates over the shorter of the lease term or the useful life (though one would expect that the useful life would rarely be shorter than the lease term).
9.	What FAS 13 calls “interest expense,” IAS 17 calls “finance charge” or “finance expense.”
10.	Future rent disclosures for FAS 13 are by year for the first 5 years, then all remaining amounts. Such disclosures for IAS 17 are in three groups: the first year, years 2 through 5 inclusive, and beyond 5 years.
11.	Sale-leaseback transactions of real estate may be disallowed by FAS 13 if there is “continuing involvement” between the parties (requiring the transaction to be treated instead as a financing). No such disallowance is discussed in IAS 17, though some of the issues may be implicitly covered by IAS 17’s general principle of treating transactions “in accordance with their substance and financial reality and not merely with legal form” (¶13).
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Our EZ13 PC software and our lease accounting service are focused on meeting the requirements of FAS 13 (and the nearly identical Canadian CICA 3065). However, using the information listed here, they can be used to meet IAS 17. Once the joint FASB/IASB project to revise lease accounting is complete, we expect that the rules will be the same for companies covered by both boards, and our software and services will be updated to meet the new common standard.