Abstract
Over the years, accounting standards in financial reporting have been governed, regulated and influenced by two financial standard-setting bodies, namely the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). Furthermore, these bodies have issued numerous financial reporting standards. One such standard, that has been a point of discussion since 1949, is that of lease accounting to achieve fair presentation, transparency and relevant information for users of financial statements that are globally accepted and consistently applied across the board. Lessee accounting in financial reporting is an important aspect in lease accounting. The understanding of the concept of leases has resulted in different interpretations, models and, ultimately, the accounting treatment from a lessee’s perspective.
The aim of this study is to perform a qualitative narration and interpretation of the conceptual basis and historical development of lessee accounting within the standard-setting bodies, the FASB and IASB, in order to describe the evolution of lessee accounting. The research describes the developments of lessee accounting from the late 1940s document Disclosure of Long-Term Leases in Financial Statements of Lessees up until International Financial Reporting Standards (IFRS) 16 Leases authored by the American Institute of Certified Public Accountants (AICPA) and the IASB, respectively. The qualitative interpretation of this research is to chronologically and systematically track the historical development of lessee accounting, and to document the evolution in the conceptual thinking and the key driving factors that moved lessee accounting from rules-based and capitalisation versus non-capitalisation towards the right-of-use thinking.
The study found that, for over half a century, lessee accounting has created a lack of transparency, as well as inconsistencies and ambiguity regarding financial reporting. Before IFRS 16, standard-setting bodies struggled to find a solution to lessee accounting that effectively and accurately depicts a lessee’s economic and financial position without addressing off-balance-sheet accounting and adopting a model that capitalises all leases. Ultimately, the promulgation and issuance of IFRS 16, by eliminating the classification of leases between operating and finance leases and capitalising all long-term leases and detailed disclosure requirements, symbolises a move in the right direction for the financial reporting of lessees.