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Accounting for Leases
In July 2006 the International Accounting Standards Board (IASB) in conjunction with the US Financial Accounting Standards Board (FASB) commenced a project to rewrite the current Leasing Accounting Standard (IAS17). In August 2010 the Boards issued an exposure draft (ED) of the lease accounting standard, proposing the ‘right-of-use’ accounting model. A lessee would make no distinction between finance and operating leases, and would record its right to use the underlying asset at the present value of the lease payments, and a liability to pay rentals, including contingent rentals. For lessors, where the lease transfers significant risks or benefits of the underlying asset to the lessee, the lessor would apply the ‘derecognition’ approach; part of the underlying asset is taken off the balance sheet (the residual asset remains) and a right to receive lease payments is recorded. Where the lessor retains exposure to significant risks it would apply the ‘performance obligation’ approach; the lessor keeps the underlying asset on the balance sheet, and records a right to receive lease payments with the liability to permit the lessee to use the underlying asset.
As part of the consultation process, AELA representatives met with the accounting boards. Lessor representatives provided examples of recast lease contracts under the ED proposals, illustrating our major concerns. AELA’s submission on the ED was forwarded to IASB/FASB in December 2010. It concluded that the ED in its present form was not an effective improvement on the existing lease standard, and that additional time was required to address the fundamental concerns identified. Major deficiencies included that capitalisation of amounts due under options and contingent rentals was inconsistent with the IASB Conceptual Framework; the performance obligation approach was inconsistent with the right of use model; the derecognition approach did not enable accretion of the residual asset; intangible assets were not included within the scope; lease expenses were front-end loaded; reassessment should only occur where a change in lease parameters has occurred; and transitional proposals had a substantial impact on lessee profitability.
AELA also participated with the other major national leasing bodies in a joint submission to IASB/FASB. This submission highlighted the six key concerns of the global leasing industry, which were broadly consistent with the issues raised in our submission. The joint letter of the national leasing bodies: questioned whether it is appropriate to capitalise all leases; endorsed the derecognition approach for lessor accounting as opposed to the performance obligation approach, but allowing for accretion of the residual asset; suggested simplification of the treatment of short term leases; suggested an alternative approach for subsequent measurement to mitigate P & L impacts for lessees; recommended changes to the proposed treatment of optional periods and contingent rentals; and suggested sale and leaseback changes.
It is pleasing to report that the IASB/FASB Boards have announced that revised proposals for a new lease accounting standard will be re-exposed for comment. This is an outcome that we, in conjunction with the major international leasing associations, had been advocating. Notwithstanding the changes to the ED, the Boards reaffirmed the major change to present lease accounting to report all leases on the lessee’s balance sheet. Some major issues remain under review by the Boards, including the front end loading of lessee expense compared with the present straight line expense for operating leases. A revised ED is likely to be re-exposed for comment in mid-2012, and the proposed application date may be 2015 or the following year.
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