Leasing: better late than never?

02 March 2011

With only four months left until the new leasing standard is due to be published, the boards still appear to have a huge amount of debate and decision-making left to do. Should the boards really be deliberating what the definition of a lease is at this stage in the process? The answer is clearly no, but as the saying goes ‘better late than never’. Perhaps this should be the strap line for the project as a whole at the moment.

It is no surprise that the leasing exposure draft attracted a large number of comment letters (over 780 to date). It is an area that affects nearly every entity to some degree, and the original proposals would be complex and costly for many preparers to implement without necessarily providing the intended benefits to users.

Indeed, the original proposal managed to attract opposition from both users and preparers – quite an achievement. The IASB and FASB have undertaken extensive consultation since the exposure draft was published and have heard the strength of feeling from constituents. In hindsight, perhaps more thorough consultation earlier in the process could have prevented a fundamental change in direction so close to the publication date.

It does make you wonder what the boards were doing in the period leading up to the exposure draft, particularly given this debate has spanned over a decade. Maybe in attempting to remove the perceived bright lines between operating and finance leases and minimising structuring opportunities, the boards lost sight of the overarching aim of the project: to bring all leases on-balance-sheet.

Some people, including at least one board member, have commented that if the boards had focused on achieving this aim, the project would have not run into so much opposition. Indeed looking at the direction of the boards’ redeliberations since the start of the year, the change in direction appears to be taking us back closer to an IAS 17 model with two categories of leases, but requiring all leases to be on-balance sheet.

The boards started 2011 with a clear path towards the final standard. This includes the re-deliberation of five key areas: lease term, variable lease payments, lessor accounting, profit and loss recognition and determining the definition of a lease.

A more sensible tentative decision has already been taken on lease term, and the boards have given a clear direction to the staff to undertake targeted consultation on the other four key areas. So the boards are now moving in a direction that responds to constituents’ concerns and, if adopted, would result in a more workable model for both lessees and lessors while providing meaningful information to users.

Certainly, if the boards continue at the same pace as we have seen since the January board meeting, there is every possibility that all key decisions, if not the final standard, could still meet the June 2011 deadline. The question of whether due process will require re-exposure still looms in the background.

This will no doubt be dictated by how different the final standard looks from the exposure draft once all key decisions have been made. One thing is clear: as Sir David Tweedie flies off into his retirement, he can do so in the knowledge that his plane will one day be on someone’s balance sheet.

Did I get it right? Please let me know your thoughts and opinions.


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I totally agree with you. But on question of re-exposure, I guess Board has roll back many of the controversial proposal and bring new criteria into model which warrant re-exposure. Nevertheless it still not clear where Board end up?. But what you think, has the Board has made sensible decision with respect to lease term.

I question whether the target of bringing all leases on-balance-sheet (or should we say on-statement-of-financial-position?) is the correct one.

As a user of (non-bank) accounts I am keen on knowing what a business is committed to paying/receiving and when, as well as what has been paid/received in the period.

Discounted payment commitments are irrelevant as are notional costs arising from the unwinding of such discounting. I can make my own adjustments if I want to compare a business owning assets with a business leasing assets.

As someone who looks at notes to the accounts, I could not care less whether this information is presented in the notes or "on-balance-sheet", so long as it is presented clearly.

My concern is that the IASB seems to be searching for intellectual purity, rather then clear communication of information.

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What I am worried about is the fact that it took IASB so long to finally come back to more or less the same as you indicated in the blog. If the "only" element is to bring all leases on to the balance sheet, which I believe nobody is against, then a simpler process could have been followed in my opinion. This would have allowed IASB to invest in other projects that clearly will have big impacts such as consolidation and revenue recognition or hedging.

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