Leasing – what is happening now? And what is the next big project likely to be?

05 August 2011

What can I say about the leases project? Back in March, I thought the pace of decision-making meant that the proposals would be finalised by June. How wrong I was.

At the time, you will remember that the Boards had moved in a direction that seemed to provide a more workable model for preparers while still providing useful information for users. My blog prompted a number of you to raise comments – principally along the lines of why has it taken this long to come to a sensible answer?

Then in May, many of those tentative decisions were reversed, and the proposed standard seemed to be moving back in the direction of the exposure draft. For example, concerns from preparers and users about front-loading expenses have returned – there will no longer be a distinction between financing and ‘other than finance’ leases. I understand that the changes were hard to reconcile to the conceptual framework, but there is an argument that the Boards are concentrating on conceptual purity rather than practical expediency. If a lease is manifestly not financing, then will the proposed accounting provide useful information? What do you think?

Despite the reversals, there are still significant changes since the original proposals – not least the Boards’ eventual agreement on a single lessor proposal. For that reason the Boards have decided to do a limited re-exposure of the leasing project. This is due before the end of 2011. We wait to see what limited re-exposure means in practice.

So what have the Boards agreed on lessor accounting? All lessors will account for leases using a ‘receivable and residual’ approach (previously known as the ‘derecognition approach’). But there will be scope exemptions for investment property valued at fair value and simplified accounting for leases with a maximum term of 12 months or less.

This is good news and is certainly an incentive for investment property companies to use the fair value option in IAS 40; otherwise, the accounting by lessors for multi-tenant properties could become very complex under the new leasing standard.

Re-exposures such as those planned for revenue and leasing will not speed up the Board’s standard-setting process. But we broadly support the plan to re-expose these standards, as a formal process is more likely to result in a standard that meets investors’ information needs and preparers’ operational needs, while avoiding unintentional consequences.

Despite the delays to the current batch of standards, that hasn’t stopped the IASB thinking about what happens next. In July they issued a request for views (the ‘Agenda Consultation 2011’), seeking input from stakeholders on the strategic direction of the IASB’s future work plan. The new Chairman, Han Hoogervorst, urged all those that are directly or indirectly affected by financial reporting to get involved.

They are particularly interested in understanding the needs of users of financial statements. It goes without that saying that PwC and many of the other accountancy firms will respond to the consultation, but I would mirror Hans’ request and urge investors and preparers to respond as well. Your views are important to the IASB, and if you have an urgent issue you want addressing, or you want no change at all for the next 10 years, then tell the Board by 30 November 2011). Because if you don’t, no-one else will.



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Hi John

On the question of lessees and "other than finance" leases, I think I'm with the Board on this one.

I understand that at the core the objective is to provide useful information, but I could never understand how a user would view a lease over a material time period to be "other than financing". Every liabilty under IFRS is discounted if the effect of discounting is material, with the unwind shown as a finance charge. All assets are depreciated straight line unless the pattern of consumption indicates otherwise. Users seem to understand and accept these treatments.

So I guess my question would be: why should the lease liability and the corresponding right-of-use asset treatments be any different from other liabilities and assets?

Being an observer of the development in leasing standard I don't see reason for being critic of the approach Board has taken. The Board did listen to the concern of front loading and ready to change of presupposition that every lease is having finance element and it reflect in so called other than finance lease. But later in stage of development, the Board find it difficult to differentiate principally between the two as find it hard to draw a line. However, I do have sympathy for view that property or real estate lease being different than equipment lease. I understand that Board is working on different presentation of so called other than finance lease from profit or loss perspective instead of balance sheet / SOFP perspective. But most of the concern would be allieviated if property or real estate owner choose IAS 40 instead.
Nevertheless eager to see limited exposure of lease.

I think the leasing proposals will make it easier to spot those companies with high operational gearing and that will be a benefit to users. However, understanding the numbers may be a challenge and I wonder how quickly those coming up with valuations will adjust to the brave new world arising from the uneven impact of this standard on the income statement. I look forward with interest to the IASB's cost:benefit analysis on this one (when it is published!) as my sense is that the costs could be high so there will need to be a convincing benefits case.

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