Leases – Another nail in the coffin of convergence?
21 March 2014
One would be forgiven for thinking that the IASB / FASB redeliberations of the leasing project in March were aimed to achieve a converged solution. The two Boards sat in the same room, but came to very different preliminary conclusions on the accounting by both lessors and lessees. Limited support was expressed in the 640 comment letters received on the dual model proposed in the May 2013 ED. This was the third attempt by the Boards to develop a converged model since they began working on this project in 2006.
Hans Hoogervoost, IASB Chairman, has acknowledged the challenges. He said, “We have been struggling with this standard for many years, for two reasons, I think. First of all, because it’s very controversial: many companies simply don’t like this stuff on the balance sheet. And secondly, because it’s also intellectually challenging. And I agree with all those who say there is no simple answer. It’s not easy to find the right answer.”
But is there more than one right answer? Let’s have a quick look at the current direction of the Boards.
So what did they say about lessee accounting?
Whilst both Boards agreed that the balance sheet would reflect all leases (other than those eligible for scope exceptions), the income statement will be different.
The IASB decided to pursue a single approach for all leases. The lessee will account for all leases (except for leases with a term of less than 12 months and small ticket leases) as finance (Type A) leases. This would result in a front loaded expense for all leases, similar to finance lease accounting today.
The FASB however decided to pursue a dual approach with classification as finance (Type A) or operating (Type B) based on the current dividing line in IAS 17 today. The income statement for Type A leases would be the same as the IASB’s approach. But the income statement for Type B leases will reflect straight line expense recognition, similar to operating leases today.
This is a straightforward clash between conceptual simplicity (the IASB view) and practical expediency (the FASB view). One thing that is certain is that the May 2013 proposals are dead.
In our comment letter on the May 2013 ED we argued for practical expediency along the lines the FASB now favours, as we couldn’t see sufficient support for a single lease model given the criticism of the single income statement approach this implied. The IASB now has a challenge to develop a single lease model that is simple enough to garner enough support. I wish them good luck!
And about lessor accounting?
Neither board showed any appetite to move away from the current (IAS 17) lessor model. However it is interesting that the FASB has decided to put a constraint on the recognition of selling profit or revenue for sales type leases based on the guidance in the soon to be published converged revenue recognition standard. The IASB did not agree to such overlay.
I think it is sensible to stay with the current lessor model, given the commonly voiced view that for lessors there was nothing much wrong with IAS 17, so why go to the expense of changing it?
Deliberations will continue in the coming months and it’s not clear what the final outcome will be.
I would be interested to know your views. Do you favour conceptual purity over practicality? Which Board do you think has come to the right answer?