08 July 2013

EFRAG: Draft comment letter on the IASB's revised ED Leases

EFRAG agrees with the IASB that more lease arrangements than today’s finance leases are in-substance purchase of assets, albeit for a term that is less than the useful life of the asset. For this reason, EFRAG remains supportive of the IASB Lease project. In particular EFRAG believes that the right-of-use model if applied to the right population of leases has the potential to bring useful information to users of those financing arrangements which are kept off balance sheet today. EFRAG also notes that the ED incorporates a number of its previous recommendations, reflects significant improvements in the accounting for leases in accordance with the right-of-use model (both for lessee and lessor) and includes a better approach to the distinction between lease and service arrangements.

However, not all lease transactions have the same characteristics (for example, consumption of the underlying asset may vary as the IASB recognises) and in EFRAG´s view there are some leases for which the right-of-use model is not appropriate and that might rightly be not presented on the balance sheet.

The IASB has emphasised in its communications that the project was intended to recognise financial liabilities that are currently left off balance sheet. Focussing on this objective seems to have been the primary driver behind the development of the right-of-use model. This model is based on a notion that an asset is a bundle of rights, one of them being the right-of-use; this is a new approach, which has never been debated on a conceptual level and EFRAG is not convinced that the focus on liability recognition has led to capturing the right population to which the right-of-use model should be applied. This is in EFRAG´s view illustrated by the inconsistencies in the proposed application, in particular the use of two measurement bases and different accounting for lessors and lessees which will add to the perception of complexity.

In EFRAG's answers to both the Discussion Paper published in 2009 and the first ED published in 2010, as well as in other communications such as regular EFRAG-IASB meetings, EFRAG has emphasised the need to ensure that constituents have a good understanding of the objectives of the project and what economic phenomena the IASB intended to depict in the primary financial statements. EFRAG does not think that this understanding exists today and EFRAG does not think that it is adequately explained in the Basis for Conclusions.

EFRAG is therefore concerned that without a proper debate on the underlying concepts and the related transactions, the right-of-use model will not be understandable for constituents and this will add to the feeling that this proposed IFRS is unduly complex.

Based on these observations, EFRAG recommends that the IASB proceeds to finalise its project in steps:

1. To require without delay relevant disclosure on lease arrangements to ensure that users have access to the information they need;
2. To take advantage of the discussion on the conceptual framework to refine the definition of the right-of-use, distinguish this right from the other rights which are bundled in the asset, investigate whether the consumption of economic benefits of the underlying asset has a role to play, and refine the guidance to identify what activities convey the ability to direct the use of an asset and how this links with the business models of lessors (providing finance or managing assets). Such discussion could in EFRAG's view be concluded before completion of the conceptual framework project itself;
3. Finalise the accounting for leases, with the benefit of clarified objectives and a carefully identified lease population and the results of the current consultation.

Press release

Draft comment letter

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