14 October 2013

Responses to the joint IASB-FASB ED on leases: Deloitte, EBA, EFRAG

The ED on leases deals with the right-of-use (ROU) asset approach that appropriately depicts the rights and obligations for lessees and should serve as the foundation for changes to the recognition and measurement requirements in the current lease standards.

Deloitte

While Deloitte recognises that the boards developed the dual-classification approach for lessees in response to comments received on the original ED, Deloitte is concerned about the conceptual merit of the Type B lessee approach. That is, Deloitte is concerned about an approach that would result in an increasing amount of amortisation over the lease term. In addition, the proposed dual-model approach may be more costly and complex for preparers than existing standards and may not result in sufficiently improved information for users. For example, the proposal would need to contain additional guidance defining and interpreting the meaning of “property” and may result in significantly different measurements and presentation for leases that are economically similar. This may increase complexity in both application and interpretation, cause similar transactions to be accounted for differently, and create new opportunities for accounting arbitrage.

Deloitte is also concerned that the combination of the proposed measurement requirements for the lease liability and proposed disclosures may not provide financial statement users with sufficient information about a lessee’s future lease payments. Specifically, users are trying to understand the full extent of a lessee’s commitments under existing lease contracts, which may not be fully conveyed under the proposal. As a result, to arrive at data necessary for their analysis, users may have to remove the amounts recorded under the proposal from the financial statements and then make adjustments similar to those that are currently made.

Deloitte also believes that the boards have not yet sufficiently developed the ROU model for lessors and have not made a compelling case that the information provided by the proposed lessor accounting model represents a significant improvement over the existing lessor accounting model. Rather, the model introduced in the ED, if implemented, may obscure the financial statements of lessors as a result of the proposed classification requirements.

Press release

Full response

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EBA

The current accounting treatment of leases allows some assets and liabilities relating to leases to remain off-balance sheet, there is inadequate disclosure of operating leases and the leverage position of lessees may not be accurately reflected. The EBA believes that the core principle of the proposed model in which a lessee is required to recognise assets and liabilities arising from a lease will improve the transparency of information about lease rights and obligations.

The EBA acknowledges the efforts of the IASB to maintain an appropriate balance between faithful representation of the various types of lease transactions and simplicity in application. The new proposal to determine the lease term and the conditions under which contingent clauses need to be factored in the lease payments address some of the concerns raised in relation to the cost and complexity of the previous proposals. Additionally, the EBA welcomes the efforts of the IASB in analysing the effects of the proposed requirements as explained in the Basis for Conclusions (BC329-465), which highlight the benefits of the proposed model compared against the costs of implementation and the impact of the changes in the existing arrangements. The EBA supports that the IASB continues to work on this analysis through further outreach activities.

The EBA also welcomes the IASB’s efforts to distinguish between a lease contract and a service contract. The EBA understands that these changes are introduced to better portray the different types of contracts that exist today and the EBA supports a model that achieves faithful and transparent accounting of the various types of arrangements.

The EBA appreciates the challenges to develop a single approach that could be appropriately applied to all the various types of lease arrangements. The proposed dual approach that requires a lessee to recognise a lease liability and a corresponding right-of-use asset (RoU) for all leases of more than 12 months (whether they are classified as Type A or Type B leases) should limit the opportunities for structuring arrangements to achieve a beneficial accounting treatment and increase the transparency of financial statements, through the wider recognition of financial liabilities and the right-of-use assets on the balance sheet. However, the EBA would welcome further developments of the conceptual basis of the “right-of-use” asset in the proposed model.

In addition, the EBA has concerns about the clarity and soundness of some of the terms and requirements of the ED for the accounting treatment of leases. These could result in significant scope for judgment and inconsistency in the application, which will undermine the comparability of the financial information. The EBA believes that in order for the proposed accounting model for leases to achieve its objectives, these requirements need to be adequately articulated and robustly set. Also, the EBA would support requirements for more regular and robust reassessment of lease classification and lease payments to be included in the Standard.

The EBA welcomes the commitment of the IASB and FASB in reaching a converged high quality solution. The EBA encourages both Boards to continue their efforts in developing a single set of accounting requirements, which will be of benefit for the preparers and users of financial statements.

Full response

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EFRAG

EFRAG agrees that more lease arrangements should be recognised by lessees in their statement of financial position and remains supportive for the project. However EFRAG has significant concerns on the proposals and does not recommend finalising the Standard on the basis of the Exposure Draft.

In particular EFRAG:

• disagrees with the dual measurement model for lessees;
• believes that the receivable and residual model raises issues that need to be investigated;
• believes that the proposals are far from reaching an appropriate cost-benefit balance and that significant simplifications are needed, such as exempting numerous small ticket lease arrangements from the requirements and strengthening the application of materiality when accounting for leases.

EFRAG emphasises the need to ensure that constituents have a good understanding of the objectives of the project and what economic phenomena the IASB intends to depict in the primary financial statements. EFRAG recommends taking advantage of the discussion on the Conceptual Framework to clarify the conceptual basis and the definition for right-of-use assets.

Full response

Feedback statement

Link to project - leases