Some of the tentative decisions made by the boards at their
October meeting could have a significant impact on leasing
companies.
The decision to potentially exclude hire purchase and other
underlying purchase-type agreements from the scope of the project
will affect manufacturer-dealer lessors.
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It has been mooted that some transactions currently accounted
for as leases are really sales with deferred payment proceeds –
which is hard to disagree with in principle, although of course in
real life they are often harder to categorise.
There is more work to be done, but the IASB and the FASB at
least seem to accept the principle.
But the most significant development concerns the decisions
taken regarding accounting by lessors.
Taking a three-year car lease as an example, the boards are
currently considering two approaches to lessor accounting.
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By GlobalDataOne is the derecognition model, under which a lessor would, when
signing a lease contract, recognise two assets, namely a lease
receivable, usually paid monthly by the lessee, and a right to deal
with the asset at the end of lease – a residual value, in other
words.
Both assets would be recognised on the balance sheet. The
lessor’s ‘right to use’ the asset during the lease period would be
‘derecognised’, hence the name for the model.
Under the performance obligation model, the lessor is considered
to have entered into a contract with rights and obligations
attached: it has the asset known as the receivable, it has the
asset named, and it has the liability of a performance obligation
to make the asset available to the lessee.
The effect of this will be to ‘gross up’ the lessor’s balance
sheet, with two assets recognised – one the asset, and one a
receivable – together with a liability, but the question is whether
this provides useful information.
In our comment letter we supported the derecognition approach.
The boards were split – when put to a vote, eight members of the
IASB and four members of the FASB were in favour of the performance
obligation model, which would not be strong enough support for the
IASB to proceed, so there is clearly still both uncertainty, and
more work to be done. IASB staff have been sent away to write up
what the performance obligation model will look like in
practice.
Back in the summer, the boards decided to go for the performance
obligation model – it was only in response to comment letters that
they decided to have another look. The board may well strengthen
its current view, or may change tack completely.
Lessors have grounds to argue against the performance obligation
model – why should they retain a performance obligation when the
lessee has taken delivery of the asset and has a right to use it?
There seems to be an inconsistency here that the IASB will need to
explain.
Fleet management, of course, encompasses a whole range of
different offerings – where do you draw the line between lease and
service?
Historically IFRIC 4 guidance has been followed – but when the
distinction between an operating lease and a finance lease
disappears, that distinction will become far more important, and
could bear with being looked at again.
The guidance may end up standing as it is, but the existing
decision in many cases as to what is and isn’t a lease may
change.
At the moment, you might have on one hand a service contract
giving rise to straight-line revenue, or you might have an
operating lease which also gives rise to straight-line revenue –
but if that distinction goes, we will in future be talking about
recognising an asset or a debt on the balance sheet, which is far
more significant.
The boards’ intention was to sort out lessee accounting and to
do lessor accounting later on, but a large majority of respondents
said they ought to be undertaken at the same time. The October
meeting’s outcomes were far from unanimously decided, so the boards
may have to spend more time on the project. My personal perspective
is that lessor and lessee accounting should be dealt with
together.
Peter Hogarth
The author is a partner in the accounting consulting
services group, PricewaterhouseCoopers UK
