Jacqueline Mills explains why Leaseurope is unhappy with the progress of lease accounting project

The IASB and FASB’s (the Boards) are due to issue a draft leases standard for public consultation in the first quarter of 2013. The content of this second attempt at a leases exposure draft is known to a large extent. It will include a revised definition of a lease and important simplifications for lessee accounting compared to the original proposals. For instance, the treatment of features such as extension options and contingent rentals has improved significantly. Additionally, equipment and vehicle lessors will be able to use the de-recognition approach (now called the receivable and residual approach) they have been arguing for.

Nevertheless, Board discussions have not always run smoothly and it took the IASB and FASB months to reach an agreement on whether and how to deal with the front loading of lease costs created by their right of use model. The compromise resulting from this debate re-introduces categories of leases. In practice, this boils down to a model where real estate lessees will have a straight line lease expense, while equipment lessees will be required to use the original proposal, where total lease expenses remain front loaded and are split into interest and amortisation.

Even before being officially released for consultation, these proposals have met with severe criticism from a wide range of stakeholders. In particular, users of accounts have said that they will still need to make adjustments to lessee financial statements under this approach. European national standard setters and the European Financial Reporting Advisory Group (EFRAG) have also expressed doubts as to whether there is any conceptual justification for this approach.

Leaseurope shares these concerns. We consider that the new proposals are not an improvement over the existing leases standard and do not warrant the cost and burden of changing from IAS 17. To make our views known publicly, we have written an open letter to the IASB.

In this letter we point out that the six year long debate on lease accounting has shown that different types of users of accounts view leases in different ways and therefore have different informational needs. We argue there is no single, magic number that can always accurately reflect an entity’s use of leasing and rental, nor is there an approach to lease accounting that is superior to existing accounting in all circumstances. It is therefore our view that in such a situation the interest of users and preparers of accounts would best be served by retaining IAS 17, ensuring its principles are correctly applied and supplementing it with the provision of additional disclosures.

IAS 17 is not broken. It provides users with relevant information on the different economic effects of different types of leases. With additional breakdowns of committed payments under operating leases, users will have the necessary information and flexibility to gain a full understanding of an entity’s use of leasing and determine the metrics they consider to be the most useful in their analysis of a company. This must be the Boards’ way forward for accounting for leases.

Jacqueline Mills is director of asset finance and research at Leaseurope