The International Accounting Standards Board (IASB) has claimed to be on course to publish its controversial new accounting standard for leases in June as planned, despite claims by business groups that the proposed rule is too complex and should be delayed.
Experts also warn that the standard, which will put more than $1 trillion (€707bn) of leased assets on corporate balance sheets, will increase compliance costs for business.
The IASB, which sets accounting standards for the European Union that are also followed by a number of other countries, declined to comment. However, Leasing Life understands that the IASB board is quietly confident that it can still publish a final version of the standard in June, more than four years after the accounting rule was first suggested.
The standard is being developed in partnership with FASB, the US standard setter, and will be an important milestone in the drive to create a full set of international financial reporting standards (IFRS).
When the IASB published an exposure draft of the lease accounting standard in August 2010, it attracted nearly 800 comments. Industry concerns included how to differentiate leases from services; complexities in considering contingent rents and estimating lease terms; and the impact of lease accounting on the income statement.
Since then, however, the IASB is understood to have made significant revisions to its proposed rule on lease.
It has tried to simplify the standard by clarifying the definition of a lease. It has also provided more guidance on how businesses can work out the likely duration of a lease by using the test of whether there is a “real economic incentive” to extend it. Such an incentive could be, for example, if a business spends a large amount of money on refitting a building shortly before the lease is due to expire, or if the lease payments in the renewed lease would be substantially lower.
But the revisions have not won over leasing companies, accounting experts and business groups. In a survey earlier this month, PwC, the accountancy firm, estimated that the new lease accounting standard would affect around $1.2tn (£740bn) in gross lease obligations.
One worry among business is that the lease accounting rule will cause significant disruption to IT and administrative systems as well as balance sheets.
Companies will need to track thousands of leased assets – ranging from photocopiers to heavy machinery, to property – and put them on the balance sheet. Some IT systems, especially basic spreadsheets, may be unable to cope with the logistical demands of lease accounting, experts have warned.
There are also fears that putting leases on the balance sheet could lead to a slump in demand for leasing.
In a separate survey published in October 2010 PwC found that one in two European lessees could move away from leasing in the future as a result of the proposed changes on lease accounting.
Companies may decide that leasing relatively cheap but high volume items such as Blackberries or photocopiers, is not worth the “accounting hassle”, and may opt for outright purchase instead, said John Williamson, a PwC director and an expert in lease accounting.
Retailers, some of whom may have thousands of leased properties, are among the industry sectors who would be most affected by lease accounting.
The British Retail Consortium is concerned about the cost of the proposed accounting change, and that it could make leasing less attractive to retailers.
“Most retailers disagree with the boards’ current proposals to capitalise all lease contracts on balance sheet. We do not believe that the proposals meet the Boards’ objectives,” the BRC said last December, in response to the lease accounting exposure draft.
It urged the IASB to delay the introduction of the standard.
It added: “The cost of transition to, and ongoing compliance with, the proposed changes is expected to be high and disproportionate to any perceived benefit to users. In our view, the changes would actually reduce the relevance and comparability of accounts to users. The compliance and cost burden is therefore difficult to justify in an economic environment that is already extremely challenging for retailers and produces significant constraints on business resources.”