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.
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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.
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By GlobalDataIt 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.
Demand Slump
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.”
