CHP Consulting’s Steve Taplin unpicks the latest
machinations on lease accounting by the IASB.
Go deeper with GlobalData
CHP Consulting has
issued a white paper on the lease accounting exposure draft (ED),
and I’d like to discuss some of the recent developments in light of
the industry reaction to the new proposals.
As a result of feedback received,
the IASB is deliberating anew several aspects of the ED, including
whether its scope should include lessor accounting at all.
The board will continue to discuss
both lessor and lessee accounting, but limit their discussion of
lessor accounting to those issues which are critical to both
lessees and lessors, such as the likely outcome aspects of the
ED.
A recent staff report to the IASB
noted the enormous opposition to likely outcome accounting, and the
negative feedback about front-weighting of costs for lessees.
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By GlobalDataIt also acknowledged criticism
levelled at the two new lessor accounting models.
However, it seems clear that the
IASB will persist with the most fundamental reform: that lessees
will need to capitalise all assets and liabilities arising under a
lease contract.
So it looks like Sir David Tweedie,
outgoing chairman of the IASB, will achieve his ambition to fly in
an aircraft that appears on the airline’s balance sheet.
An interesting point is that the
response from users of accounting statements – the analysts and
investors who are very much the target audience of improvements to
accounting rules – was lukewarm at best.
Some say the ED will give them
improved information, while others don’t expect to see their
preferred measures taken and will continue to make their own
adjustments to lessees’ financial statements. For these groups, the
whole reform could seem rather pointless.
Encouragingly
however, a recent (probable) change to the content of the ED
dictates that neither lessees nor lessors will need to determine
the “longest lease term likely to occur” by assigning probabilities
to a customer’s lease renewal options.
Instead, they’ll only need to
account on the basis of the minimum term, unless there is a clear
economic incentive for the lessee to take up a particular option –
which will be reasonably rare.
A further change is that lessees
and lessors will not need to assess the likely term on a regular
basis; only reconsider how long the lease is likely to last if
there is a significant change in circumstances. This is a
significant step towards making the ED less burdensome to both
lessors and lessees.
Potential progress on a separate
IASB project regarding investment property accounting could offset
significant concerns about property leasing that have arisen in
relation to the ED.
As a result, it’s likely that the
IASB will not continue its discussions of the fundamentals of the
new lessor accounting models for some months. Indeed, the board is
still working to define what exactly constitutes a lease.
CHP will continue to monitor
progress on the proposals, and we’ll keep working with our clients
to help them prepare for the new standard as it becomes set in
stone.
CHP Consulting’s white paper, How lessors are meeting
new challenges using futureproof technology, is available from
www.chpconsulting.com.
