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February 28, 2011updated 12 Apr 2017 4:16pm

Small steps, but the ED is still a drag

CHP Consulting has issued a white paper on the lease accounting exposure draft (ED), and Id like to discuss some of the recent developments in light of the industry reaction to the new proposals.

By Steve Taplin

CHP Consulting’s Steve Taplin unpicks the latest machinations on lease accounting by the IASB.


Photo of CHP Consulting’s Steve Taplin 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.

It 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.

Image of a businessman about to climb a ladder to escape from a darkened room into the lightEncouragingly 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


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