Leases exposure draft – a mixed reception

22 Oct 2013

For some, the best part of the new leases Exposure Draft (ED) is that it looks like it might be the last – a standard may be on the way.

The comment period for the 2013 joint ED from the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) is now over. Feedback from some quarters is notably more positive than the heavily criticised 2010 draft, on which a wide range of stakeholders declared a memorably vicious ‘open season’. But the feedback to date is far from consistent.

What’s the aim?

The ED’s proposals aim to address investors’ concerns that companies’ habit of keeping large operating lease liabilities off the balance sheet was masking their true obligations, asset values and leverage.

The boards have come up with the concept of ‘right-of-use’ to reflect the rights and obligations arising from leases but while many have commended the boards for progressing their thinking from the previous ED, some significant concerns remain.

Dual recognition

The ED suggests that companies take a dual approach to the recognition, measurement and presentation of expenses and cash flows arising from a lease, based on the level of consumption of the underlying asset. This will broadly be divided into leases of equipment (Type A) and leases of property (Type B). The type of lease recognised will govern what information is included in the financial statement, and where.

There has been some institutional opposition to the dual recognition model, with influential organisations such as the European Financial Reporting Advisory Group (EFRAG) arguing that the right-of-use idea does not accurately reflect the pattern of consumption under a Type B lease, and is therefore not an appropriate accounting basis for such a transaction.

There has been market opposition to the proposals too, with a number of businesses registering displeasure because they fear the requirements will trigger significant and unnecessary changes to their business models.

“The boards should finalise the project now, but without sacrificing the main aim – recognition on the balance sheet”
Peter Hogarth, PwC

Some take the view that these concerns are serious enough to justify the boards dropping their proposals altogether, and restricting change now to enhanced disclosures.

Use criteria from IAS 17?

Others, PwC included, suggest that the boards finalise the project, but with the proposed criteria for distinguishing different types of lease being replaced with those in the current standard, IAS 17.

Peter Hogarth, lead technical partner at PwC in the UK, said: “in our view, this would address many of the ED’s operational difficulties without sacrificing the boards’ principal objectives on balance sheet recognition”.

A source close to the investment community emphasised that the IASB needs to “pull the trigger” and start using the standard proposed, rather than “relentlessly tinkering” in an attempt to strike a perfect balance between preparers and users.