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Lease contracts are very important sources of financing for entities and the existing accounting standard on lease accounting has been criticised, particularly by users. We are therefore pleased that the IASB has decided to address lease accounting and we support the decision to do the work as a convergence project with the FASB. Our detailed comments are set out in the appendix to this letter, but to summarise:
The discussion paper (DP) focuses almost exclusively on lease accounting by lessees, although the DP does contain a ‘high level discussion’ chapter on the subject. Even though we understand why this has been done, it does mean that fundamental decisions about the direction and key principles underlying the new lease accounting model have been taken from only one perspective (the lessees’). We are very uncomfortable about this because we believe some of the crucial decisions (including the proposal that a ‘right-of-use’ approach should be used) might have been different had a more comprehensive analysis of the issues been undertaken, based on both perspectives. We therefore believe it is essential that the IASB takes no final decisions on the approach to lease accounting to be adopted for lessees until the lessor accounting part of the project has progressed significantly.
We are currently inclined towards supporting the ‘right-of-use’ approach for all lease arrangements, but would wish to have the opportunity to consider fully the implications of such an approach for lessors before taking a position on the matter. However, putting that aside we would be concerned about the cost-benefit implications were such an approach to be applied to short-term lease arrangements. We have discussed whether the normal materiality considerations might make it unnecessary in many cases to apply the ‘right-of-use’ approach to such arrangements, and think it would be helpful if this matter could be addressed specifically at the next stage of the project.
Having said that, we believe that applying the ‘right-of-use’ approach to all leases will make the distinction between leases and service arrangements even more important than it is currently. It will therefore be important to make sure there is a clear, principle-based boundary between the two.
EFRAG members are divided on the DP’s proposal that lessees should recognise a single lease asset and a single lease liability. Some members believe that the approach proposed is pragmatic and makes it possible to propose important improvements in lessee accounting. Some other members believe that the approach proposed will result in amounts being recognised as liabilities that are not liabilities, and favour adoption of the components approach to the extent possible.
Finally, we note that the IASB has undertaken to carry out, and issue, impact assessments on all proposed major new standards. We are not sure whether it was the IASB’s intention to carry out such an assessment on the proposals in the DP, but we would strongly recommend that it does so because of the fundamental effect the proposals will have for many entities. |
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