Jonathan Minter speaks to lease accounting stakeholders about their reaction to the second exposure draft, what changes the boards might implement, and why the existing system is still the best
With more than 600 comments submitted to the accounting standard boards in response to the second lease accounting exposure draft, the mood among stakeholders is a mix of optimism and apprehension. However, the consensus that change to the existing system is largely unnecessary still prevails.
Julian Rose, head of asset finance at the UK’s Finance & Leasing Association tells Leasing Life he is optimistic the International Accounting Standards Board (IASB) is planning to listen to concerns over the lease accounting exposure draft due to the volume of responses received.
He also says the FLA "received some strong and positive signals from [the IASB] that it would now look to further simplify the proposals" when it held meetings with the body, during the consultation period.
The draft was issued by the IASB and the US Financial Accounting Standards Board (FASB) in May 2013 with a comment deadline of 13 September 2013.
Despite the amount of criticism levelled at the second exposure draft, accountants and leasing experts tell Leasing Life the proposal is a definite improvement on the 2010 offering.
According to Ralph Petta, chief operating officer of the US Equipment Leasing and Finance Association (ELFA), "they made some improvements regarding lease terms, how contingent rents would be recognised, and it really made significant improvements in the way some of those things would operate for equipment leases as well as commercial real estate transactions."
Paul Cooper, corporate reporting manager of the Association of Chartered Certified Accountants (ACCA) is keen to point out that there are elements in the draft his organisation does like, such as the guidance surrounding what constitutes a lease and what constitutes a service contract, although the ACCA has ultimately rejected the 2013 draft.
He says: "One thing which we particularly liked was that they left it for the lessor or the lessee entity to decide on how they aggregate disclosures for common types of leases."
Grant Thornton partner John Hepp says the 2010 draft took leases from executory contracts – whereby the expense isn’t recorded until it is incurred – to being a straight financing, with the debt and assets recognised on the balance sheet.
"As a result, the expense recognition pattern would tend to be front loaded due to the higher amount of interest allocated to earlier years based on the remaining ‘debt’ outstanding at that point," Hepp said.
It is in order to address this issue, the IASB and FASB have divided leases into Type A leases and Type B leases, depending on whether the asset being leased was real property or not.
Hepp added: "The front loading issue was addressed by creating a new model of amortisation of the leased asset," meaning "you would still have the front loading of interest expense, but that would be offset by having reduced amortisation in the early years that would increase over time."
For Petta, although he is "pleased that they moved away from a one-lease model, the way they made the classification, in terms of recognising lease expense, we think, makes no sense".
One concern ACCA’s Cooper has with the right of use model is that the IASB still needs to make some clarifications about the nature of the right of use asset: "Is it a tangible, like a motor car, or is it an intangible, like a patent?"
The overwhelming criticism from those Leasing Life speaks to is that the new draft will make things overly complicated, and in many cases won’t present end-users with more useful information.
This complexity is partly thanks to the right of use model. Hepp explains: "The right of use model requires you to first distinguish if the contract as a whole is a lease or not, then whether certain elements within the contracts are a lease or not, and then only the lease elements would get recorded and put on a balance sheet as a right of use asset. And only the payments associated with those elements would get recorded on the balance sheet. Needless to say, that’s going to be quite complex and quite a bit of work."
The FLA’s Rose says the general consensus, based on feedback from FLA members, appears to be the added complication won’t result in better information. There are also complaints that the rules are vague and open to interpretation, says Cooper.
Petta says: "If [the boards] did nothing we’d be very happy. We basically think that FAS 13 and IAS 17 work."
The ACCA would also be happy if IAS 17 were to be retained in preference to the new draft, albeit "beefing it up" by increasing the disclosure around operating leases and lowering the bar between whether something is a finance lease or an operating lease.
Hepp says Grant Thornton would also retain the IAS 17 model, but would "update it from a risks and rewards model to a control model. "It’s not rejecting the model, it’s just updating it," he said.
When asked to comment, the IASB said it had received 600 responses to the exposure draft, and added: "The boards expect to discuss a summary of that feedback at the November joint board meeting, with board re-deliberations of the proposals expected to begin in December."
A FASB spokesperson said: "Currently, FASB and IASB staff are analysing the international feedback received through outreach activities, round table meetings, and comment letters."
Correction: A previous version of this article misspelled Ralph Petta as Ralph Petter. This has now been amended. Leasing Life apologies for the error.