The International Accounting
Standards Board’s project to update lease accounting is one the
most hotly debated items on the board’s agenda. The
Accountant is co-hosting a round table that will bring
together accounting and leasing experts to discuss the proposals.
The International Accounting Bulletin previews the
IAS 17 Leases is one standard that is almost converged around the
world and almost everyone knows it is wrong. This was the sentiment
expressed by International Accounting Standards Board (IASB) member
Jan Engström at an IFRS event in Milan this month. But while there
might be consensus that IAS 17 is wrong, there is some debate about
what alternative is right.
The IASB decided in mid-2006 that lease
accounting needed to be reviewed and in March this year the board,
in conjunction with the US Financial Accounting Standards Board,
released a discussion paper putting forward preliminary views on
what a new lease accounting standard could look like.
The discussion paper has caused some furore
among the leasing community. Among the issues most hotly contested
are an amendment that would bring more big-ticket leased items,
such as aircraft, on balance sheet and a requirement for preparers
to estimate the likely length of an extendable lease at each
PricewaterhouseCoopers partner Peter Holgate
will be one representative from the accounting community at a
roundtable that will be hosted by The Accountant and
Motor Finance magazine next month. Holgate says he is
happy overall with the discussion paper. He thinks when the
standard is finalised it will improve on current practice.
For Holgate, the biggest issue is the absence
of lessor accounting in the discussion paper – it covers only
“They are a stage behind on the lessor side
and I think it is important to deal with both sides of it together.
A coherent leasing standard really does need to deal with both
lessors and lessees,” Holgate says.
IASB project director Rachel Knubley says the
board has not yet decided what to do with lessor accounting. They
plan to discuss it again in July and decide whether it should be
included within the scope of the new standard.
Holgate concedes the most controversial issues
are on the lessee side. Perhaps the most controversial is that the
IASB is proposing the new standard will bring significantly more
leases on balance sheet.
Under IAS 17, if the lessee has the right to
use an asset for all of its lifespan, it is classified as a finance
lease and held on balance sheet. However, if the lessee has only
committed to pay for and use the asset for part of its life, it is
classified as an operating lease and held off balance sheet.
The proposed solution is a ‘right of use’
model. This would mean, for example, that if a lessee has committed
to lease an aircraft for eight years of a 20-year lifespan, they
must recognise those eight years as an asset, and the obligation to
pay rentals as a liability, and record it on balance sheet.
Holgate explains that the IAS 17 solution was
unsatisfactory and the ‘right of use’ model provides a much better
description of the commercial situation.
Another contentious element of the proposal is
a requirement that, in the case of a lease with an extension or
cancellation option, lessees must estimate the most likely lifespan
of the lease at each reporting date.
Holgate explains that, while this is quite
complicated, it is a complicated lease by virtue of the extension
option, so it is hard to find a simpler solution.
There has been concern from lessees that this
could mean an unmanageable extra burden in some cases.
But Holgate says this is an example of where
materiality comes into play. He explains a change on policy that
means a lease on small items is going to run for three rather than
four years is something that is not going to happen regularly, but
rather as a one-off change.
Knubley notes that requiring an estimate of
how long a lease will run for puts judgment into the accounting.
She says the board hopes it will also supply better information but
that they are also hoping for feedback from users.
One area where there has been some confusion
is how the standards would treat service contracts compared with
similar leasing contracts.
Holgate says there is probably a bit more work
that needs to be done in this area, which is currently covered by
“I imagine there is a bit of a gray area
between a service contract and a lease and as I recall [the
discussion paper] does not go into that great detail. It is
probably something that could do to be worked on a bit more at the
next stage when they publish the exposure drafts,” he says.
Comments on the leases discussion paper are
due by 17 July. An exposure draft is due for release in the second
quarter of 2010 and a final standard expected in 2011.
IAS 17 LEASES
Problems with existing standards
Fail to meet the needs of
• Users adjust financial statements
to recognise assets and liabilities arising out of operating
leases. This information should be supplied to them
• Two different accounting models
means similar transactions can be accounted for differently
• Provides opportunities for
• Difficult to define dividing line
between finance and operating
• Conceptually flawed
• Rights and obligations that meet
the definitions of assets and liabilities are not recognised