And that was where a recent debate between members of the UK Hundred Group of Finance Directors and members of the IASB began. There was a simple question about the standard: "Why now?" There were other arguments about the sheer scale of change which will be involved, the expensive and cumbersome changes to systems, and technical arguments. But it was timing which was uppermost in people's minds. No one really was arguing that change was not necessary. What they were arguing about was that in the midst of a precarious economic period replete with all the rethinking, restructuring, and uncertainty, they really didn't want to be introducing and implementing something which, while necessary, they saw as being a long way off urgent. People were supportive of the theory but felt that cost/benefit considerations and the practicalities involved ought, at this time, to outweigh the gain of attaining purity of theory.

There speak the preparers of accounts, always looking to the practicalities of implementation. But standard-setters have a different remit and know that with a controversial issue like leasing there will never be a good time to broach the subject. And that is what they argued. The process of trying to get to grips with leasing predated the founding of the IASB. It was a process of evolution. The informal G4+1 group of standard-setters had started work on this in 2000. "So", as Board member Stephen Cooper made clear, "this has been thought about for a long time". And the point in time when the thinking comes to fruition is not determined by a particular point in the economic cycle. "We can't make our judgements depending on the economic cycle", said Cooper, though he did suggest that they could take that into account when deciding on the date when the eventual standard takes effect.

The other argument is over whether you could achieve the desired transparency for users and investors by simply improving disclosure requirements and so saving preparers from the upheaval of change. This too failed to convince the IASB. Disclosure was not going to be a substitute for providing primary information in the financial statements. The topic of the recognition of assets and liabilities was not going to be fudged. As Board member Patrick Finnegan put it: "The Board doesn't agree with just increasing disclosure in the notes. That is not the way to improve the accounting", he said.

A straw poll of the audience showed that the majority there agreed that in theory all leases should be on the balance sheet. But the doubt over whether this was the appropriate time to be doing it lingered. One heartfelt intervention pointed out that preparers had suffered the impacts of changes involving pensions, healthcare plans and share-based payments and why did leases have to come into the same timeframe. Stephen Cooper was not giving any ground on this one. "We are not unaware of the social consequences of our work", he said. "But ultimately our mandate is to improve financial reporting and reflect the economics as fairly as we can".

Again he emphasised that the effective date would be at least 18 months after publication of the standard. There was then a riposte from the audience. The cat was already out of the bag they argued. Just having the proposals out in the public domain meant that analysts were already asking questions about the likely effects on their figures.

After this the questioning turned to short-term leases and the practical issues involved. And this was when photo-copiers started to bulk large in the arguments. When it comes to dealing with lease and other components in service contracts should you split out the photo-copier, the paper and the toner, one CFO asked. The answer from the IASB was that surely materiality would come into this. To which the response was that this was all very well with fixed assets. Fixed assets were tracked through systems. But, suggested a preparer, you don't do that for small items. Fixed assets went through a procurement process. Smaller items did not and so you were more prone to errors on low ticket items. And as someone else pointed out you could easily risk spending 50% of your time on 1% of the balance sheet.

Through all the arguments in the session the same central theme held sway. The theory was fine but the practicalities could prove impossible. When the discussion moved to considering options to extend or terminate a lease one exasperated finance director wanted to know if the several million company cars in existence would all need their lease terms to be continually reassessed. And when the concept of contingent rentals came to be discussed the same question of the enormity and reliability of the task involved came to the fore. One finance director argued that not everyone is a technical accountant. The people involved in this process of preparing and gathering the mass of data would tend to be operational people rather than technical accountants and that, for him, created a concern about getting high quality information.

These are early days in the debate. But time is short. And Stephen Cooper acknowledged this. He asked the audience to get their opinions in well before the official deadline of mid-December. His message was that leasing was an extremely challenging topic but the key now was for everyone out there to think about the issues and, if they had serious points to make, to get on the phone or send an email. The IASB is obviously expecting a difficult ride on this topic and are making real efforts to hear about solutions, or the existence of further unseen problems, early in the process. It is all going to be complex, and it is going to be hard work.

Robert Bruce
October 2010

Related links

• The Bruce Column — The Perennial Challenges of Leasing (March 2011)
• Our summary of the Leases project