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Leases

Date recorded:

Jan Engström presented the options facing the IASB and the FASB as they prepare to finalise their proposals on Leasing. The Boards are seeking a workable standard.

Achieving a high-quality standard

Patrina Buchannan reviewed the possibilities under consideration to simplify, or reduce the complexity in lease accounting by the IASB, including:

  • Exclude leases of ‘low value’ assets
  • Apply leases guidance at a portfolio level
  • Extend the one year ‘short-term lease’ exemption
  • Simplify the remeasurement of lease assets and liabilities
  • Simplify lease classification
  • Simplify separation of lease and non-lease components
  • Simplify disclosure and transition requirements

Various Advisory Council members spoke in favour of the IASB complete a high-quality standard, featuring recognition and measurement of significant long-term leases using the right of use approach. The IASB needed to develop a business case for preparers, showing how providing information under the IASB standard would result in better financial reporting and reducing analysts’ guessing the true picture. In doing so, the IASB should avoid bright lines in the standard (without any principle-based backstop), that would only lead to game-playing through componentisation.

Investor advocates stressed going for a high-quality solution, without bright lines. Investors would drive the preparers. However, a securities regulator seemed to argue that some bright lines might be useful for enforcement. A preparer spoke in favour of completing a high-quality standard, acknowledging the desire to reduce complexity. He also welcomed any simplification/ reduction of complexity that could be achieved.

Preparer/political challenges

One Council member asked whether the project was sufficiently high priority to warrant the potential push back. The representative of a European standard-setter noted that there was a concern that some ‘operating leases’ might be ‘service contracts’ and that any rigour around making the distinction between the two would be welcome. In the particular jurisdiction concerned, both the standard-setter and the preparer community were generally opposed to the right of use approach to lease accounting.

A representative from Japan also spoke in favour of postponing finalisation of the recognition and measurement approach, favouring improved disclosure.  Other preparers spoke in favour of putting leases on balance sheet – they have the data.

User representatives urged the IASB to stick to its guns: the better information provided by the right of use model.

There was a brief discussion of shipping contracts (charterhires) and whether these represented service contracts or asset leases or both (crew=service contract; ship=lease). The focus of the IASB is control of the asset (here, the ship) and the provision of a crew was more likely to be a service contract.

Convergence

Many Council Members spoke in favour of a single converged solution.  Preparers did not want to have to bear the cost of non-convergence by having to do one approach in the financial statements and another in the notes.  Others spoke in favour of placing a high-quality solution above achieving convergence.  Other Council members stated that, while convergence was desirable, the IASB had to retain the right to pursue the course it felt was right, even if this was at the cost of convergence.

Mr Hoogervorst noted that he did not expect any problem about convergence with respect to the balance sheet; the income statement treatment was more likely to lead to a difference of view. In response to this question, a user asked whether the number would be the same, just reported in a different place. In response to this question, the staff stated that the net income would be the same, but the split between operating and financing expenses would be different.

IASB and staff members thanked the Council for their input. They noted that the Council was the first of a series of meetings on this topic. The Council would be followed by a meeting of the Global Capital Markets group and the Accounting Standards Advisory Forum, before a joint meeting with the FASB in March 2014.

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