For lessees, the Exposure Draft ED/2013/6 Leases proposes the recognition of a liability and a right-of-use asset for all leases with a profit or loss impact dependent on the classification of a lease. The lessor model in the ED is similar to current lease accounting with some nuances for the recognition of revenue and discounting of the residual asset. The proposals are only applicable for leases with a lease term of more than 12 months.  

ESMA agrees that IAS 17 Leases, which does not require a lessee to recognise assets and liabilities arising from operating leases, “fails to provide complete and useful information regarding the financial position of lessees”.  They also agree with the improvements in lessor accounting proposed by the IASB. 

ESMA comment: 

By requiring the recognition of assets and liabilities arising from all lease contracts except for short term leases, we believe that financial statements will serve as a better basis for determining financial ratios, thus contributing to increased transparency for users of financial statements 

Commenting on the proposed dual model, ESMA feel that this “better reflects the significant differences in the economics of leases depending on the substance of the contract” and is an improvement on the 2010 ED. 

However, there are a number of areas where ESMA feels that the IASB should make improvements to the ED.  Their key concerns are: 

• Additional guidance should be provided to “assist preparers in assessing whether they have the right to control the use of an identified asset” and “for determining when protective rights are deemed to be substantive and prevent a lessee from controlling the use of the asset”.  ESMA feel that this will “promote consistent application and limit the potential issues of enforceability that may arise”.
• Additional clarification and guidance should be provided on “how to determine whether variable lease payments are “in-substance fixed payments”” as ESMA are of the view that the guidance in the ED may not cover all types of variable lease payments that might qualify as “in-substance fixed payments” and lack of guidance may lead to inconsistent application.
• Clarification should be provided as to the meaning of the concepts of “substantially all”, “major part” and “insignificant” used in the ED.
• That the application of paragraph 23(c) of the ED may “result in accounting for a contract as a lease when the lease component in the contract is significant”.
• That “structuring opportunities and issues of enforceability may occur in relation to leases of non-property assets”.  ESMA are concerned that companies may structure contracts to benefit from the different presentation requirements between Type A and Type B leases.

The full comment letter, including detailed responses can be found here (link to ESMA website).