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.   

EFRAG still supports the view that more leases should appear on the balance sheet as they are of the view that “more leases than today’s finance leases are in substance purchase of assets”.  They also comment that the ED “reflects significant improvements in the accounting for leases”.  However they are concerned with some of the proposals including the right of use model. 

EFRAG's concerns around the application of the right-of-use model are expressed as follows:

In its communications, the IASB has emphasised in its communications that the project was intended to recognise financial liabilities that are currently left off balance sheet. Focusing on this objective seems to have been the primary driver behind the development of the right-of-use model. This model is based on a notion that an asset is a bundle of rights, one of them being the right-of-use.  This is a new approach, which has never been debated on a conceptual level and we are not convinced that the focus on liability recognition has led to capturing the right population to which the right-of-use model should be applied.  EFRAG is concerned that without proper debate on the underlying concepts and the related transactions, the right-of-use model will not be understandable for constituents and this will add to the perception that this proposed IFRS is unduly complex.

EFRAG believes there is a need to need to fully explain the project from a conceptual perspective.  EFRAG recommends that the IASB refines the definition of 'right-of-use' (and how this right is distinguished from other rights bundled in an asset) as part of its conceptual framework project.  Among other things, EFRAG would also like the IASB to “refine” guidance to identify what activities convey the ability to direct the use of an asset and how this links with the business models of lessors.

As well as expressing the view that there is a “lack of clarity in the conceptual model”, EFRAG are also of the view that:

• The proposed dual measurement approach should be abandoned.
• There are a number of unanswered questions regarding the receivable and residual model which need to be answered “before lessor accounting is finalised”.
• The benefits of the proposals do not outweigh the costs.  EFRAG comments that “significant simplifications are needed” such as excluding “small ticket” lease arrangements from the requirements of the standard and “strengthening the application of materiality when accounting for leases”.

The comments of EFRAG are consistent with those of the Financial Reporting Council (FRC) and The European Securities and Markets Authority (ESMA) who have also expressed concerns over the proposals.  The Association of Chartered Certified Accountants (ACCA) favour keeping the existing IAS 17 model with certain amendments.

The press release and full EFRAG response to the questions raised in the IASB Exposure Draft can be found on the EFRAG website.