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.  

Whilst the FRC agrees with the “focus of the ED” and “the need to report useful information about the amounts, timing and uncertainty of cash flows arising from a lease”, they have expressed concerns over a number of areas contained within the proposals: 

• Allocation of consideration to lease components.  The FRC “has concerns regarding the proposals for the allocation of consideration to lease components” commenting that the application of the hierarchy in paragraph 23 “may result in an accounting treatment that may not reflect the substance of the contract”.  The FRC comment that where there are no observable stand-alone prices for any components of the contract, a lessee should be able to use an estimate “in a similar way to the proposed requirements in the Revenue Recognition ED”.  
• Dual approach to measurement.  The FRC comment that the dual approach proposed in the ED is “difficult to apply in practice as it requires a high degree of judgment in determining whether the lessee is expected to consume more than an insignificant portion of the economic benefits embedded within the underlying asset”.  They consider that the dual approach is complex to apply and will reduce “users’ ability to understand the financial statements”.  They comment that constituents have raised concerns over the use of the terms “insignificant”, “substantially all” and “major” in the ED and highlight that users may interpret them differently “leading to inconsistent application in practice”.  If the dual approach is maintained, the FRC believe that “the distinction between finance leases and operating leases in IAS 17 ‘Leases’ should be retained to reduce complexity and increase understandability”.  They comment that IAS 17 finance leases would apply “Type A” accounting and IAS 17 operating leases would apply “Type B” accounting.
• Lease term.  The FRC comment that “it is not clear when a change in the lease term should be accounted for as a reassessment of the lease term and when it should be accounted for as a new lease” and ask that the IASB clarify this point.  Concerns are also expressed over the term “significant economic incentive”.
• Variable lease payments.  The FRC ask that the IASB provides further guidance for the term “in-substance” fixed lease payments as they consider that the examples provided in the ED are insufficient.
• Disclosure.  The FRC considers that the disclosure requirements in the ED are “extensive and very detailed” and are concerned that preparers may seek to disclose everything in the ED rather than considering materiality.  This would prove costly for preparers. 

The FRC comment letter can be found here (link to FRC website).