FRC outreach highlights support for simplifications to the leases proposals

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07 Apr, 2014

The Financial Reporting Council (FRC) has published the results, in the form of a letter, of outreach undertaken to understand the views of UK preparers on the costs and benefits of simplifications to the leases proposals which were discussed by the International Accounting Standards Board (IASB) in its January 2014 meeting and were set out in Agenda Paper 4A of the Accounting Standards Advisory Forum (ASAF) March meeting. The FRC highlights that they “received largely consistent feedback with most participants supporting significant simplifications to the proposals”.

The key comments from the preparer outreach were:

  • That there was “general support” for ‘approach A’ lessee accounting discussed by the IASB at its January 2014 meeting.  This proposes a single approach, according to which a lessee would account for all leases as the purchase of a right of use (ROU) asset on a financed basis.  Under this model a lessee would account for all leases as Type A leases (that is, recognising amortisation of the ROU asset separately from interest on the lease liability).  Only a minority supported the dual approach (‘approach 3’) with lease classification based upon the existing guidance in IAS 17 Leases’.
  • There were concerns raised as to the distinction between a lease and a service.  A majority of the participants considered that the proposals were not clear on how to determine whether or not a contract is a lease or a service.  Participants were also of the view that if a contract considered a significant service component then it should be accounted for as a service contract and the lease component should not be accounted for separately. 
  • A number of participants were supportive of a reduction in the requirements to reassess the lease liability discussed in ASAF Agenda Paper 4A (link to IASB website).
  • Most participants were of the view that they would incur “significant costs” to implement the lease proposals and were in favour of simplifications that reduced costs.  The FRC highlight that “most of these participants are unsure whether the leases proposals in their current form will result in a sufficient enhancement of the usefulness of financial statements to justify the costs of implementing the proposals as well as the ongoing costs”. 

Subsequent to the January meeting the IASB held further discussions on leases in their March 2014 meeting where a number of these concerns were raised and deliberated.  At that meeting the majority of the IASB voted in support of a single lessee accounting model.  Click here for the meeting notes taken and our 'Need to know' newsletter detailing the decisions reached.

The full letter can be obtained from the FRC website.

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