FEI proposes simplified approach to leases

  • FEI (Financial Executives International) (lt green) Image

14 Nov 2013

Against the backdrop of repeated complaints about the complexity of the IASB's and FASB's joint re-exposed proposed approach for the recognition and measurement of leases, Financial Executives International (FEI) has reminded the boards of an alternative approach to lease accounting it developed in its original comment letter. FEI believes its suggested 'Display approach' would achieve the enhanced balance sheet display that is the primary goal of the leases project while at the same time avoiding the complexity of the boards' proposals.

In a letter dated 13 November 2013, FEI emphasises the need to focus on display issues versus a change to the recognition and measurement model for leases. In order to reduce complexity, FEI believes it would be beneficial to adopt a more limited approach that focuses on changing the display of the contract in the statement of financial position. Therefore, FEI points again at its 'Display approach' developed in its September 2013 comment letter.

Under the suggested display model, the lessee would record a leased asset and a lease obligation at the end of each period based upon the present value of the remaining lease payments, adjusted for any prepaid or deferred rent recorded under existing GAAP. According to FEI, the liability recognised under this approach should not be characterised as debt because FEI believes such obligations are not legally or economically debt equivalents. The statement of financial position would be prepared using this methodology, and the statement of earnings would reflect the rent expense during the period in accordance with existing GAAP.

FEI states: "Our proposed model would achieve the enhanced balance sheet display which is the primary goal of this project while avoiding the artificial allocation of costs in the statement of earnings that is proposed  for Type A leases. We believe that our proposed model would also eliminate the amortization computations required for Type B leases under the proposed recognition model, which could be challenging to implement across the broad spectrum of lease arrangements."

FEI also lists the benefits the suggested approach is believed to have:

  • It is relatively straightforward to implement and could be adopted more quickly than any of the recognition and measurement alternatives under consideration by the Boards.
  • It greatly simplifies lessee accounting by eliminating the necessity to classify leases.
  • It allows lessees to retain their current unit of accounting for all leases.
  • It avoids the distortive cost allocations that arise in many Type A leases.
  • It eliminates the need for systems changes required for Type B lease accounting.
  • It avoids the distortion and complexity that would arise with foreign currency leases when translating nonmonetary assets and monetary liabilities into the entity’s functional currency.
  • It simplifies transition substantially.
  • It clearly separates the lessee model from lessor accounting and eliminates any need for symmetrical results.

IASB and FASB will discuss the accounting for leases again at the upcoming IASB meeting. Agenda papers for the meeting have been made available on the IASB's website.

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