Jo Tacon reports on
the latest developments in the IASB and FASB’s lease accounting
project
The IASB and FASB’s lease accounting
project is gathering pace, with an exposure draft due in the second
quarter of next year, and the final standard itself in the second
quarter of 2011. But there is still much to be decided before then
– as illustrated by two recent developments in the project’s
evolution, one of which narrows the scope of the project, and one
of which expands it dramatically.
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Exclusion of ‘purchase-type’
contracts
At the joint board meeting in October, it
was tentatively agreed that ‘purchase-type’ agreements should be
“scoped out” of the final standard.
Rachel Knubley, senior project manager at the IASB,
explains: “The decision made at the October board meeting was that,
if you have an agreement which is essentially a purchase of an
underlying leased item, you should account for it as a purchase,
even if it is currently covered by the lease accounting
guidelines.
“For example, hire purchase [HP] contracts are
accounted for as a lease at the moment, but in many cases they are
simply purchases of the underlying leased asset, and should be
accounted for as such.”
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By GlobalDataHP is currently accounted for in the same way as a
finance lease under UK GAAP – so the move to exclude it could
potentially entail major changes for lessees, and lessors.
“We have not yet developed guidance for which
purchase-type leases should be excluded from the new standard,”
Knubley adds as a caveat. “The underlying principle is that if it
looks and feels like a purchase, rather than a lease, it should be
accounted for as such.”
Many SMEs acquire business vehicles via HP, meaning
the boards’ decision could change the way they account for wheeled
assets – although the lease accounting standard will not be
incorporated into SME accounting rules for some time, if at
all.
Julian Rose, head of asset finance at the Finance
& Leasing Association (FLA) criticised the move.
He says: “We think it is wrong for the IASB to
design a standard for the largest companies and to tell everyone
not to worry about SMEs until later. Whatever rules the IASB comes
up with now are bound to be applied to SMEs later. This approach
flies in the face of all ‘think small first’ UK and European
regulatory principles.”
Inclusion of lessor
accounting
The boards’ decision to include lessor
accounting within the scope of the project is a major development.
It had initially been decided that the lease accounting project
should look first of all at lessee accounting, given the complexity
of the topic, but responses to the discussion paper (DP) made it
clear that the weight of industry opinion favoured tackling the two
together, in order to tackle from both parties’ point of view any
problems which arose.
Furthermore, the shape of the lessor accounting
model was made a little clearer at the October meeting, with the
boards tentatively opting for the ‘performance obligation
approach’.
Knubley explains: “Under the new accounting model,
the lessor will recognise a receivable from the lessee and will
retain the leased asset on its books. The lessor will also enter a
performance obligation on its books, which recognises that the
lessor has promised the lessee the use of the asset over the term
of the lease. It is fundamentally a very different approach from
existing standards [see opposite page].”
Rose is dubious about the new approach’s
merits.
“The concept that the same piece of equipment
should be recorded as an asset twice on a lessor’s balance sheet –
once because the lessor owns it, and once because the lessor
receives a revenue stream from it – seems bizarre,” he says.
“We doubt that anyone using accounts would see this
as useful, no matter how theoretically sound it might be. ”
Knubley is keen to emphasise that all decisions are
still very much open to debate; the IASB and FASB have sent staff
out to work on the performance obligation approach, and to examine
how it will affect lessors.
“The boards will take comments from all interested
parties into account before issuing a final standard,” Knubley
says.
Coming up next
Hot on the heels of these new
developments, the boards will, at their next meetings, examine
issues which are at the heart of fleets’ businesses: the treatment
of options (such as contract extensions) and contingent rentals
will be tackled in November, with the split between the service and
financing elements of a lease on the agenda for December. It is
clear that no fleet company can afford to take its eye off the
lease accounting ball.
IASB and FASB October meeting:
From the minutes
The boards tentatively decided to adopt
the performance obligation approach. Under that approach, a lessor
would:
• recognise an asset representing its
right to receive rental payments (a lease receivable)
• recognise a liability representing its
performance obligation under the lease – that is, its obligation to
permit the lessee to use one of its assets (the leased item). The
lessor would recognise revenue as that performance obligation is
satisfied over the lease term. That means that a lessor would not
recognise revenue at the inception of a lease contract
The boards discussed whether an entity should
recognise any assets or liabilities during the period between the
signing of a lease contract and delivery of the leased item to the
lessee. The boards tentatively decided that:
• assets and liabilities arise when a
contract is signed
• between contract signing and delivery,
the unit of account is the contract as a whole and the contract
position would be presented net in the statement of financial
position of both the lessee and lessor
• an entity would initially and
subsequently measure the net contract asset or liability on a cost
basis, subject to impairment (generally initial measurement of the
contract asset would equal the initial measurement of the contract
liability)
• an entity would provide disclosures
about the assets and liabilities that arose upon contract
signing
For more on lease accounting from MF November
09, click here
