Question marks still remain
over PO model and costs/benefits of new rules.

 

When it comes to lease accounting, the
months since September last year have been extremely busy for the
International Accounting Standards Board (IASB).

The board has taken dozens of decisions fleshing
out their proposals for a lessee right of use model in preparation
for their next public consultation, which is still officially
scheduled to be issued by the end of the second quarter.

Recently, they have also begun what the leasing
industry hopes will turn out to be a 360-degree shift in their
views on lessor accounting.

The progress of the lessor accounting proposals can
best be described as a saga.

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At the start of the project in 2006, the IASB
announced that they would review all aspects of lease accounting,
including accounting for lessors. However, in 2008, the Financial
Accounting Standards Board (FASB), suggested the focus should be on
improving accounting for lessees only. Nevertheless, following
complaints from the leasing industry, both boards proceeded to
develop a discussion paper covering only lessee issues, although a
last minute intervention from the FASB meant that the paper did
include a brief chapter on lessor accounting, creating concerns
within the industry that due process for lessor accounting would be
not be followed appropriately.

With FASB staff developing lessor accounting models
during the comment period to the discussion paper, the Boards voted
to pursue the now well-known performance obligation (PO) approach
for lessors and confirmed that lessor accounting was back in the
project scope.

The PO model, which involves the lessee recognising
both a receivable and the leased item on its books, together with a
liability for its performance obligation to allow the lessee to use
the asset, came as a surprise to many.

Not only is the approach fundamentally inconsistent
with the right of use model for lessees (where lessors are
considered to have performed when they deliver the asset), it also
fails to depict the economics of a deal, with lessors having
artificially grossed up balance sheets and all their financial and
performance ratios being distorted.

Reacting to these developments, Leaseurope issued
several comment letters and met with members of both boards to
explain the major drawbacks of the model. The model’s flaws became
even more apparent when several exemptions and exceptions had to be
introduced, resulting in some Board members questioning whether
they had the right approach.

After months of pursuing the PO model, the IASB
decided in late March to look at an alternative, the de-recognition
model, which the leasing industry had been advocating from the
start. The FASB, however, continues to consider that the PO
approach is best.

The author is senior adviser
at Leaseurope