IASB exposure draft on lease accounting - ACT response

In August 2010 the IASB and FASB jointly published Exposure Draft ED/2010/9: Leases – Proposed amendments to IAS 17.

The three most significant changes proposed in the exposure draft are:

• Recording operating leases on the balance sheet (currently only finance leases are) which will ensure one accounting model for all leases;
• Accounting for lessors based on whether there has been a transfer of significant risks or benefits of the underlying asset; and
• Accounting for leases based on their expected lease term, which includes options to extend or terminate, rather than the current minimum lease term (for finance leases only).

In responding to the IASB consultation the ACT is in general agreement with the overall approach to a ‘right-of-use’ accounting model whereby both lessees and lessors record assets and liabilities arising from lease contracts. However we noted that conceptually it is difficult to understand why one accounting model covers all lease situations from the lessee’s perspective whilst the same lease contracts require two different accounting models for the lessor. The performance obligation approach results in the asset being capitalized onto the balance sheet of two different parties, the lessee and the lessor. We also highlighted the practical difficulties for treasurers to implement some of the proposals e.g. assessing and making judgement calls on the lease term.