Lessees urged to get involved in new IFRS lease accounting standard
The call comes from Leaseurope, the trade body representing the European leasing and car rental industry, in advance of next month's anticipated publication of an exposure draft of the new accounting standard by the International Accounting Standards Board (IASB).
The new standard is being introduced following concerns that the existing approach fails to reflect the assets and liabilities companies may have under operating leases and looks to streamline the approach to all lease and rental contracts to avoid 'structuring opportunities'.
The initial exposure draft was due to be published in June but is now due next month following re-deliberations of the IASB's initial proposals . According to Leaseurope, the future accounting treatment could prove far more complex and burdensome than existing accounting and the trade body says that fleets need to get involved once the exposure draft is published to register their comments.
Jacqueline Mills, senior adviser, Leaseurope, said: 'In recent months, the IASB has focused heavily on the lessors and have made little change to their proposals for lessees. Our big concern is that we find the proposals to be unnecessarily burdensome. For instance, the new standard is likely to require lessees to make estimates of their intentions to exercise renewal options as well as their expected rental payments when these are based on a variable factor such as mileage. This is something that we will be focusing on when the exposure draft is out and we will be doing all we can to make sure that the IASB understands the cost and complexity that lessees are being faced with. But it's also up to lessees to voice their concerns to the IASB. If they themselves alert the IASB to the burden that will be created for them by the new standard, then that is likely to carry much more weight in helping the IASB to change their minds.'
She added: 'We're expecting the exposure draft some time in August and there'll be a four-month comment period where lessors and lessees can write in to the IASB or contact them for meetings. They're very willing to listen to preparers of accounts, particularly if the arguments made are backed up by concrete examples and/or hard data.'
In terms of the issues for lessors, Leaseurope says that it remains concerned over current IASB proposals to adopt a hybrid approach whereby the performance obligation model – which requires lessors to gross up assets on the balance sheet – would be used for some leases whilst in other cases , where the lease transfers essentially all of the risk and benefits to the lessee, then the lessor would use the derecognition model. In practice, this approach would be similar to maintaining today's dividing line between finance and operating leases, although the models applied in the various situations would have very different accounting effects.
Leaseurope has already voiced its concerns over the use of a hybrid approach and it says it's still calling on the IASB to revisit this issue before it publishes its draft exposure to ensure that it uses a single model that reflects the economic substance of lease transactions.
Commenting on the issues involved with the IASB's current proposal of a mixed model, Ms Mills said: 'We're in a situation now where we're not entirely sure that the IASB's latest thinking actually represents an improvement compared to the existing situation. The whole reason for embarking upon the project was to remove the line between different kinds of leasing, which they have done on the lessee side.
'We still think that the derecognition model should be applied to almost all leases – the only exceptions would be property leases and short-term contracts, which the IASB is defining as contracts less than 12 months. Otherwise the risk is that there's going to be a lot of change for not much additional benefit.
'We would say that you can use the derecognition model for the vast majority of leases.'