Accounting alert 2013/12
IASB re-exposes proposals on lease accounting
The International Accounting Standards Board (IASB) has re-exposed its proposed approach for the recognition and measurement of leases as ED/2013/6 Leases ("revised ED").
Re-exposing the revised proposals on lease accounting is a significant point in the long debate over whether all leases should be recorded on balance sheet. The IASB argue that all leases convey a right of use of the leased asset and that right and a matching liability should be recorded on balance sheet.
This revised ED addresses some of the concerns raised in submissions on the IASB’s original lease exposure draft published in August 2010 (the "2010 ED"), particularly around the profile of recognition in the income statement and the complex judgements around lease term and variable lease payments. Given the significance of changes to the proposals, the IASB has decided to re-expose the lease accounting proposals for comment.
For lessees, the revised ED proposes the recognition of a liability and a right-of-use asset for all leases with a profit or loss impact dependent on the classification of a lease. Under the proposals, leases would be classified as either 'Type A' or 'Type B' depending on the nature of the underlying asset:
- Type A: leases of assets other than property, unless the lease term is an insignificant portion of the underlying asset’s economic life or the present value of fixed lease payments is insignificant relative to the fair value of underlying asset – i.e. most leases of equipment or vehicles would be 'type A' leases
- Type B: leases of property, including land, a building, or part of a building
This revised model results in what, from a profit or loss perspective, looks like operating lease accounting for property leases, while most equipment leases will be subject to the front-loaded expense recognition pattern. The lessor model in the revised ED is similar to current lease accounting with some nuances for the recognition of revenue and discounting of the residual asset. The proposals are only applicable for leases with a lease term of more than 12 months.
The proposals would significantly affect the accounting for lease contracts by both lessees and lessors. In addition, changes in recognition, measurement, and presentation of leases under the revised proposals may significantly impact financial statement metrics.
- Operating lease/off balance sheet treatment would be eliminated for virtually all leases except for short-term leases
- The lease expense recognised each period could be significantly impacted depending on the nature of the underlying leased asset as property or non-property
- Detailed analysis of lease payments will be required for both classification and measurement
- The nature of the underlying leased asset will dictate whether the asset is derecognised and the pattern of income recognition. Some leases previously treated as operating leases may require the underlying asset to be derecognised and be replaced with a lease receivable and a residual asset
The proposals would require management to exercise significant judgement in areas including identifying a lease, determining the lease term, and measuring lease assets and liabilities compared to current practice.
There would be significant changes to the financial reporting of leases which may have a significant knock-on effect on some key KPIs such as gearing ratios, debt-covenants and anything which is an earnings-related measure. On top of that there may well be a need to capture additional data about leases in reporting systems and also there may be considerable deferred tax implications to book when the eventual standard is first applied.
Submissions are due to the Australian Accounting Standards Board by 14 August 2013 and to the IASB by 13 September 2013.
Deloitte’s global edition of IFRS in Focus outlines the proposals included in the May 2013 revised ED 'Leases' and summarises some of the significant changes from existing IFRSs.
Additional resources available:
- Exposure Draft ED/2013/6 'Leases' (link to IASB website, includes access to the Basis for Conclusions and the Illustrative Examples)
- IASB’s project page on the IASB’s leases project including a snapshot document and an Investor spotlight article
- Deloitte IFRS podcast — Revised lease accounting proposals interview
- Industry insights (link to IAS Plus) on the implications of the revised leases exposure draft for the following industries: