Exposure Draft on Lease Accounting

Lease Accounting ED/2013/6

Current Provision
1. Bright Line - Items which as similar in nature can be accounted for totally differently
  Annotations:
  - See ACCA P2 Exam June 2010 Question 4
  Attachments:
  - ACCA June 2010 Q4
  1. The decision as to how to treat assets is highly subjective
    1. US accounting standards don't like substance over form (this is a joint project)
2. Comparability between companies is limited
3. The criteria used to identify finance leases and operating leases is complicated
4. There is a lack of transparency as to how items are classified
5. The treatment of operating leases contradicts other accounting standards (contracts, revenue)
6. Operating leases are off balance sheet finance (leverage). Adding them to the books of the FTSE alone will add billions to the liabilities of these companies
7. The front loading of costs (depreciation plus interest expenses) in finance leases doesn't represent the economic reality of the transactions
8. There is an inconsistency within the standard (Leases should be financial instruments)
9. Easy to manipulate and create transactions in one category rather than the other
10. Complicated to understand for non-accountants
11. Lack of transparency in the treatment of leases
Proposal
1. New bright line (separating leases into two categories)
  1. Type A (not property)
    1. Similar to a finance lease
  2. Type B (property)
    1. Similar to an operating lease
2. Classification based on consumption
3. Annual review required to ensure lease is being correctly treated
4. Exceptions to the proposal (leases under 12 months) which will not need to comply with the standard
5. Classification can be changed from the expected type based on the asset
6. Recognise a rights to use asset and a liability
  1. recognised at PVMLP
Impact on Financial Reporting
1. Users of the accounts
  1. New standard can still be manipulated
  2. Two categories so still complex
  3. Type A and Type B are meaningless ICAEW Comments letter
  4. Compromise of the needs of all users so no winner
  5. Comparability
  6. Improved transparency
2. Framework
  1. Framework in under review so may no longer be comparable
  2. Could see a number of companies no longer able to use going concer
  3. If the FASB do not adopt will be global inconsistency
  4. Loopholes allow preparers to adjust as necessary
  5. No conceptual underpinning to the suggested proposal
3. Profitability
  1. Impact on a significant number of metrics
  2. Impact on share price
    1. Impact on PE ratio (indicator of profitability and potential growth)
  3. Huge costs associated with change
    1. Training Additional Staff Legal costs Research Accounting systems
  4. Taxation
  5. Availability of data
  6. Possibility of errors due to new nature of standard
There is no impact on the trade of the business (it's just an accounting adjustment)
The IASB have agreed that there is an issue and are trying to resolve it
Data Collection will be impacted as will data management
Companies may decide to change their acquisition strategies
Transition from current standard will require retrospective adjustments to existing leases
Specific industries will be impacted more than others (retail)
Change in risk profile for companies (less credit risk more asset risk)
Need to be a global standard otherwise investors will cherry pick where they invest their money

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Exposure Draft on Lease Accounting

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	Created by Lisa Wakefield about 10 years ago