Peter Hogarth looks
over recent developments in the IASB and FASB’s lease accounting
project
Some of the tentative decisions made by
the boards at their October meeting could have a significant impact
on leasing companies.The decision to potentially exclude hire
purchase and other underlying purchase-type agreements from the
scope of the project will affect manufacturer-dealer lessors.
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During talks around the discussion paper (DP) in
spring, it was mooted that some transactions currently accounted
for as leases are really sales with deferred payment proceeds –
which is hard to disagree with in principle, although of course in
real life they are often harder to categorise. There is more work
to be done, but the IASB and the FASB at least seem to accept the
principle.
But the most significant development concerns the
decisions taken regarding accounting by lessors. Taking a
three-year car lease as an example, the boards are currently
considering two approaches to lessor accounting. One is the
derecognition model, under which a lessor would when signing a
lease contract recognise two assets, namely a lease receivable,
paid monthly by the lessee, and a right to deal with the car at the
end of lease – a residual value.
Both assets would be recognised on the balance
sheet. The lessor’s ‘right to use’ the car during the lease period
would be ‘derecognised’, hence the name for the model.
Under the performance obligation model, the lessor
is considered to have entered into a contract with rights and
obligations attached: it has the asset known as the receivable, it
has the asset named a car, and it has the liability of a
performance obligation to make the car available to the lessee.
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By GlobalDataThe effect of this will be to ‘gross up’ the
lessor’s balance sheet, with two assets recognised – one a car, and
one a receivable – together with a liability, but the question is
whether this provides useful information.
In our comment letter we supported the
derecognition approach.
The boards were split – when put to a vote, eight
members of the IASB and four members of the FASB were in favour of
the performance obligation model, which would not be strong enough
support for the IASB to proceed, so there is clearly still both
uncertainty, and more work to be done. IASB staff have been sent
away to write up what the performance obligation model will look
like in practice.
Back in the summer, the boards decided to go for
the performance obligation model – it was only in response to
comment letters that they decided to have another look. The board
may well strengthen its current view, or may change tack
completely.
Lessors have grounds to argue against the
performance obligation model – why should they retain a performance
obligation when the lessee has taken delivery of the asset and has
a right to use it? There seems to be an inconsistency here that the
IASB will need to explain.
Service/lease distinction
Fleet management of course encompasses a
whole range of different offerings – where do you draw the line
between lease and service? Historically IFRIC 4 guidance has been
followed – but when the distinction between an operating lease and
a finance lease disappears, that distinction will become far more
important, and could bear with being looked at again.
The guidance may end up standing as it is, but the
existing decision in many cases as to what is and isn’t a lease may
change. At the moment, you might have on one hand a service
contract giving rise to straight-line revenue, or you might have an
operating lease which also gives rise to straight-line revenue –
but if that distinction goes, we will in future be talking about
recognising an asset or a debt on the balance sheet, which is far
more significant.
The boards’ intention was to sort out lessee
accounting and to do lessor accounting later on, but a large
majority of respondents said they ought to be undertaken at the
same time. The October meeting’s outcomes were far from unanimous,
so the boards may have to spend more time on the project. My
personal perspective is lessor and lessee accounting should be
dealt with together.
The author is a partner in the accounting
consulting services group, Pricewaterhouse
Coopers UK
For more on lease accounting from MF November 09,
click here
