Hire purchase inclusion into lease
accounting draws flack from leasing critics. Jo Tacon
reports
The IASB and FASB’s lease accounting
project is gathering pace, with an exposure draft due in the second
quarter of next year, and the final standard itself in the second
quarter of 2011. But there is still much to be decided before then
– as illustrated by two recent developments in the project’s
evolution, one of which narrows the scope of the project, and one
of which expands it dramatically.
At the joint board meeting in October, it was
tentatively agreed that ‘purchase-type’ agreements should be
“scoped out” of the final standard.
Rachel Knubley, senior project manager at the
IASB, explained: “The decision made at the October board meeting
was that, if you have an agreement which is essentially the
purchase of an underlying leased item, you should account for it as
a purchase, even if it is currently covered by the lease accounting
guidelines. For example, hire purchase [HP] contracts are accounted
for as a lease at the moment, but in many cases they are simply
purchases of the underlying leased asset, and should be accounted
for as such.”
HP is currently accounted for in the same way
as a finance lease under UK GAAP – so the new move to exclude it
could potentially entail major changes for lessees, and for
lessors.
“We haven’t yet developed guidance for which
purchase-type leases should be excluded from the new standard. The
underlying principle is that if it looks and feels like a purchase,
rather than a lease, it should be accounted for as such,” Knubley
added as a caveat.
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By GlobalDataMany SMEs acquire business vehicles via HP,
meaning the boards’ decision could change the way they account for
wheeled assets – although the lease accounting standard will not be
incorporated into SME accounting rules for some time, if at
all.
Julian Rose, head of asset finance at the
Finance & Leasing Association criticised the move: “We think it
is wrong for the IASB to design a standard for the largest
companies and to tell everyone not to worry about SMEs until later.
Whatever rules the IASB comes up with now, they are bound to be
applied to SMEs later. This approach flies in the face of all
‘think small first’ UK and European regulatory principles.”
The boards’ decision to include lessor
accounting within the scope of the project is a major development.
It had initially been decided that the lease accounting project
should look first of all at lessee accounting, given the complexity
of the topic.
But responses to the discussion paper (DP)
made it clear that the weight of industry opinion favoured tackling
the two together, in order to adress from both parties’ point of
view any problems which arose.
Furthermore, the shape of the lessor
accounting model was made a little clearer at the October meeting,
with the boards tentatively opting for the ‘performance obligation
approach’.
“Under the new accounting model, the lessor
will recognise a receivable from the lessee and will retain the
leased asset on its books,” Knubley explained. “The lessor will
also enter a performance obligation on its books, which recognises
that the lessor has promised the lessee the use of the asset over
the term of the lease. It is fundamentally a very different
approach from existing standards.”
Rose was dubious about the new approach’s
merits.
“The concept that the same piece of equipment
should be recorded as an asset twice on a lessor’s balance sheet –
once because the lessor owns it, and once because the lessor
receives a revenue stream from it – seems bizarre. We doubt that
anyone using accounts would see this as useful, no matter how
theoretically sound it might be.”
Knubley was keen to emphasise that all
decisions are still very much open to debate; the IASB and FASB
have sent staff out to work on the performance obligation approach,
and to examine how it will affect lessors in practice, she pointed
out.
“The boards will take comments from all
interested parties into account before issuing a final standard,”
Knubley said.
Hot on the heels of these new developments,
the boards will, at their next meetings, examine issues which are
at the heart of fleets’ businesses: the treatment of options (such
as contract extensions) and contingent rentals will be tackled in
November, with the split between the service and financing elements
of a lease on the agenda for December.
It is clear that no fleet company can afford
to take its eye off the lease accounting ball.
