The Finance and Leasing Association (FLA) has issued its response to the International Accounting Standards Board’s (IASB) latest Lease Exposure Draft.

The FLA document criticises several points in the Exposure Draft (ED), raising issues over the "insufficient" targeting of proposals and any likelihood of damaging equipment-leasing take-up, and over the incorrect perception that leasing is still commonly used for "structuring" purposes.

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Too complex

The FLA also highlighted the complexity of the ED which, while having improved since the previous draft, still includes over 100 points for each component of a lease. The FLA believes this will be seen as an "unnecessary" burden, especially as many users may not fully understand, and may resort to their own analysis regardless.

The letter offers three options for reducing the complexity of the ED:

  • By including examples in the body of the standard, showing how certain steps can be avoided for "straightforward" leases.
  • By representing the "flow" of paragraphs in the ED in a more "user-friendly" manner, showing how the standard can be applied in practice.
  • By keeping the document to essential guidance only, leaving interpretations for the International Financial Reporting Standards (IFRS).

Leases, services and purchases

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The FLA also raised several issues with the ED method of identifying leases, with a need to clarify the "margins" between leases and services, and between leases and purchases.

Regarding services, the FLA said it appeared erroneous to rule out small business equipment agreements as being classified as services – which would "significantly reduce the burden" of the ED – simply because auditors expect regular "substitution" of assets.

The FLA stance is that "substitution would only happen on a regular basis if there was a significant economic incentive", and the ED should include a "no economic barriers" test for substitutions.

Regarding the definition of purchases, the FLA has welcomed discussion over the definition of liabilities and assets as part of the Review of the Conceptual Framework of Financial Reporting, and any conclusion should be incorporated into the lease accounting standard.

Confusion

The FLA also expressed concern over possible "confusion and uncertainty" caused by "different accounting approaches for different leases".

The association proposed that all sale and leaseback arrangements should be accounted as leases, as leaseback "is not itself evidence that a sale has occurred". It was also considered that the standard should show that the "right of use asset is not an intangible asset", which should be made clear in the conceptual framework review.

Index-linked payments

The report described the changes regarding variable rate leases as "some of the most operationally onerous", requiring the reassessment of payments for even the smallest rate change and for simple leases. It said this was a move away from the current "commercial reality", as there is no difference in accounting for variable and fixed rate leases, with current IAS 17 accounting giving a "sensible" outcome.

No need to ‘kitchen sink’

The FLA also said it hoped lease term reassessments could be simplified, by being allowable as a whole portfolio review, rather than on an asset-by-asset basis.

One final concern expressed was over the necessity of disclosure. It said the proposals could add " a great deal of further clutter" to accounts, and pointed out that to avoid the possibility of "kitchen sinking" disclosures, it should be made clear they may only be relevant to the more significant leases entered into.

The full response can be found on the FLA website.