need to know / leases - project update - BDO International

LEASES - A PROJECT UPDATE
5
THE IASB/FASB PROJECT TO DATE
In order to address the criticisms set out above, the IASB and the FASB (the Boards) initiated a joint project to develop a
new approach to lease accounting that would result in most, if not all, assets and liabilities arising from lease contracts
being recognised in an entity’s statement of financial position. While the main focus was on lessee accounting, proposals
were also developed for changes to lessor accounting. An exposure draft (the ED) was issued in August 2010 which set out
an accounting approach based on the premise that lease contracts result in lessees obtaining the right to use an asset for a
specified period (the ‘right of use’ model). The proposals were controversial, and the Boards received almost 800 comment
letters.
In addition to publishing the ED for comment, the Boards:
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Initiated over 200 outreach meetings, including 7 round tables and 15 preparer workshops
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Prepared questionnaires that were completed by over 250 lessors and over 400 lessees
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Carried out targeted outreach during redeliberations with over 70 organisations.
There was general support for the proposed ‘right of use’ model. However, the feedback received also included many
comments that the detailed approach proposed in the ED was too complex, inconsistent with the economics underlying
certain transactions and, for many companies, excessively costly to implement. In particular, there were concerns about
complexity of measurement, costs associated with required reassessments during lease terms, accounting for multi element
contracts (contracts which contain lease and non-lease components) and the proposed lessor accounting model. During
their redeliberations, the Boards have made significant changes to the proposals set out in the ED. Consequently, as noted
above, the proposals will be re-exposed in order to provide interested parties with an opportunity to comment on revisions
that the Boards have proposed.
BDO comment
The Boards have addressed many of the concerns raised by constituents in response to the original proposals, and this has
resulted in simplifications being made to the proposed model which would assist in making them more straightforward to
implement. We welcome these developments. However, the proposals that we expect to be re-exposed for comment also
include what some might regard as a compromise for leases of real estate. While we believe that the proposals would continue
to bring a significant improvement to the quality of financial reporting, the extent of this improvement in accounting for leases
of real estate would be more limited. The revised proposals for lessor accounting are also complex, and we anticipate that there
may be calls for further simplification of the model in responses to the revised exposure draft.