Fundamental changes to lease accounting proposed today by the IASB and FASB would bring most leases on-balance sheet for lessees.
Commenting on today’s publication of the Boards’ joint revised proposals, KPMG’s global IFRS leases leader Wolfgang Laubach said: “Bringing leases on-balance sheet is a cherished goal of the standard-setters. These proposals would achieve that goal, but we question whether they represent a sufficient improvement over current lease accounting standards to satisfy financial statement users, or justify the considerable cost and complexity of implementation.”
Many lessee companies would see an increase in reported assets and liabilities, and the proposals would have significant impacts on many different lease transactions – ranging from leases of ‘big-ticket’ items such as manufacturing facilities and aircraft, to leases of office space and smaller items such as company cars and computers.
In addition to bringing most leases on-balance sheet for lessees, the proposals would also introduce a new lease classification test resulting in a ‘dual model’ for both lessees and lessors. This would preserve straight-line expense recognition for most leases of property – i.e. land and/or buildings – similar to operating leases today. However, there would be interest and amortisation expense recognition for most other leases, similar to finance leases today – i.e lease expense would not be recognised on a straight-line basis.
Laubach continued: “The dual model for leases is inconsistent with the Boards’ initial objective of introducing a single lease accounting model. This is a major compromise by the Boards, designed to make the proposals more palatable when applied to leases of property.”
The transition to the new proposals would require all existing leases and potential lease contracts to be re-analysed. There would also be an ongoing need for increased monitoring of leases to comply with the re-assessment requirements. For some – particularly lessors and lessees with large existing leasing portfolios – the system changes required are likely to be significant.
John McGaw, KPMG’s leasing standard implementation leader, said: “Implementing these proposals would be a real challenge for many organisations, as they would need to identify all their leases, extract key data, make new estimates and judgements, and implement new or updated systems to perform the required calculations. Companies will also need to consider how these proposals would affect their organisation and business practices.”
The proposals would impact a company’s ability to accurately predict and forecast assets and liabilities, due to the requirement to re-assess certain key estimates and judgements at the end of each reporting period. Such volatility could have a significant impact on a company’s compliance with debt covenants, its tax balances and its ability to pay dividends. Lessor accounting proposals involve considerable complexity, particularly for most leases of assets other than property.
Laubach concluded: “The Boards have made a strong case that it is time to improve lease accounting. Some will see the proposed changes as a step forward. Others will see cost, complexity and conceptual compromise. Ultimately, it is not clear whether these specific proposals will satisfy financial statement users – or whether this is the best way to take forward this important project.”
The proposals are open for comment until 13 September 2013.
For further information, contact:
KPMG in the UK
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