Air Products and Chemicals Inc.
Paul E. Huck
7201 Hamilton Boulevard
Allentown, PA 18195-1501
Tel (610) 481-7932
Tel (610) 481-7009
Sr. Vice President and
Chief Financial Officer
16 July 2009
Financial Accounting Standards Board
Technical Director
File Reference No. 1680-100
We appreciate the opportunity to comment on the Discussion Paper – Leases
Preliminary Views.
Air Products serves customers in industrial, energy, technology, and healthcare
markets worldwide with a unique portfolio of atmospheric gases, process and
specialty gases, performance materials, and equipment and services. Air Products
has annual revenues of $10 billion and operations in over 40 countries. As a lessee,
we enter into operating leases, principally related to real estate and distribution
equipment, and capital leases for the right to use machinery and equipment. As a
lessor, certain of our on-site take-or-pay contracts are considered leases under EITF
Issue No. 01-08 and accounted for as capital leases.
Overall
We commend the FASB and IASB on their continued efforts towards convergence
and recognize the complexity of a project addressing lease accounting. In spite of
that complexity, however, we believe such a project must be comprehensive,
beginning with a fundamental reconsideration of what constitutes a lease, and
address the accounting for both the lessee and lessor. In regards to the proposed
lessee accounting, while we agree that users of financial statements should be
provided with information on the extent to which operating leases are utilized, we do
not agree this necessitates recognition of an associated asset and liability in the
financial statements themselves. We believe footnote disclosures currently provided
effectively accomplish this objective in a cost-effective manner.
Reconsider Lease Definition
We believe that the scope of the proposed lease accounting standard should include a
reassessment of the types of arrangements that would be considered leases. As
noted in the discussion paper, some constituents, such as ourselves, have expressed
concerns that the scope of EITF No. 01-08 results in arrangements being
inappropriately classified as leases. In previous comment letters, we have firmly
stated our objections to EITF No. 01-08 in an effort to encourage a principles-based
approach which allows for a broader evaluation of the substance of the arrangement
by a more comprehensive analysis of the risks and rewards of ownership.
Accordingly, we recommend fundamental reconsideration of the definition of a lease
and revisiting the scope of current standards, specifically EITF No. 01-08 guidance,
within the context of a comprehensive project on lease accounting.
Establish Lessor Accounting Model
Page -2We do not support the issuance of a new accounting standard on lessee accounting
without establishing the accounting for the lessor. There must be symmetry in
accounting. Although incorporating lessor accounting would increase the complexity
of the project and potentially delay the issuance of a standard, it is warranted to
provide additional insight and understanding, again within a comprehensive project
on lease accounting.
Short-term leases
We recommend short-term leases (e.g., month-to-month arrangements) be excluded
from the scope of a new standard. Given the temporary nature of the arrangement,
balance sheet recognition is not justified. Arrangements with lease terms less than
one year should be excluded. These arrangements do not transfer the rights and
benefits of ownership and would be costly to account for with little value added.
Bright-lines/Structuring
We believe a distinction between capital and operating leases should be maintained
as the transactions differ in the extent to which the risks and rewards of ownership
are transferred. The current “bright-line” tests need not be viewed as entirely
negative just because certain entities engineer transactions to avoid capital lease
treatment. We believe these guidelines have been effective in ensuring consistency
in accounting and clarifying criteria of significance to be evaluated in making the
distinction between a capital and operating lease. In any event, if there is an intent
and incentive to structure or circumvent a certain accounting result, we expect it
will be pursued regardless of how the accounting rules are changed. For example, if
the proposed model is implemented, will arrangements be structured so they are
considered a contract for services rather than the lease of an asset?
While we agree with the objective of establishing principle-based standards, we do
not necessarily believe this means eliminating the application of a few guiding
criteria/rules for evaluating transactions within the context of a single standard
providing an overall conceptual basis to follow (as compared to extensive lists of
detailed rules or volumes of literature trying to address every possible situation).
Eliminating the distinction between a capital and operating lease would simplify the
accounting in the sense there would be no requirement to classify the lease.
However, the resulting accounting would be more complicated and costly to
implement and not reflect the substance of substantially different lease
transactions.
Asset and Liability Recognition
We do not perceive value in recognizing a right-of-use asset and obligation in the
balance sheet for operating leases, especially when considering the significant
administrative cost to implement and maintain the required detailed accounting
records on an ongoing basis. We do agree that users of financial statements should
be provided with full disclosure on operating lease arrangements, and we believe
this is currently accomplished via footnote disclosure. Users may choose to create
pro forma statements with this information (e.g., current practice of rating agencies)
or calculate present values if they find it meaningful and useful.
Page -3Asset and Liability Measurement
If recognition of a right-of-use asset and obligation for current operating leases
becomes a requirement, we do agree with the initial measurement method proposed
in the discussion paper which would reflect the present value of lease payments
discounted using the lessee’s incremental borrowing rate. We do not agree with
reassessment of the rate to reflect current market conditions. We believe the
balance sheet items should be based on the rate at inception, and a requirement to
reassess the rate would be both inconsistent with an amortized cost-based approach
and costly to implement.
Lease Term
In the proposed model, the lease term is based on the most likely lease term that
may include renewal and purchase options. While we expect, in many cases, the
most likely lease term would also represent the probable lease term, we would
suggest guidance where optional periods should be included in the lease term if
considered probable (e.g., in accordance with SFAS No. 5 where probable is defined
as the future event is likely to occur). We agree with the proposed factors to be
considered in determining lease term (e.g., contractual, financial, business factors)
consistent with making a judgment on the probability of the lease term. While
conceptually we might agree with requiring reassessment at each reporting date, we
believe practically it would be an administrative burden. We would suggest less
rigorous requirements such as an annual reassessment, or reassessment triggered
when a significant change in circumstances presents itself, as opposed to monitoring
closely continuously.
Financial Statement Presentation
We believe both the lease asset and liability, along with depreciation and interest
expense, should be presented separately from that associated with owned assets and
debt in the financial statements, if material. The temporary right to use an asset
(which will be returned) via a lease transaction is significantly different from the
permanent purchase of asset via debt and, therefore, the transactions should be
reflected in the financial statements separately. Combining amounts for
presentation could potentially confuse users of the financial statements, where
separation would improve transparency in reporting.
Lessor Accounting
Of the two possible approaches to lessor accounting referenced in the preliminary
views document, we see the finance lease approach, with derecognition of the lease
item (similar to current accounting for sales-type leases), as consistent with the
proposed lessee accounting.
We do not support the concept of creating an additional right and obligation to be
recognized on the lessor’s balance sheet. Nevertheless, we have noted that
subsequent to issuing the lessee preliminary views document, the boards have met
and tentatively decided to develop an approach whereby the lessor retains the leased
item on its balance sheet and recognizes an asset for its right to receive rental
payments and a liability for its performance obligation. We would recommend
reconsideration. As the proposed model for the lessee moves off-balance sheet items
to the balance sheet, we believe symmetry in accounting requires removal of an
asset from the lessor’s balance sheet.
Page -4-
Summary
We would recommend delaying a standard specifically on lessee accounting until a
broader evaluation, beginning with the definition of a lease and including lessor
accounting, is completed. As you know, we are strongly against the guidance under
EITF No. 01-08 which results in certain of our on-site take-or-pay contracts being
accounted for as leases. Accordingly, we would again request reconsideration of this
guidance within a comprehensive project on lease accounting.
We believe the distinction between capital and operating leases should remain and
current footnote disclosures on operating leases provides appropriate information in
a cost-effective manner. The recording of a right-to-use asset and liability has the
potential to confuse users and the administrative cost to implement would be
burdensome to preparers. In regards to the tentative decision on lessor accounting,
we do not agree with the recognition of an additional asset and liability as we view
this as inconsistent with the proposed lessee model. Further, accounting which
results in inflating the balance sheet does not generate meaningful total
asset/liability amounts to users any more than improperly allowing transactions to
remain off-balance sheet.
We appreciate the opportunity to provide comments on the Discussion Paper and
would be pleased to discuss our views further with you.
Respectfully,
Paul E. Huck
Sr. Vice President and
Chief Financial Officer