Exxon Mobil Corporation
Patrick T. Mulva
5959 Las Colinas Boulevard
Irving, TX 75039-2298
972 444 1202 Telephone
972 444 1221 Facsimile
Vice President and Controller
July 14, 2009
Mr. Russell Golden
Technical Director
Financial Accounting Standards Board
401 Merritt 7
P.O. Box 5116
Norwalk, CT 06856-5116
Sent by email to director@fasb.org
Discussion Paper DP/2009/1: Leases Preliminary Views
Dear Mr. Golden,
ExxonMobil Corporation appreciates the opportunity to respond to the proposals in the
Discussion Paper outlining the proposed approach to a new lease accounting standard.
In general we support the objective to reconsider the approach to lease accounting,
recognizing that current ASC 840 and IAS 17 have given rise to many valid criticisms,
both in failing to meet the needs of users and in providing the opportunity, through
excessive reliance on bright line tests, for entities to structure transactions to keep
leased assets and liabilities off the balance sheet.
We therefore agree with the basic principle that lessees should recognize an asset,
representing the right-of-use, and a liability, representing the obligation to pay, for lease
contracts.
However we are very concerned that in seeking to address these fundamental issues,
the Boards have not given sufficient consideration to the practical application and
implications of their proposals, and, as currently written, they will be excessively complex
and burdensome for preparers to implement, without commensurate benefit to users.
We comment below on a number of specific aspects to the proposal which cause us
concern. We have included our detailed responses to the questions in the attachment.
Practical scope exception for short term leases
We strongly recommend that short term leases, defined as leases with a fixed term that
is one year or less, should be excluded from scope. This would enable companies to
avoid the significant efforts and costs associated with accounting for and remeasuring
such short-term assets and liabilities; instead they should simply be expensed as
incurred. We do not think that this exception will significantly detract from the overall
benefits users gain from the proposed approach.
Lease Obligation Measurement
We do not agree that all options to extend the lease term meet the definition of a liability,
since they are not present obligations arising out of past events. We believe the lessee
should assess the most likely term of the lease considering the fixed non-cancelable
period and including renewal periods where there are factors associated with the lease
which economically compel the lessee to renew, in line with the existing definitions in
ASC 840.
In addition we do not agree that all contingent rentals meet the definition of a liability.
Where contingent rentals are based on future performance or usage of the asset, the
event (which has not yet occurred) giving rise to the liability is that which obligates the
lessee to pay the rentals. In our view such contingent rents should be expensed as
incurred, i.e. when the events occur that require the lessee to pay the rentals.
Further, the proposal would be very difficult to apply in practice and would result in
misleading net income, as the related asset would be amortized in advance of the
contingent rental usage. In addition, implementation would be expensive, for little to no
perceived benefit to the financial statement users.
Complexity of Remeasurement Proposals
We have significant concerns that reassessment on the basis of ‘any new facts and
circumstances’ is too broadly worded and the continuing reassessments will be
excessively onerous. ExxonMobil has in excess of five thousand significant operating
leases today, the majority of which have options such as renewal periods and contingent
rentals, in addition to many thousands of low value leases. To fully comply with the
proposals, each agreement would require quarterly review, with considerable judgment
being exercised as to whether changes in facts and circumstances would lead to a
different probability of renewal options being exercised or different estimates being made
of future rental payments. As drafted, the requirements would be essentially unworkable
and cost-prohibitive to implement, and the end result is not likely to significantly improve
financial statements.
We recommend requiring remeasurement for leases with options only when a triggering
event has occurred, such as the exercise of a renewal option, or the negotiation of a
significant change in the terms of the contract. This would improve the operability of the
standard without materially impacting the quality of the information provided to users.
Service and Supplies Contracts
We note that the issue of identifying imbedded leases in service and supply contracts will
become increasingly significant under the new proposals. As the boards are aware, this
is an area where current practice is already challenging. To prevent this from becoming
an area for possible structuring and abuse, we recommend that the standard provide
additional guidance on distinguishing payments for services or goods from payments for
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the right to use an asset. Specifically, the guidance should contain some of the following
key concepts similar to existing GAAP:
i)
the reporting entity should have control over the asset or "substantially all of the
usage of the asset",
ii)
the agreement should be for a specific asset as opposed to the service of a fleet
of assets, and
iii)
the asset component of the service or goods charge should be reasonably
estimable with fixed and determinable pricing terms to recover the capital
component.
Resolve Differences between FASB/IASB
It is critical that IASB and FASB resolve their areas of difference noted in the discussion
paper. The final standards should be identical, in order to provide for consistent financial
reporting by all entities.
Finally, the proposed changes are very significant in what is already a complex area. We
strongly recommend that the boards conduct a field test of the new proposals with a
range of different preparers and users in order to identify any significant unforeseen
issues before final guidance is issued. This will also provide further insight into the
cost/benefit analysis associated with the remeasurement proposals.
We appreciate the Board's consideration of these matters and welcome the opportunity
to discuss the above issues. Our responses to the Board's questions regarding the
proposed changes are included in Attachment I.
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Attachment I
RESPONSES TO BOARD QUESTIONS POSED IN DISCUSSION PAPER
1. The boards tentatively decided to base the scope of the proposed new lease
accounting standards on the scope of the existing lease accounting standards. Do you
agree with this proposed approach? If you disagree with the proposed approach, please
describe how you would define the scope of the proposed new standard.
We agree with the scope of the proposed standard, recognizing the practical expediency
of such an approach. However resolution of the existing scope differences between ASC
840 and IAS 17 is essential and the FASB definition (i.e. excluding intangible assets) is
the preferred one. The concerns about off-balance sheet financing do not apply to
software or technology licenses, where purchase is not an option.
Additionally, we note that the issue of identifying imbedded leases in service and supply
contracts will become increasingly significant under the new proposals. This is an area
where current practice is already challenging. To prevent this from becoming an area for
possible structuring and abuse, we recommend that the standard provide additional
guidance on distinguishing payments for services or goods from payments for the right to
use an asset. Specifically, the guidance should contain some of the following key
concepts similar to existing GAAP:
i)
the reporting entity should have control over the asset or "substantially all of
the usage of the asset",
ii)
the agreement should be for a specific asset as opposed to the service of a
fleet of assets, and
iii)
the asset component of the service or goods charge should be reasonably
estimable with fixed and determinable pricing terms to recover the capital
component.
2. Should the proposed new standard exclude non-core asset leases or short-term
leases? Please explain why. Please explain how you would define those leases to be
excluded from the scope of the proposed new standard
The proposed new standard should not exclude non-core asset leases. One of the
benefits of the new standard for preparers is the reduced complexity as a result of only
having a single model approach. It would be challenging to develop a clear definition of
non-core assets, and as a result would be difficult and overly complex to interpret and
implement in practice. It is inevitable that companies would interpret the definition
differently, thereby reducing comparability.
We strongly agree that short term leases, defined as leases with a fixed term that is one
year or less, should be excluded from scope. This would allow companies to avoid the
significant efforts and costs associated with accounting for and remeasuring such shortterm assets and liabilities; instead they should simply be expensed as incurred.
3. Do you agree with the boards’ analysis of the rights and obligations, and assets and
liabilities arising in a simple lease contract? If you disagree, please explain why.
In general we agree with the boards’ analysis in the case of simple lease contracts.
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4. The boards tentatively decided to adopt an approach to lessee accounting that would
require the lessees to recognize:
a) An asset representing its right to use the leased item for the lease term (the rightof-use asset)
b) A liability for its obligation to pay rentals.
Appendix C describes some possible accounting approaches that were rejected by the
boards. Do you support the proposed approach? If you support an alternative approach,
please describe the approach and explain why you support it.
We support the proposed approach.
5. The boards tentatively decided not to adopt a components approach to lease
contracts. Instead the boards tentatively decided to adopt an approach whereby the
lessee recognizes:
a) A single right-of-use asset that included rights acquired under options
b) A single obligation to pay rentals that includes obligations arising under
contingent rental arrangements and residual value guarantees
.
Do you support this proposed approach? If not, why?
We support the proposed single asset/liability approach. Adopting a component based
evaluation would be complicated and burdensome for preparers and the information
would be more complex for users to understand.
However, we do not agree that all options to renew a lease or contingent rentals give
rise to a liability and believe they should be excluded from the measurement of the single
obligation. The event related to the obligation to pay contingent rentals is not the past
signing of the lease contract but instead the future event which gives rise to the
obligation to pay contingent rentals, which in many cases will be dependent on the
lessee’s future performance. Instead we believe contingent rents should be expensed as
incurred, i.e. when the events occur that require the lessee to pay the rentals.
6. Do you agree with the boards’ tentative decision to measure the lessee’s obligation to
pay rentals at the present value of the lease payments discounted using the lessee’s
incremental borrowing rate? If you disagree, please explain why and describe how you
would initially measure the lessee’s obligation to pay rentals.
We agree with the boards’ tentative decision on initial measurement of the lessee’s
obligation. We consider using the lessee’s incremental borrowing rate to be a practical
approach.
7. Do you agree with the boards’ tentative decision to initially measure the lessee’s rightof-use asset at cost? If you disagree, please explain why and describe how you would
initially measure the lessee’s right-of-use asset
We agree with the Board’s tentative decision.
8. The boards tentatively decided to adopt an amortized cost-based approach to
subsequent measurement of both the obligation to pay rentals and the right-of-use asset.
Do you agree with this proposed approach? If you disagree with the boards’ proposed
approach, please describe the approach to subsequent measurement you would favor
and why.
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We agree with the boards’ tentative decision. Requiring subsequent measurement at fair
value is inconsistent with the treatment of many similar financial liabilities and in addition
would be costly and complex for preparers and outweigh any benefits to users.
9. Should a new lease accounting standard permit a lessee to elect to measure its
obligation to pay rentals at fair value? Please explain your reasons.
We do not think this approach should be permitted, as it would allow similar lease
contracts to be measured differently, thus reducing comparability across companies.
Additionally we question whether the liability element of a lease contract has a fair value,
since the lessee likely would not have the ability to settle or transfer the obligation which
is embedded in the lease contract.
10. Should the lessee be required to revise its obligation to pay rentals to reflect changes
in its incremental borrowing rate? Please explain your reasons. If the boards decide to
require the obligation to pay rentals to be revised for changes in the incremental
borrowing rate, should revision be made at each reporting date or only when there is a
change in the estimated cash flows? Please explain your reasons.
We strongly disagree with the proposal to revise the obligation to pay rentals to reflect
changes in the incremental borrowing rate for several reasons:
 It is inconsistent with the way many other financial liabilities are subsequently
remeasured; under an amortized cost-based approach the carrying amount of
financial liabilities is not revised for changes in market interest rates
 The approach artificially applies a variable interest rate to a transaction which is
essentially a fixed rate obligation, thus producing misleading financial information.
 The approach would increase costs and complexity for preparers.
Although we strongly reject remeasurement for changes in the incremental borrowing
rate, we note that if the boards decided to require remeasurement of the obligation then
the asset value should also be remeasured.
11. In developing their preliminary views the boards decided to specify the required
accounting for the obligation to pay rentals. An alternative approach would have been
for the boards to require lessees to account for the obligation to pay rentals in
accordance with existing guidance for financial liabilities. Do you agree with the
proposed approach taken by the boards? If you disagree, please explain why.
We agree with the boards’ preliminary views. Since financial instruments standards are
not currently converged, the proposed specified accounting will ensure consistency and
reduce complexity.
12. Some board members think that for some leases the decrease in value of the rightof-use asset should be described as rental expense rather than amortization or
depreciation in the income statement. Would you support this approach? If so, for which
leases? Please explain your reasons.
No, we believe that if the right-to-use assets are classified as leased assets, the expense
should be classified as amortization of leased assets. This would enable users to
distinguish the expense from that incurred for owned assets.
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13. The boards tentatively decided that the lessees should recognize an obligation to
pay rentals for a specified lease term, i.e., in a 10-year lease with an option to extend for
five years, the lessee must decide whether its liability is an obligation to pay 10 or 15
years of rentals. The boards tentatively decided that the lease term should be the most
likely lease term. Do you support the proposed approach? If you disagree with the
proposed approach, please describe what alternative approach you would support and
why.
We understand that the boards have chosen to model a single lease contract, rather
than taking a component approach (Q5 above); nonetheless we do not agree that all
options to extend the lease give rise to a liability. Per Concept Statement 6, a liability
represents a present obligation arising out of a past event. In the example cited in the
discussion paper, the contract term of 10 years is the only present obligation, until the
contract extension has been executed. The ability to renew the lease does not create an
obligation. We believe the lessee should assess the most likely term of the lease
considering the fixed non-cancelable period and including renewal periods where there
are factors associated with the lease which economically compel the lessee to renew,
similar to the existing definitions in ASC 840.
However, if the boards adopt their proposed approach, we do agree that using ‘the most
likely term’ is the better approach to determining the lease term.
14. The boards tentatively decided to require reassessment of the lease term at each
reporting date on the basis of any new facts or circumstances. Changes in the obligation
to pay rentals arising from a reassessment of the lease term should be recognized as an
adjustment to the carrying amount of the right-of-use asset. Do you support the
proposed approach? If you disagree with the proposed approach, please describe what
alternative approach you would support and why. Would requiring reassessment of the
lease term provide users of financial statements with more relevant information? Please
explain why?
As noted in question 13, we do not agree with recognition of the term option as a liability;
if only the contract term is recognized, continuing reassessment of ‘the most likely term’
would be unnecessary.
If the boards adopt their proposed approach, we have significant concerns that
reassessment on the basis of ‘any new facts and circumstances’ is too broadly worded
and the continuing reassessments will be excessively onerous. ExxonMobil has in
excess of five thousand significant operating leases today, in addition to many
thousands of low value leases. To fully comply with the proposals, each agreement
would require quarterly review, with considerable judgment being exercised as to
whether changes in facts and circumstances would lead to a different probability of
renewal options being exercised or different estimates being made of future rental
payments. As drafted, the requirements would be essentially unworkable and costprohibitive to implement, and the end result is not likely to significantly improve financial
statements
.
We recommend requiring remeasurement for leases with options only when a triggering
event has occurred, such as the exercise of a renewal option, or the negotiation of a
significant change in the terms of the contract. This would improve the operability of the
standard without materially impacting the quality of the information provided to users.
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In this event, we agree that changes in the obligation to pay rentals should be
recognized as an adjustment to the carrying amount of the right-to-use asset.
15. The boards tentatively concluded that the purchase options should be accounted for
in the same way as options to extend or terminate the lease. Do you support the
proposed approach? If you disagree with the proposed approach, please describe what
alternative approach you would support and why.
We agree that accounting for purchase options in the same manner as lease extensions
is reasonable.
16. The boards propose that the lessee’s obligation to pay rentals should include
amounts payable under contingent rental agreements. Do you support the proposed
approach? If you disagree with the proposed approach, please describe what alternative
approach you would support and why.
Similar to question 13, we do not agree that a contingent rental based on future
performance or usage of the leased asset meets the definition of a liability, since it is not
a present obligation arising out of a past event. We believe contingent rents should be
expensed as incurred, i.e. when the events occur that require the lessee to pay the
rentals.
Additionally, in practice this proposal will be very difficult to apply since it will require
predicting future events, often many years into the future. If the boards decide to adopt
the proposed approach we would recommend only including the element of contingent
rentals which can be reliably estimated.
17. The IASB tentatively decided that the measurement of the lessee’s obligation to pay
rentals should include a probability-weighted estimate of the contingent rentals payable.
The FASB tentatively decided that a lessee should measure contingent rentals on the
basis of the most likely rental payment. A lessee would determine the most likely
amount by considering the range of possible outcomes. However, this measure would
not necessarily equal the probability-weighted sum of the possible outcomes. Which of
these approaches to measuring the lessee’s obligation to pay rentals do you support?
Please explain your reasons.
As stated, we do not support the proposed recognition of contingent rental payments as
a liability. If the boards adopt the requirement to recognize contingent rentals as
proposed, we would support the FASB’s approach of ‘most likely rental payment’ rather
than the probability weighted outcome approach of the IASB. We believe the bestestimate approach to be more accurate, as a probability weighted estimate can be
skewed by inclusion of a number of improbable outcomes, and also may result in an
impossible outcome. The FASB approach is more likely to record the correct amount and
in addition is the more workable solution for preparers.
18. The FASB tentatively decided that if lease rentals are contingent on changes in an
index or rate, such as the consumer price index or the prime interest rate, the lessee
should measure the obligation to pay rentals using the index or rate existing at the
inception of the lease. Do you support the proposed approach? Please explain your
reasons.
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If the boards adopt the requirement to recognize contingent rentals as proposed, we
would support the FASB’s approach of measuring the obligation to pay rentals using the
rate or index existing at the inception of the lease. A change in an index or rate would
not change the value-in-use of the leased asset.
19. The boards tentatively decided to require remeasurement of the lessee’s obligation
to pay rentals for changes in estimated contingent rental payments. Do you support the
proposed approach? Please explain your reasons.
If the boards adopt the requirement to recognize contingent rentals as proposed, we
would not support the requirement to remeasure the obligation to pay rentals for
changes in estimated contingent rental payments at every reporting period.
As stated, we understand and support the overall objective of recognizing leased assets
and liabilities on the balance sheet. Having achieved that objective through initial
recognition and measurement, we question the incremental value to users of continual
reassessments of the uncertainties inherent in most lease contracts. ExxonMobil has a
significant number of leases where elements of the rental are contingent on changes in
an index or performance factors, such as property leases where rentals are contingent
on local CPI and service station leases where an element of the rental payment is
contingent on sales volume. The incremental changes each period are unlikely to
materially alter the liability and related asset, yet the amount of additional effort required
to test each lease and adjust the liability for every lease, every quarter, will be
excessively burdensome and would not be justified from a cost/benefit perspective.
Instead we would support remeasuring the index-based contingent rentals when a
triggering event has occurred and expensing the performance or usage based
contingent rentals as incurred.
We note that in the Discussion Paper the boards tentatively rule out a fair value
approach to subsequent measurement in favor of an amortized-cost approach. We think
that remeasurement at every reporting period for all leases with contingent rentals is
inconsistent with the amortized-cost approach and more akin to a fair value approach to
remeasurement.
20. The boards discussed two possible approaches to recognizing all changes in the
lessee’s obligation to pay rentals arising from changes in estimated contingent rental
payments:
a) Recognize any change in the liability in profit or loss
b) Recognize any change in the liability as an adjustment to the carrying amount of
the right-of-use asset.
Which of these two approaches do you support? Please explain your reasons.
If you support neither approach, please describe any alternative approach you would
prefer and why.
As discussed, we do not support recognition of changes in the lessee’s obligation to pay
rentals arising from changes in estimated contingent rental payments. However, should
the boards adopt the proposed approach, we would support recognition of the change in
the liability as an adjustment to the carrying amount of the asset. The liability has
changed because of a change in estimate of future rental payments, in effect making a
change to the originally estimated cost of the right-to-use asset and it would be
inappropriate to recognize this in current period net income. Additionally, this approach is
consistent with the proposed standard’s approach to changes in the lease term.
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21. The boards tentatively decided that the recognition and measurement requirements
for the contingent rentals and residual value guarantees should be the same. In
particular, the boards tentatively decided not to require residual value guarantees to be
separated from the lease contract and accounted for as derivatives. Do you agree with
the proposed approach? If not, what alternative approach would you recommend and
why?
We agree with the proposed approach.
22. Should the lessee’s obligation to pay rentals be presented separately in the
statement of financial position? Please explain your reasons. What additional
information would separate presentation provide?
We agree that the lessee’s obligation to pay rentals should be presented separately in
the statement of financial position, reflecting the fact that lease obligations are distinct
and separate from other financial obligations as they are tied to the right to use assets
under lease contracts.
23. This chapter describes three approaches to presentation of the right-of-use asset in
the statement of financial position. How should the right-of-use asset be presented in the
statement of financial position? Please explain your reasons. What additional
disclosures (if any) do you think are necessary under each of the approaches?
The right of use asset should be presented in the statement of financial position as an
intangible asset. Since the right of use asset is significantly different in many respects to
an owned asset, it is important to differentiate. We do not agree with a further separation
of in-substance purchases from other leased assets.
We note that under the proposed approach, there may be situations where previously
recognized assets and obligations are removed from the balance sheet, as obligations
related to purchase options and renewal periods are reconsidered and adjusted. We
believe the impact of derecognition should be reported net in the income statement,
rather than separately reporting a loss from operations and a gain from financing, which
we think is a misleading representation of events.
24. Are there any lessee issues not described in this discussion paper that should be
addressed in this project? Please describe those issues.
We note that in the boards’ June 2009 meetings further tentative decisions were taken
on two outstanding areas not covered by the discussion paper, namely transition
provisions and impairment of leased assets. We agree with the proposals for transition
as reported, and understand the decision to require entities to apply existing standards
for impairment i.e. IAS 36 or the impairment sections of ASC 360-10.
Other important areas still to be addressed would include the following:
 How the proposed lessee model fits into the Financial Statement Presentation
proposals
 Elimination of remaining differences between IASB and FASB – the final
standard when issued should be identical
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We have not commented on questions 25-29 as lessor accounting is of limited
application to ExxonMobil.
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