Appendix A: Summary of questions for respondents
This appendix summarises all the questions for respondents included in this
discussion paper.
Chapter 2: Scope of lease accounting standard
Question 1
The boards tentatively decided to base the scope of the proposed new lease
accounting standard on the scope of the existing lease accounting standards.
Do you agree with this proposed approach?
Yes
If you disagree with the proposed approach, please describe how you would define
the scope of the proposed new standard.
Question 2
Should the proposed new standard exclude non-core asset leases or short-term
leases? Please explain why.
The standard should exclude short term leases, which are leases with a lease term of twelve months or less.
Analyzing those contracts and tracking down all of the data needed to build capital lease accounting models for
short term leases would be an onerous and time consuming process. Some short term leases might be close to
expiration by the time all of the data needed to build the lease accounting model is obtained.
Please explain how you would define those leases to be excluded from the scope
of the proposed new standard.
Chapter 3: Approach to lessee accounting
Question 3
Do you agree with the boards’ analysis of the rights and obligations, and assets and
liabilities arising in a simple lease contract?
Yes
If you disagree, please explain why.
Question 4
The boards tentatively decided to adopt an approach to lessee accounting that
would require the lessee to recognise:
(a) an asset representing its right to use the leased item for the lease term
(the right-of-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?
Yes
If you support an alternative approach, please describe the approach and explain
why you support it.
Question 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 recognises:
(a) a single right-of-use asset that includes 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?
I support the proposed approach of a single right-to-use asset. Regarding the proposed approach of a single
obligation to pay rentals, only rental payments where the lessor is recovering the leased asset’s capital costs plus
a return on its capital investment (i.e., minimum lease payments) should be included. Residual value guarantees
should be included in the minimum lease payments, but contingent rental payments should be excluded (please
see Question 16’s answer). Payments where the lessor operates and maintains the leased assets, performance
related bonuses or penalty deductions, etc. should also not be included in the liability and should be expensed as
incurred.
Chapter 4: Initial measurement
Question 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.
I disagree for two reasons. 1) Using the lessee’s incremental borrowing rate to discount minimum lease payments
may significantly overstate the lease liabilities account on the balance sheet and understate interest expense in the
income statement. When the discount rate was reduced from the interest rate implicit in the lease to a theoretical
incremental borrowing rate of 9% in Excel models for two existing capital leases (a power plant and a ship), the
initial lease liability balance increased by more than 40% for each lease. These new liability balances may be much
higher than the actual loan balances we would assume or termination fees we would pay if these leases ended
early. 2) When the interest rate implicit in the lease is greater than the lessee’s incremental borrowing rate,
shouldn’t this higher cost of financing be reported to users as interest expense in the income statement instead of
hiding it in the lease liability? Paying the higher financing costs of leases may not make economic sense if we were
only renting assets, but in most of these agreements the lessor also operates and maintains the assets and these
cost savings greatly exceed the higher financing costs. 3) Calculating the interest rate implicit in the lease is not
too hard if the minimum lease payments and fair value of the leased asset are known, the unguaranteed residual
value is assumed to be zero (present value of unguaranteed residual value is tiny compared to fair value leased
asset when lease term is long and lessor’s disposal costs at end of lease may exceed leased asset’s unguaranteed
residual value), and Excel’s Goalseek function is used.
The approach I would use to determine the initial lease liability balance is the fair value of the leased asset per IAS
17’s paragraph 20. Some potential sources of information to identify fair value of the leased asset(s) are financial
models used to secure financing from the project’s lenders, internal lease vs. buy models, purchase prices if the
lease contract has purchase options, etc.
Question 7
Do you agree with the boards’ tentative decision to initially measure the lessee’s
right-of-use asset at cost?
If you disagree, please explain why and describe how you would initially measure
the lessee’s right-of-use asset.
I disagree because using the lessee’s incremental borrowing rate to discount minimum lease payments may
significantly overstate the leased asset account on the balance sheet and overstate leased asset depreciation
expense in the income statement. When a theoretical incremental borrowing rate of 9% was used instead of fair
value of the leased asset in Excel models for two existing capital leases (a power plant and a ship), the initial
balance for the leased asset increased by more than 40% for each lease. These new leased asset balances are
much higher than the actual amounts we would pay if we purchased the assets per the terms of the contracts.
The approach I would use to determine the initial leased asset balance is the fair value of the leased asset per IAS
17’s paragraph 20, but make capitalizing initial direct costs optional (please see answer to Question #24). Some
potential sources of information to identify fair value of the leased asset(s) are financial models used to secure
financing from the project’s lenders, the lessee’s internal lease vs. buy models, purchase prices if the lease
contract has purchase options, etc.
Chapter 5: Subsequent measurement
Question 8
The boards tentatively decided to adopt an amortised 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?
Yes.
If you disagree with the boards’ proposed approach, please describe the approach
to subsequent measurement you would favour and why.
Question 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.
Per my answers to Questions 6 and 7, initial measurement of the lease liability should be based upon fair value.
Subsequent measurement of the lease liability should be use an amortized cost-based approach per the reasons in
5.18 (a) and (c).
Question 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.
No. Building lease accounting models is hard and having to constantly update them for changes in the incremental
borrowing rate and prepare adjusting entries would be onerous and time consuming with the benefits outweighing
the costs. Explaining these adjusting entries to financial statement users and our management would be hard;
lease accounting is a complex subject not easily understood by non-accountants and even by many accountants.
Please keep the standard as simple as possible.
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.
No revisions should be made for changes in the incremental borrowing rate.
Question 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.
Does this question pertain to subsequent adjustments in 5.28? If yes, the retrospective approach might be simpler
to perform assuming the initial lease liability balance was based upon the leased asset’s fair value. The original
model could be updated with actual minimum lease payments to date and future estimated minimum lease
payments. Excel’s Goalseek function would then be used to crunch the revised interest rate implicit in the lease
using the initial lease liability balance and updated minimum lease payments information. Comparing the updated
lease liability amortization schedule to previous version in effect should allow the accountant to identify the
adjustments needed to the lease liability, interest expense, and gain/loss accounts.
Question 12
Some board members think that for some leases the decrease in value of the
right-of-use asset should be described as rental expense rather than amortisation
or depreciation in the income statement.
Would you support this approach? If so, for which leases? Please explain your
reasons.
No. Keep the standard as simple as possible. We currently use the straight line method of depreciation to amortize
our leased assets and depreciate owned PP&E. This method is simple and easy for users to understand. No major
modifications to our SAP system would be required if the standard allows us to continue using the straight line
method.
Chapter 6: Leases with options
Question 13
The boards tentatively decided that the lessee should recognise an obligation to
pay rentals for a specified lease term, ie 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?
Yes. It’s simple and simple is beautiful.
If you disagree with the proposed approach, please describe what alternative
approach you would support and why.
Question 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
recognised as an adjustment to the carrying amount of the right-of-use asset.
Do you support the proposed approach?
Yes.
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.
Not really. Given Question 13’s example and that my company has a short term focus on yearly costs and a
business plan period of five years, the most likely lease term will be 10 years not 15 unless the rental rate in years
11-15 is extremely low. Equipment wears out, technology becomes obsolete, market rental rates fluctuate, and
prices for the company’s products are constantly changing so the decision to extend the contract five more years
likely won’t be made until year 10.
Question 15
The boards tentatively concluded that purchase options should be accounted for
in the same way as options to extend or terminate the lease.
Do you agree with the proposed approach?
Yes.
If you disagree with the proposed approach, please describe what alternative
approach you would support and why.
Chapter 7: Contingent rentals and residual value guarantees
Contingent rentals
Question 16
The boards propose that the lessee’s obligation to pay rentals should include
amounts payable under contingent rental arrangements.
Do you support the proposed approach?
If you disagree with the proposed approach, what alternative approach would you
recommend and why?
No because it only adds more complexity when building the lease accounting models and building these models is
difficult enough under the existing standards. A company with numerous lease contracts would require an army of
accountants to constantly update the lease accounting models for differences between estimated and actual
contingent rentals and prepare adjusting entries. Most companies don’t have an army of accountants to do Chapter
7’s proposed work, especially in these challenging economic times. This discussion paper’s theories are a vast
oversimplification of lease accounting work performed in the real world. The lease contracts we deal with are 100+
pages long; some can be 500+ pages long. The actual monthly payments we make under these agreements are a
sum of numerous line items and/or formulas some of which are based on factors that are impossible to predict. For
example, actual monthly payments for one of our leased power plants can vary greatly due to plant availability that
the lessor controls, what level of power and steam that we the lessee tell the lessor to produce, the plant’s actual
power produced (varies greatly due to weather conditions), the plant’s fuel efficiency performance, changes in
inflation indices and/or currency exchange rates, etc. Actual monthly payments for one of our leased ships can
vary due to factors controlled by the lessor such as ship availability, crew size and nationality, etc.
The approach I recommend is to follow the existing lease accounting standards, which is that all contingent rentals
and reimbursable costs are to be expensed as incurred.
Question 17
The IASB tentatively decided that the measurement of the lessee’s obligation to
pay rentals should include a probability-weighted estimate of 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.
I support neither approach for the reasons provided in Question 16’s answer.
Question 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.
Yes. The FASB’s approach helps to keep things simple. Minimum lease payments that have a price index, interest
rate, currency exchange rate, etc. variable should be based upon the variable’s value existing at the inception of
the lease. These variables’ values are impossible to predict and can fluctuate greatly over time so changes in
amounts payable due to changes in these variables should be recognized in the income statement as actual
payments are made or accrued.
Question 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? If not, please explain why.
No. Please see the answer to Question 16.
Question 20
The boards discussed two possible approaches to recognising all changes in the
lessee’s obligation to pay rentals arising from changes in estimated contingent
rental payments:
(a) recognise any change in the liability in profit or loss
(b) recognise 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.
I support neither approach for the reasons provided in Question 16’s answer. The approach I recommend is to
follow the existing lease accounting standards, which is that all contingent rentals and reimbursable costs are to
be expensed as incurred.
Residual value guarantees
Question 21
The boards tentatively decided that the recognition and measurement
requirements for 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?
I agree that residual value guarantees should not be separated from the lease contract and accounted for as
derivatives. However, I disagree with the approach of remeasuring residual value guarantees because it increases
the complexity of the lease accounting process. To help keep things simple, I recommend following the approach
in the existing standards, which is to recognize the maximum amount payable under the residual value guarantee.
Unless the residual value guarantee’s amount is really large relative to the leased asset’s fair value at the inception
or commencement of the lease or the lease term is really short, the discounted value of the residual value
guarantee should be a small fraction of the initial lease liability balance especially if the lease term is long and the
lease liability balance is based upon fair value of the leased asset. For example, assume the leased asset’s fair
value is $25 million, maximum residual value guarantee of $2.5 million, 10% yearly discount rate, and 20 year lease
term. For a 20 year lease, the discounted value of the residual value guarantee is $371,609.07 or 1.49% of the $25
million lease liability balance. For a 10 year lease, the discounted value of the residual value guarantee is
$963,858.22 or 3.86% of the $25 million lease liability balance. In both examples, the discounted value of the
residual value guarantee is small relative to the initial lease liability balance. What value is added for users by
regularly remeasuring residual value guarantees? My view is that the 80/20 rule should apply; lease related
liabilities need to be disclosed on the balance sheet to users, but they should not be adjusted constantly.
Chapter 8: Presentation
Question 22
Should the lessee’s obligation to pay rentals be presented separately in the
statement of financial position? Please explain your reasons.
No, because the lease liabilities portion of a company’s financial liabilities could be broken out separately in the
footnotes to the financial statements.
What additional information would separate presentation provide?
Question 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?
Leased assets should be reported in the fixed assets section of the balance sheet, but leased assets should be
separated from company owed PP&E. In theory, company owned PP&E is a more liquid asset than a leased asset,
because a company can sell or pledge as collateral the PP&E it owns. Lease contracts typically don’t allow a lessee
to sell or pledge the leased assets as collateral and may contain provisions severely restricting the lessee’s right to
terminate the lease or substitute another party as lessee.
Please explain your reasons.
What additional disclosures (if any) do you think are necessary under each of the
approaches?
Chapter 9: Other lessee issues
Question 24
Are there any lessee issues not described in this discussion paper that should be
addressed in this project? Please describe those issues.
Some thoughts on Chapter 9 and other issues.
Timing of initial recognition should follow the existing standard where the lessee recognizes its assets and
liabilities on the commencement date. The big ticket items (power plants, ships, etc.) we lease have to pass
performance and reliability tests stated in the contract before we will accept the leased asset and commencement
begins; recognizing assets and liabilities before commencement when the lessee is not obligated to make lease
payments makes no sense.
Under the new standard, lessees should have the right to expense initial direct costs as incurred. Initial direct costs
for capital leases I have worked on were a small fraction (1-2% or less) of the leased asset’s fair value. Costs
exceed the benefits of tracking initial direct costs for leased asset capitalization; we are at the mercy of non-
accountants in operating departments to provide reliable data and it would also cause much confusion on internal
reporting for capital and operating budgets.
All contingent rentals and reimbursable costs should be expensed. If the boards determine that contingent rentals
and reimbursable costs should be disclosed in the footnotes to the financial statements, they should be combined
and disclosed as one item in the footnote. (Total lease payments net of minimum lease payments = combined
contingent rentals and reimbursable costs) is a fairly simple, straightforward calculation. Determining whether line
items on invoices are contingent rentals, reimbursable costs, or minimum lease payments is not a simple task for
operations staff who code lease invoices for payment and who are not accountants.
How would cancellable leases be handled in the new standard? We have some long-term leases for big ticket items
where we can terminate the contract for any reason at any time for a token amount such as 10 days of rental
payments or 5-10% of the remaining lease payments.
How would leases for low value items such as computer workstations be handled in the new standard? Such items
are well below my company’s capitalization threshold for fixed assets. Continually tracking such items and
updating any related lease accounting models to help identify adjustments to the leased liabilities and leased
assets accounts would be a time consuming and onerous process.
This discussion paper’s theories are a vast oversimplification of lease accounting work performed in the real world.
Once the new standard on lease accounting is approved and published, lessees must be given a long lead time of
2-3 years or longer to implement the standard. The large company I work for has numerous operating lease
contracts 100+ pages long. Analyzing those contracts, building the lease accounting models, going to the
operating departments and/or lessors for help in finding data needed for the models or annual financial statements,
potential modifications to the company’s systems and its internal reports and other processes, etc. will be a
massive undertaking requiring people resources that we do not have in the current economic environment.
Chapter 10: Lessor accounting
Question 25
Do you think that a lessor’s right to receive rentals under a lease meets the
definition of an asset? Please explain your reasons.
Question 26
This chapter describes two possible approaches to lessor accounting under a
right-of-use model: (a) derecognition of the leased item by the lessor or
(b) recognition of a performance obligation by the lessor.
Which of these two approaches do you support? Please explain your reasons.
Question 27
Should the boards explore when it would be appropriate for a lessor to recognise
income at the inception of the lease? Please explain your reasons.
Question 28
Should accounting for investment properties be included within the scope of any
proposed new standard on lessor accounting? Please explain your reasons.
Question 29
Are there any lessor accounting issues not described in this discussion paper that
the boards should consider? Please describe those issues.