EFRAG’s views on
ED Leases
Final comment letter 15 December 2010
EFRAG cover letter
EFRAG position
EFRAG
agrees with
• A single right of use model for all lessees, subject to the development of robust criteria
for distinguishing between leases and contracts that are in substance service
arrangements.
EFRAG has a
number of
concerns
• We do not support the hybrid model for lessors and believe that a single partial
derecognition model should be applied.
• We believe that the derecognition model should be amended to depict the return that
lessors earn on the total investment in the lease, which includes both the receivable and
the residual asset.
• We disagree that amounts payable under options to extend and contingent rentals are
included in the measurement of lease assets and liabilities. We believe that options
should be recognised and measured separately.
• We propose to apply the partial derecognition approach also to sale and leaseback
transactions.
• We support a full retrospective transition approach when practicable.
Lessee’s accounting model (Question 1)
EFRAG position
Will the
proposals
result in more
relevant
information?
EFRAG acknowledges that the right of use model is consistent with the conceptual premise
that an asset is a bundle of rights and it can be supported, subject to the development of
robust criteria for distinguishing between leases and contracts that are in substance service
arrangements.
Lessors’ accounting model (Question 2)
EFRAG position
One
accounting
approach for
lessors
EFRAG supports a single partial derecognition model for lessors. EFRAG believes that the
performance obligation model is not consistent with the conceptual premise that the asset
is a bundle of rights.
Short-term leases (Question 3)
EFRAG position
An exemption
for short-term
leases
EFRAG supports the short-term lease exemption granted to lessors.
EFRAG believes that the simplification granted to lessees is not sufficient. EFRAG
supports granting a short-term lease exemption also to lessees.
Definition of a lease (Question 4)
EFRAG position
Boundary
between leases
and service
arrangements
EFRAG believes that the boundary between leases and contracts that are in substance
service arrangements will be difficult to determine. EFRAG thinks that the IASB should
further clarify and improve the criteria to distinguish leases from service arrangements.
EFRAG believes that the criteria to identify a lease put excessive weight on the physical
delivery or access to the underlying physical asset. The criteria should instead focus on
the benefit or the right-of-use that is actually transferred with the lease itself.
Boundary
between leases
and
sales/purchases
EFRAG advises to align the criteria to identify a sale/purchase with those in the
Revenue Recognition proposals. However, EFRAG believes that if there was a single
derecognition approach for lessors (as EFRAG supports) it would be unnecessary to
distinguish between a lease and a sale/purchase.
Scope of the proposals (Question 5)
EFRAG position
Exemption for
investment
property at FVTPL
EFRAG agrees with the exemption for investment property carried at fair value through
profit and loss in accordance with IAS 40.
Leases of
intangibles should
be included in the
scope
EFRAG disagrees with the decision that the proposals should not be applied to leases
of intangible assets.
Interaction with
IFRIC 12
EFRAG advises to include a scope exemption for public-to-private arrangements that
are in the scope of IFRIC 12 Service Concession Arrangements
Service and lease components (Question 6)
EFRAG position
Identification
of separate
components
EFRAG agrees that an entity should separate services that are distinct based on the
criteria in the Revenue Recognition proposals.
When a contract includes both lease and non-distinct service components, EFRAG
believes that the lessee should assess which is the predominant component, and treat the
whole contract correspondingly.
When a contract includes both lease and non-distinct service components, EFRAG
believes that the lessor should always separate the service components regardless of the
accounting approach that the lessor is applying.
Purchase options and Lease term (Question 7 and 8)
EFRAG position
Options should
be valued
separately
EFRAG disagrees that amounts payable under options to extend a lease should be
included in the measurement of the lease assets and liabilities.
EFRAG believes that purchase options that are not bargain purchase options should be
treated as options to extend – that is, that they should be recognised and measured
separately.
EFRAG believes that options to purchase the underlying asset and/or extend the lease
term should be accounted for, but their measurement should reflect their values rather
than the gross cash flows resulting from the exercise.
Include virtually
certain
extensions only
In the event that amounts payable under options to extend were to be included in the
measurement of lease assets and liabilities, EFRAG would support including only those
amounts that are virtually certain, as required in IAS 17.
Contingent rentals (Question 9)
EFRAG position
Performance and
usage-based
contingent payments
EFRAG believes that contingent rentals that are under the control of the lessee,
such as those based on either use or performance of the underlying asset, are not
liabilities for the lessee or assets for the lessor; therefore EFRAG believes that
these contingent rentals should not be included in the measurement of the lease
assets and liabilities.
Use of most likely
outcome
EFRAG agrees with the inclusion of contingent rentals based on an index or rate,
but would include them based on the most likely outcome (and not on an expected
outcome basis).
Reassessment (Question 10)
EFRAG position
Impact of
reassessment
If the EFRAG’s position on options and contingent rentals were not followed:
EFRAG agrees that it would be onerous to require a periodic reassessment of changes in
the obligation and receivable arising from changes in the lease term or contingent
payments. EFRAG agrees that lease assets and liabilities should be remeasured only
when changes in facts and circumstances indicate that there may have been significant
variations;
•
EFRAG that when the a lessor applies a derecognition approach, remeasurement of
usage-based contingent rentals should be charged to profit and loss.
•
Sale and leaseback transactions (Question 11)
EFRAG position
A different
approach for sale
and leasebacks
EFRAG supports the application of the partial derecognition model also to sale and
leaseback transactions. Under this model the parties recognise the sale of the residual
asset and the financing of the right-to-use retained by the seller/lessee.
If the IASB model were to be confirmed, EFRAG disagrees with the requirement that
the buyer/lessor shall apply the performance obligation model to the leaseback
transaction. EFRAG supports a partial derecognition model for all leases.
Presentation (Question 12, 13 and 14)
EFRAG position
Presentation
EFRAG supports the presentation requirements for the statement of comprehensive
income and the statement of financial position.
Linked
presentation of
performance
obligation
If the IASB were to confirm the performance obligation model, EFRAG would not agree
with its linked presentation in the lessor’s statement of financial position.
Interaction with
IAS 7
requirements
EFRAG notes that the presentation requirements for interest payments in the statement
of cash flows conflict with the current requirements in IAS 7. EFRAG believes that
changes in the cash flow statement should be addressed in the Financial Statements
Presentation project.
Disclosures (Question 15)
EFRAG position
Extensive
disclosure
requirements
EFRAG welcomes the requirement in paragraph 71 of the proposals that an entity is not
obliged to provide all the disclosures but should consider the level of disclosures
appropriate to identify and explain the amounts recognised in the financial statements
arising from leases; and describe how leases may affect the amount, timing and
uncertainty of future cash flows.
Transition and Costs and Benefits (Question 16 and 17)
EFRAG position
Transition
requirements
EFRAG supports a full retrospective approach of the new proposals unless impracticable,
in accordance with the requirements of IAS 8.
Extend the
outreach
activities on
assessment of
costs and
benefits
EFRAG encourages the IASB to expand its outreach activities to collect additional
information on the costs associated with the implementation of the proposals and their
benefits.
Other matters (Question 18)
EFRAG position
Initial direct
costs
EFRAG advises the IASB to use consistent concepts and wording across the different
projects that are affected by this issue (revenue recognition, insurance contracts and
leases).
IAS 36 and
performance
obligation
approach
EFRAG does not support the performance obligation approach. Moreover, EFRAG
believes that it is unclear how IAS 36 Impairment of Assets should be applied to the
underlying asset.
Subsequent
measurement
of residual
asset
EFRAG believes that the residual asset in the derecognition approach should be
remeasured to provide an appropriate presentation of the return earned by the lessor on
the lease transaction.