Additional public consultation, issued by EFRAG and national standard-setters, in June 2014
Comments from ACCA (submitted via the FRC)
22 August 2014
On the matter of lease identification, the consultation questions focus on arrangements which will fall to be treated as leases under the revised Standard, but which are, in substance, service contracts. ACCA believes that this issue should be of low impact if the concept of control is applied correctly. In order to do this, clear guidance on substitutability is needed. We see a greater need to examine how relaxations can be extended, in order to exclude from the scope of the revised Standard assets deemed to be small, and arrangements covering relatively short periods of time.
Of the two proposed approaches, ACCA prefers the IASB’s over that of the FASB. Our reasoning, including cost and complexity aspects, is set out below, along with the question of whether additional relief from disclosure requirements can be provided.
You are invited to provide examples of transactions that would qualify as leases under the proposals, but you consider to be in substance services and for these transactions, please specify the following:
Why should this transaction not be treated as a lease and recognised by a lessee?
What changes could be made to the definition and/or criteria to identify a lease, to exclude this transaction from the scope of the proposals?
How common in practice is this type of transaction?
The question of whether the lessee controls the use of an asset is central to the question of whether an arrangement involves a lease within the scope of the Standard. Applied correctly, this concept should ensure that service contracts can be identified and excluded from the scope of the revised Standard.
However, ACCA encourages the IASB to look at further reliefs on the grounds of both practicality, and reducing the likely additional burden for preparers of the Right–of-Use (RoU) model. For example, we would support the treatment as a service contract of an arrangement in which the ‘rental’ is principally paid for services, such as utilities, staffing and consumables. This would avoid a need to identify and account separately for a leasing element, and potentially offer a wide-ranging exemption from the scope of the revised Standard, such as for a number of standard items of IT and office equipment, notwithstanding that they are subject to agreements termed ‘leases’.
Further relaxations will be possible through the potential exemption for ’small’ items, although ‘small’ will need to be sufficiently well-defined to avoid differing interpretations by preparers. The scope for such additional relaxations is likely to be limited, as small items are likely to be substitutable (and consequently, outside the definition of leased assets).
Indeed, there are assets such as motor vehicles and standard plant, which would not usually be seen as ‘small, but do tend to be readily substitutable by the owner. Substitutability is an important concept, we believe, in the determination of whether a lease exists. In consequence, it is advisable for the IASB to re-visit its guidance on the subject (paras 8-10 of ED/2013/6) to identify any remaining areas of potential ambiguity.
Attempts have previously been made to distinguish assets by type, broadly based on function, with the potential for a differing treatment of the lease arrangements. Attempts were made to distinguish ‘core’ and ‘non-core’ assets, and certain assets do have a clearer link to additional income generation than others (for example, a new store in a chain, compared to the premises which will always be needed to house Head Office functions). We have noted previously that the core / non-core distinction would be difficult to determine precisely, and doubt that this area of consideration can be fruitfully developed. The function of an asset is unlikely to be relevant to the central question of control by the lessee rather than the lessor.
Generally, the shorter the lease / rental period (as established through ‘reasonable certainty’), the less likely it will be that the difference between treatment as a lease and as a service contract will have a material effect on the financial statements. The IASB could therefore consider whether the proposed exemption for short-term arrangements should encompass leases of at least two, and up to three, years.
Assuming that the Boards confirm the scope of application and the guidance to identify a lease, which of the approaches described above in paragraphs 14 to 21 do you prefer? Please explain the reasons for your views.
Based on the description above, which of the two approaches you believe to be less complex and costly to implement? Please explain the reasons for your views.
Given that the revised Standard on leasing will be based on a RoU model, ACCA supports the IASB’s approach. This requires lessees to account for all leases as ‘Type A‘, and preparers will not, then, have to spend additional time assessing whether a lease is ‘Type B’ instead. Furthermore, we believe that Type B accounting has a less-than-satisfactory outcome in the income statement of the lessee.
In addition, the IASB’s approach gives greater scope for practical exemptions, such as for ’small’ items. As set out in our responses to Questions 1 and 2 above, we believe that the IASB should explore more fully the scope for reliefs from the full requirements of the revised Standard.
ACCA still has concerns that the adoption of the RoU model for leasing will entail additional complexity and compliance costs for preparers, compared to the current IAS 17 model. As a result, we believe that these are important factors to consider as the IASB finalises the revised Standard.
In addition to the scope relaxations discussed in the answers to the previous questions, the IASB needs to re-examine the disclosure requirements in the proposed revised Standard. Preparers have identified that the disclosures would be burdensome in total, and that certain would be of limited value. In particular, reduced disclosures would be appropriate for short-term leases, in view of the relaxations for their recognition.