FINANCIAL ACCOUNTING

Financial Accounting

Financial Accounting

Point 1

The discussion paper Leases

Preliminary Views is a response to concerns raised by investors and other users of financial statements regarding the treatment of lease contracts under International Financial Reporting Standards (IFRSs) and US generally accepted accounting principles (GAAP).

According to the World Leasing Yearbook 2009, total annual leasing volume in 2007 amounted to US$760 billion; yet many of those lease contracts do not appear in an entity's statement of financial position (balance sheet). This is because IFRSs and US GAAP split leases into two categories—finance leases (capital leases under US GAAP) and operating leases—and only the assets and liabilities arising from finance leases are recognised in the statement of financial position. For an operating lease the lessee simply recognises lease payments as an expense over the lease term.

The different accounting treatment of finance and operating leases has given rise to various problems, in particular: Many users of financial statements believe that all lease contracts give rise to assets and liabilities that should be recognised in the financial statements of lessees. Therefore these users routinely adjust the recognised amounts in the statement of financial position in an attempt to assess the effect of the assets and liabilities resulting from operating lease contracts.

The split between finance leases and operating leases can result in similar transactions being accounted for very differently, reducing comparability for users of financial statements. The difference in the accounting treatment of finance leases and operating leases also provides opportunities to structure transactions so as to achieve a particular lease classification.

In the discussion paper the IASB and the FASB discuss a possible new approach to lease accounting. The boards propose that lease accounting should be based on the principle that all leases give rise to liabilities for future rental payments and assets (the right to use the leased asset) that should be recognised in an entity's statement of financial position. This approach is aimed at ensuring that leases are accounted for consistently across sectors and industries. The boards have not yet discussed the method of transition or the effective date. Those issues will be discussed after comments are received on this discussion paper, and included in the provisions of a subsequent exposure draft of the proposed standard.

The boards decided in July 2008 to defer consideration of lessor accounting in order to resolve the problems associated with lessee accounting as quickly as possible. Consequently, the discussion paper deals mainly with lessee accounting. However, it also describes some of the issues that will need to be addressed in a future proposed standard on lessor accounting.

While much of public attention rightly focuses on accounting issues relating to the financial crisis, this is a project of great importance and deserves public interest. Leasing is a significant source of financing for many companies. It is therefore important that interested parties should take the time to familiarise themselves with our proposals and give their views through the comment letter process. I would also like to thank members of the Leasing Working ...