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April 17, 2014

EFRAG study finds support for single model lease accounting

A majority of respondents in a European Financial Reporting Advisory Group (EFRAG) survey indicated a preference for the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) to use a single model in their attempts to create a converged lease accounting standard.

The two boards have been attempting to create the new leasing standard based on the right of use model, whereby all leases would be recognised on the balance sheet provided the lessee has a right to use the asset.

To address early complaints from the US, leases were split into two types – Type A and Type B, with the determining factor being whether the asset being leased was equipment or property, respectively.

The boards released an exposure draft on lease accounting in May 2013, but the majority of the feedback pointed to it being too complicated, and a March 2014 meeting between the FASB and IASB revealed divisions on how to proceed.

The IASB argued in favour of a more singular approach, with most leases being classified as Type A leases, whereby amortization of the asset would be recognised separately from interest on the lease liability.

The FASB wanted a dual approach with most leases accounted for as Type B leases, where they are recognised as a single total lease.

The majority of respondents to the EFRAG survey argued for a single model of lease accounting, along the Type A model lines, whereby amortization of the asset would be recognised separately from interest on the lease liability.

Within this group there was a difference of opinion, however. Some respondents considered that having a single model would reduce implementation and costs.

Some only supported a single Type A model on the grounds that the distinction between lease and service contracts be improved in the eventual standard.

If this distinction was not developed to a sufficient standard, they indicated they would support a resolution based on IAS 17, the IASB’s current standard related to lease accounting.

Others indicated support for a single Type A model, but with exceptions for leases on properties, while some opposed a single model altogether, saying it would not reflect the economic differences between various types of leases.

Additionally, respondents said the IASB and FASB needed to make "broad and systematic" simplifications to the IASB and FASB’s revised Exposure draft, published in May 2013.

The majority of respondents also were in favour of exemptions in the standard for non-core assets to help reduce complexity. They did acknowledge defining what ‘core’ and ‘non-core’ meant could be challenging in practise, though.

The survey was conducted in conjunction with the national standard setters of the UK, France, Germany and Italy, and involved 44 respondents from 10 countries, representing a number of industries.

Related story

IASB and FASB fail to agree on lease accounting

Related link

European Financial Reporting Advisory Group

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