Draft proposals by the Financial Accounting
Standards Board (FASB) and International Accounting Standards Board
(IASB) on joint exposure for leases have been met with some
criticism and concern.

Ernst & Young said the joint exposure
draft for leases requires “significant changes”, before an
operational standard can be achieved. In its letter to the both
boards, the firm said exposure draft leases “require significant
changes, additional field testing and stakeholder consultation
before an operational standard can be achieved.”

The Big Four firm said it is concerned about
“the conceptual basis for a lessee recognising a liability for
lease payments that do not represent an unconditional obligation
and similarly for a lessor recognising a receivable for amounts
other than those that the lessor has an unconditional right to
receive”, the firm said in a statement.

Meanwhile, PwC said it supports the objective
of the proposals but does not believe they meet these objectives.
The firm added that key proposals should be reconsidered. “These
key areas include the measurement of more complex leases,
specifically term extension options and contingent payments, lessor
accounting and transition provisions.”

In its response to the IASB, the Institute of
Chartered Accountants of Scotland also revealed its issues with the
proposals. While the organisation said it supports the development
of a new standard on lease accounting, it revealed concerns with
the details of the draft.

In terms of the distinction between a lease
and a service contract, “we believe that more guidance is required
to assist in distinguishing between a lease and a service contract.
We believe that the overall focus should be on the business purpose
of a transaction rather than the current narrow focus on the
provision of a specified asset,” the Institute said in its

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The Institute said that although the lease is
defined appropriately in the proposals “we are concerned that the
distinction between leases and service contracts will be difficult
to apply in practice.”

The draft lease accounting standard is
designed to bring all leases on balance sheet – introducing more
transparency to the rights and obligations arising from leases.