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 statement.
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.