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Leases




Introduction

In July 2006, the IASB decided to include the project Leases in its agenda, to be developed jointly with the FASB as part of the Memorandum of Understanding.
The project was initiated because the current model of recognition of leases under IAS 17, based on the distinction between finance leases and operating leases, has raised many difficulties in implementation and interpretation, leading to a lack of comparability of financial statements.
In addition, the accounting model currently does not provide useful information to users of financial statements, as relevant information about the rights and obligations relating to leases is omitted. More specifically, in the case of operating leases, the balance sheet of the lessee does not indicate the amount of liabilities (debt) towards the lessor.
In March 2009, the IASB, jointly with the FASB, published a Discussion Paper Leases: Preliminary Views and later, on 17 August 2010, issued ED Leases, in consultation until 15 December 2010.


Objectives

The project’s objectives are therefore:
— to eliminate the uncertainties and the discretion in the distinction between operating leases and finance leases representing as an asset the right of lessee to use the property during the lease term; and
— to bring out the implicit debt (the obligation to make the lease payments) in all leases, even those concerning operating leases for which today the debt is not apparent from the financial statements of the lessee.


Summary

The ED proposes the application of the right of use model in accounting for all leases, which states:
— the lessee recognises an asset which represents the right to use the leased property for the duration of the contract and a liability which is the obligation to make the lease payments;
— the lessor recognizes an asset which represents the right to collect lease payments and, depending on the risks and benefits associated with the leased asset which is exposed:
• recognizes a liability, while continuing to recognize the leased asset (performance obligation approach);
• derecognises the leased property that is transferred to the lessee and continues to recognize a residual asset representing its residual rights to the leased asset at the end of the lease (derecognition approach).


IASB Work Plan

The re-exposure of the proposals is expected by the end of 2012.


For more information, please refer to the IASB website.


The EFRAG and the OIC organized jointly an outreach event on Leases project. The event held in Rome on 5 May 2011. More information on the initiative and the feedback report, prepared by EFRAG, are available cliccking here.


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