Associations Seek Role in Accounting Standard Reinterpretation

In a recent development in the ongoing reinterpretation of the accounting standard for commercial leases by the International Accounting Standards Board ('IASB') and the Financial Accounting Standards Board ('FASB'), The Equipment Leasing and Finance Association ('ELFA') has announced that six equipment finance representative associations from around the world have signed a joint communication seeking to have them play an instrumental and constructive role in the process. The joint communication by the ELFA, the UK Finance and Leasing Association, Leaseurope, the British Vehicle Rental and Leasing Association, the Australian Finance Conference, and the Canadian Finance & Leasing Association set forth 11 key principles that should be addressed as the IASB and FASB proceed with deliberations toward a single, efficient global leasing standard.

The 11 basic principles that the groups believe the new leasing standard must meet are as follows:

1) It must provide information about future lease obligations and rights to use assets that are both meaningful and useful to the users of accounts, such as information about future committed cash flows and the flexibility and conditionality of those cash flows.

2) The recognition that there are real economic differences between leases and loans, and other financial instruments. As a result, the new standard should distinguish leases from debt, other types of obligation, and other types of executory commitments.

3) The recognition that the rights and obligations of the lessee and lessor vary not only from contract to contract, but also by jurisdiction, and in some cases between the private and public sectors. Therefore, an appropriate international standard must be sufficiently robust and flexible to accommodate a variety of different legal frameworks.

4) The recognition that the range of assets and contractual arrangements between lessee and lessor and the flexibility for the lessee to cancel, extend, or modify these arrangements vary enormously. Consequently, accounting principles must treat the different legal effects appropriately.

5) There must be clear and unambiguous definitions of leased assets and obligations, and the basis of their measurement.

6) Both lessor and lessee accounting must be covered comprehensively. Lessor accounting raises complex issues that should be fully and properly debated and not simply considered the mirror image of the lessee's accounting.

7) Lessor accounting should take into account the economic consequences of material tax benefits and the time value of money in the measurement of leased assets and the recognition of income.

8) The introduction of simplicity into lessee accounting, whether tax based or not, so that otherwise sound economic transactions are not avoided because of cost benefit considerations. There must be a clear way to account for immaterial leases, which would presumably be similar to the current operating lease method. Here, a more robust disclosure may be useful, including explaining leasing policies for classes of assets, disclosing expected actions at lease expiry, disclosing calculations that the analysts need like the present value of lease payments using the unique incremental borrowing rate for each lease, disclosing the weighted average incremental borrowing rate of leases combined and the expected future rent expense to be paid for immaterial leases of core equipment.

9) With respect to small and medium enterprises ('SMEs'), the new standard should have a modular structure, with varying degrees of information and complexity required, in relation to the kind of lease transaction and lessee. Large and small-ticket transactions should be treated appropriately, but not necessarily identically.

10) Leased and owned assets should be clearly distinguished in the balance sheet of the lessee.

11) The profit and loss implications of a changed treatment of lease payments should be carefully considered. When the annual payments associated with an operating lease with no purchase option correspond to the cost of using the leased asset, any capitalization of the lease should not alter the P&L result.

To see the joint communication and other related accounting documents, please visit, www.elfaonline.org/accounting/#FAS13.

In a recent development in the ongoing reinterpretation of the accounting standard for commercial leases by the International Accounting Standards Board ('IASB') and the Financial Accounting Standards Board ('FASB'), The Equipment Leasing and Finance Association ('ELFA') has announced that six equipment finance representative associations from around the world have signed a joint communication seeking to have them play an instrumental and constructive role in the process. The joint communication by the ELFA, the UK Finance and Leasing Association, Leaseurope, the British Vehicle Rental and Leasing Association, the Australian Finance Conference, and the Canadian Finance & Leasing Association set forth 11 key principles that should be addressed as the IASB and FASB proceed with deliberations toward a single, efficient global leasing standard.

The 11 basic principles that the groups believe the new leasing standard must meet are as follows:

1) It must provide information about future lease obligations and rights to use assets that are both meaningful and useful to the users of accounts, such as information about future committed cash flows and the flexibility and conditionality of those cash flows.

2) The recognition that there are real economic differences between leases and loans, and other financial instruments. As a result, the new standard should distinguish leases from debt, other types of obligation, and other types of executory commitments.

3) The recognition that the rights and obligations of the lessee and lessor vary not only from contract to contract, but also by jurisdiction, and in some cases between the private and public sectors. Therefore, an appropriate international standard must be sufficiently robust and flexible to accommodate a variety of different legal frameworks.

4) The recognition that the range of assets and contractual arrangements between lessee and lessor and the flexibility for the lessee to cancel, extend, or modify these arrangements vary enormously. Consequently, accounting principles must treat the different legal effects appropriately.

5) There must be clear and unambiguous definitions of leased assets and obligations, and the basis of their measurement.

6) Both lessor and lessee accounting must be covered comprehensively. Lessor accounting raises complex issues that should be fully and properly debated and not simply considered the mirror image of the lessee's accounting.

7) Lessor accounting should take into account the economic consequences of material tax benefits and the time value of money in the measurement of leased assets and the recognition of income.

8) The introduction of simplicity into lessee accounting, whether tax based or not, so that otherwise sound economic transactions are not avoided because of cost benefit considerations. There must be a clear way to account for immaterial leases, which would presumably be similar to the current operating lease method. Here, a more robust disclosure may be useful, including explaining leasing policies for classes of assets, disclosing expected actions at lease expiry, disclosing calculations that the analysts need like the present value of lease payments using the unique incremental borrowing rate for each lease, disclosing the weighted average incremental borrowing rate of leases combined and the expected future rent expense to be paid for immaterial leases of core equipment.

9) With respect to small and medium enterprises ('SMEs'), the new standard should have a modular structure, with varying degrees of information and complexity required, in relation to the kind of lease transaction and lessee. Large and small-ticket transactions should be treated appropriately, but not necessarily identically.

10) Leased and owned assets should be clearly distinguished in the balance sheet of the lessee.

11) The profit and loss implications of a changed treatment of lease payments should be carefully considered. When the annual payments associated with an operating lease with no purchase option correspond to the cost of using the leased asset, any capitalization of the lease should not alter the P&L result.

To see the joint communication and other related accounting documents, please visit, www.elfaonline.org/accounting/#FAS13.