CURRENT ISSUES: LEASES

In August 2010, an exposure draft on leases was published proposing some significant changes to the current accounting treatment of leased assets. The proposed changes include the following:

1. The current model of classification of leases under IAS 17 Leases would cease to exist.
2. Lessees are required to recognise an asset and liability for all leases (i.e. no 'off-balance sheet' financing).
3. Lessors will have two accounting models as follows:
• Performance obligation approach. This is for lessors who retain exposure to significant risks and rewards associated with the leased asset.
• Derecognition approach. This is for lessors who do not retain exposure to significant risks and rewards associated with the leased asset.

Why change?

The exposure draft has been issued as a result of criticisms about the current accounting treatment for leases. These include:

1. The split between finance and operating leases can result in similar transactions being accounted for very differently, reducing comparability for users of financial statements.
2. The difference in the accounting treatment of finance and operating leases provides opportunities to structure transactions so as to achieve a particular lease classification.
3. The current accounting treatment of operating leases is inconsistent with the definition of assets and liabilities in the Framework. The Framework defines as asset as 'a resource controlled by the entity as a result of past events and from which economic benefits are expected to flow to the entity'. A liability is defined as 'a present obligation arising from past events, the settlement of which is expected to result in an outflow of economic resources from the entity'. Under an operating lease, the lessee has the right to use the asset to generate economic benefits and an obligation to make lease payments. However, an asset and liability are not recognised.