This Comment Letter was sent by BDO Global Coordination B.V. on behalf of BDO International, to the International Accounting Standards Board on 17 July 2009:
Dear Sir,
Discussion Paper Leases - Preliminary Views
We are pleased to have the opportunity to comment on the above discussion paper issued by the International Accounting Standards Board (IASB), on behalf of BDO International1.
In general, we support the broad principles set out in the paper. However, we believe that such a significant change to current practice justifies substantially more guidance, both on the reasoning behind the change and on the application of the new standards. Key concepts such as the nature of the asset that is recognised should be made sufficiently clear to drive the remainder of the accounting.
More fundamentally, because there are substantial unresolved areas, including the lack of a robust boundary between leases and other (executory) contracts, we believe that it would be premature to move immediately into issuing an exposure draft. Instead, the Boards should consider issuing a further discussion paper which deals with those other areas, which will help to focus user comments on the Boards’ proposals.
We are particularly concerned that the issue of a standard for lessees which is not accompanied by parallel guidance for lessors will lead to problems in the future when the lessor standard is written. The only way to ensure consistency, or known inconsistency, between lessor and lessee accounting is to draft both standards together, even if this does result in delays to the project as a whole: it is more important to get it right than to get it quickly. Full proposals for lessor accounting could be included in a second draft of the discussion paper, again before the exposure draft phase.
We also believe that in areas where other standards are developing at present, such as financial instruments and revenue, it is necessary to ensure consistency of approach. We note, for example, that the definition of an asset in the revenue discussion paper is inconsistent with the definition of an asset in the leases discussion paper; an executory contract for the provision of services would appear to give rise to an asset from a revenue perspective, but we doubt that there is an intention that such a contract would be within the scope of the guidance for leases. While it may be preferable to wait until the financial instruments and revenue standards are agreed before finalising lease accounting proposals, we appreciate that this may not be practicable within the Board’s desired timetable.
Finally, it is important that agreement between the IASB and FASB on the proposed approach is reached as far as possible, so that a united front can be presented without the risk of accounting arbitrage.
Our comments on the detailed questions included within the discussion paper are attached as an Appendix.
We hope that our comments and suggestions are helpful. Should you wish to discuss any of the points we have raised please contact either Tracey-Lee Massey at +32 2 778 01 30 or Andrew Buchanan at +44 (0)20 7893 3300.
Yours faithfully,
BDO Global Coordination B.V.
Appendix
This Appendix contains responses to the detailed questions asked by the Board.
Chapter 2: Scope of lease accounting standard
Question 1
The Boards tentatively decided to base the scope of the proposed new lease accounting standard on the scope of the existing lease accounting standards.
Do you agree with this proposed approach?
If you disagree with the proposed approach, please describe how you would define the scope of the proposed new standard.
We agree that the scope of the existing lease accounting standards provides a reasonable starting point for the formation of a new standard. In particular, we do not feel it appropriate to defer the publication of an Exposure Draft on leasing on the grounds of scope uncertainty. One of the purposes of an ED is to identify problems with application, and scoping can be dealt with through this mechanism.
It would be of some concern were the proposed standard to be narrow in scope, as this would suggest a move to more rules-based than principles-based standards. If the standard sets out sufficiently broad principles then these should by definition be applicable to a wide range of leasing contracts and so the scope exclusions should be minimal.
It should be noted, though, that the removal of the concept of an operating lease will lead to interpretation difficulties when distinguishing between leasing contracts and contracts for services or other executory contracts. We recommend that as part of the scope section, detailed and unambiguous guidance is provided in this area, including on the separation of contracts which appear to have both lease and service components.
Question 2
Should the proposed new standard exclude non-core asset leases or short-term leases? Please explain why.
Please explain how you would define those leases to be excluded from the scope of the proposed new standard.
The proposed new standard should not exclude either non-core asset leases or short-term leases.
For non-core asset leases the abuse risk of allowing exclusion is too high. In other financial reporting, assets, liabilities, income and expense are classified according to their inherent nature rather than taking into account business-specific uses, and the leasing standard should be the same.
In the case of short-term leases, a specific scope exclusion does not appear necessary, as the more general applicability of accounting standards only to material items should result in the exclusion of leases which would give rise only to small assets and liabilities. Attempting to scope out such leases would be likely to give further opportunities for structuring, for instance through the inclusion of non-substantive break clauses in longer leases.
Chapter 3: Approach to lessee accounting
Question 3
Do you agree with the Boards’ analysis of the rights and obligations, and assets and liabilities arising in a simple lease contract? If you disagree, please explain why.
We agree with the Boards’ analysis of this theoretical and very simple lease contract. We suggest, though, that in the ED the example is expanded or supplemented to be slightly less simple, for instance through inclusion of maintenance obligations, or a right to purchase. This is because an excessively simple example is less likely to capture all potential issues; it also may appear unrealistic to constituents, who may therefore lose confidence in what, conceptually, the standard is trying to achieve.
We also urge the Boards to address the outstanding conceptual and application issues, as the discussion paper at present has a number of significant unresolved questions, such as on scoping and the approach to contingent rentals.
Question 4
The Boards tentatively decided to adopt an approach to lessee accounting that would require the lessee to recognise:
(a) an asset representing its right to use the leased item for the lease term (the right-of-use asset)
(b) a liability for its obligation to pay rentals.
Appendix C describes some possible accounting approaches that were rejected by the Boards.
Do you support the proposed approach?
If you support an alternative approach, please describe the approach and explain
why you support it.
Of the available options, that selected by the Boards appears the most appropriate.
The ‘whole asset approach’ in Appendix C has the virtue of simplicity, and may appeal to certain sub groups of constituents for this reason; it also recognises the intuition that to all intents and purposes the lessee controls the actual leased asset, rather than a more theoretical intangible asset. The liability side is less straightforward, though, and involves a mix of financial and non-financial liabilities which would seem likely to give considerable complexity in practice.
The ‘executory contract’ approach would involve an entirely separate conceptual map and should, at this stage, be set aside.
Question 5
The Boards tentatively decided not to adopt a components approach to lease contracts. Instead, the Boards tentatively decided to adopt an approach whereby the lessee recognises:
(a) a single right-of-use asset that includes rights acquired under options
(b) a single obligation to pay rentals that includes obligations arising under contingent rental arrangements and residual value guarantees.
Do you support this proposed approach? If not, why?
We agree with the principle that a single contract should be accounted for as such. An alternative which involved notional disaggregation would appear to run counter to both the substance and the form of a lease as one contract negotiated in its entirety and giving rise to one asset and one liability.
There may be some concerns about inconsistency between leasing contracts and financial instruments generally. We do not feel, though, that it is appropriate to over-complicate lease accounting if it is possible to give guidance for it as a self-contained area which is relevant to entities who otherwise would not be accounting for complex financial instruments. Moreover, our understanding of the proposed amendments to IAS 39 is that these will reduce or eliminate the existing requirement to account for certain embedded derivatives separately, so any apparent inconsistency will decrease. We believe that the next discussion paper or exposure draft on leasing should take into account the effect of the proposed IAS 39 amendments.
The down side of allowing relatively simple accounting which is not component based is that it increases the pressure on the accuracy of estimates, particularly those relating to contingent or uncertain future events. It is crucial, then, that if the Boards’ tentative decision is retained this is supported by sufficiently robust guidance on the appropriate initial recording of assets and liabilities. The accounting requirements must also be supplemented by disclosure requirements which allow users to understand the complexities in, and risks associated with, lease contracts, in particular for potential future obligations that may not be included in the initial accounting (for example, a lease extension period).
Chapter 4: Initial measurement
Question 6
Do you agree with the Boards’ tentative decision to measure the lessee’s obligation to pay rentals at the present value of the lease payments discounted using the lessee’s incremental borrowing rate?
If you disagree, please explain why and describe how you would initially measure the lessee’s obligation to pay rentals.
The measurement of the liability associated with the obligation to pay rentals should initially be at the present value of the lease payments, with the judgement being whether this present value should be measured using a discount rate specific to the borrower, or by deriving a rate from the lease itself. We see each option as having certain conceptual and practical issues, but suggest that the use of the lessee’s incremental borrowing rate is on balance the better approach, as it results in the recording of the lease asset at the fair value of consideration given and the lease liability at its fair value (which is consistent with guidance for financial instruments).
The use of the interest rate implicit in the lease, while being familiar from existing accounting for finance leases under IAS 17, will be of practical difficulty for leases which are not for a substantial part of the asset’s life. Deriving a rate would involve ascertaining residual value at the end of the lease term, although conventionally short leases that have been treated as operating in nature would not state a residual value.
A concern with using the lessee’s incremental borrowing rate is that two entities signing up to the same lease contract over identical assets would be compelled to record the liability, and hence the asset, at different values. This is an initially counterintuitive result in respect of assets, since the two parties are leasing the same asset. The Boards might consider addressing this concern through an explanation, perhaps within the Basis for Conclusions, of why it is considered an acceptable outcome (or of why it might seem unlikely that this situation would arise, as two entities with significantly different credit profiles may not be able to lease an asset on the same terms).
In any event, more guidance should be provided in this area, particularly for entities which may not have substantive amounts of debt and therefore do not have a ready source of information for their own incremental borrowing rate.
Question 7
Do you agree with the Boards’ tentative decision to initially measure the lessee’s right-of-use asset at cost?
If you disagree, please explain why and describe how you would initially measure the lessee’s right-of-use asset.
We agree that the tentative decision to measure the right of use asset at cost is defensible, as it is based on a broad principle about the acquisition of assets, and there is no reason to alter it here. IAS 16 requires that the cost of an asset is measured at the fair value of the consideration payable, so the proposal is consistent with existing guidance.
Chapter 5: Subsequent measurement
Question 8
The Boards tentatively decided to adopt an amortised cost-based approach to subsequent measurement of both the obligation to pay rentals and the right-of-use asset.
Do you agree with this proposed approach?
If you disagree with the Boards’ proposed approach, please describe the approach to subsequent measurement you would favour and why.
This proposed approach has the virtue of simplicity and is consistent with a proposed accounting approach which is driven by measurement of the liability.
The Boards may wish to consider the appropriate location of guidance on whether the right to use asset may be revalued, and if so in what circumstances. For example, it may be appropriate to cross refer to the guidance in IAS 16 and/or IAS 38, although we appreciate that this will to some extent be influenced by the asset’s classification on the balance sheet as discussed below.
As noted in our response to question 5, we believe that the Board needs to take the newly published amendments to IAS 39 into account when dealing with the accounting for lease contracts. While many leases will contain simple embedded derivatives which the new guidance may not require to be accounted for separately, it will be appropriate for consideration to be given to how leases with more complex arrangements, which might result in fair value measurement of a financial liability under the revisions to IAS 39, should be dealt with.
Question 9
Should a new lease accounting standard permit a lessee to elect to measure its obligation to pay rentals at fair value? Please explain your reasons.
In the interest of consistency of approach, we believe that the introduction of options in standards should be avoided as far as is possible and compatible with appropriate financial reporting.
However, for consistency with the financial instruments standards it may be reasonable to allow designation of the liability at fair value in strictly limited circumstances. Again, this should be consistent with any revisions to IAS 39, and may therefore be restricted to circumstances associated with avoiding an accounting mismatch. It would not seem likely that such circumstances would be common in the context of lease contracts.
Question 10
Should the lessee be required to revise its obligation to pay rentals to reflect changes in its incremental borrowing rate? Please explain your reasons.
If the Boards decide to require the obligation to pay rentals to be revised for changes in the incremental borrowing rate, should revision be made at each reporting date or only when there is a change in the estimated cash flows?
Please explain your reasons.
Remeasurement of existing lease liabilities would be a significant change from current practice and would entail considerable extra cost and effort for preparers. It would also be inconsistent with IAS 39, the current version of which would not support remeasurement of a liability held at amortised cost based on a change in the issuer’s borrowing rate.
Question 11
In developing their preliminary views the Boards decided to specify the required accounting for the obligation to pay rentals. An alternative approach would have been for the Boards to require lessees to account for the obligation to pay rentals in accordance with existing guidance for financial liabilities.
Do you agree with the proposed approach taken by the Boards?
If you disagree, please explain why.
We agree with this proposed approach. Leases are a distinct type of contract and as such the regulations for accounting for them should be separate from the principles for other financial liabilities. Since they are so widely used, it is reasonable to apply the effort to produce specific guidance.
The Boards should consider, though, whether in practice the changes to IAS 39 will mean that the proposed accounting for lease obligations is in fact the same as that being proposed for financial liabilities or, if it is not the same, whether the differences are small enough that they can be eliminated. If it is possible to adopt the same approach for lease and financial liabilities, then a cross reference between the two standards would be the most efficient way of providing guidance.
Question 12
Some Board members think that for some leases the decrease in value of the right-of-use asset should be described as rental expense rather than amortisation or depreciation in the income statement.
Would you support this approach? If so, for which leases? Please explain your reasons.
We do not agree with this proposal.
It is crucial to the success of a new standard based on the approach set out in the discussion paper that all leases are viewed as being on a continuous scale, rather than being disaggregated into two types of leases. It would, therefore, be a backward step to allow or require a different approach to be adopted for assets held under a lease and those assets which have been purchased outright for the purposes of income statement presentation, as it would support further distinctions in the accounting too.
If it is concluded that the asset associated with a lease is described as a right of use asset and included in non-current assets in the balance sheet, then the income statement charge should always be called depreciation or amortisation (depending on whether the asset is recorded as a tangible or intangible asset).
While we appreciate that concerns may arise in connection with those entities that place emphasis on trading performance reported on an EBITDA basis, we believe that this is a reporting and disclosure issue and not one which should affect the accounting for leases.
Chapter 6: Leases with options
Question 13
The Boards tentatively decided that the lessee should recognise an obligation to pay rentals for a specified lease term, ie in a 10-year lease with an option to extend for five years, the lessee must decide whether its liability is an obligation to pay 10 or 15 years of rentals. The Boards tentatively decided that the lease term should be the most likely lease term.
Do you support the proposed approach?
If you disagree with the proposed approach, please describe what alternative approach you would support and why.
We agree with the proposed approach. While it does, necessarily, involve a degree of management judgement which will place a certain level of pressure on both preparers and auditors, this is better than the alternative of mandating either the inclusion or the exclusion of an extension option. We would also strongly resist an alternative based on probability weighting the possible outcomes: we do not feel it appropriate to have the lease term that is accounted for being one which it is not possible will arise in practice.
The Boards’ suggestions on guidance for determining the lease term, in paragraphs 6.38 onwards, are helpful but we are not convinced that it is appropriate to ignore the lessee’s intentions when making the assessment. The suggestions could also be supplemented by a consideration of economic compulsion, where an entity has little realistic choice other than to extend a lease.
The Boards may also wish to consider, depending on the final decision on asset classification, whether to make use of the guidance in IAS 38(94) onwards in respect of the useful life of intangible assets.
Question 14
The Boards tentatively decided to require reassessment of the lease term at each reporting date on the basis of any new facts or circumstances. Changes in the obligation to pay rentals arising from a reassessment of the lease term should be recognised as an adjustment to the carrying amount of the right-of-use asset.
Do you support the proposed approach?
If you disagree with the proposed approach, please describe what alternative approach you would support and why.
As raised in our response to question 10 above, we have some concerns about any requirements to perform annual reassessments without triggers, as these might create an onerous burden on (for example) preparers who may use a large number of small leases. Instead, reassessment should only be required if specific indicators of change have been noted, as suggested by the Boards, “on the basis of any new facts and circumstances”.
The outcome, however, of any reassessment should be included in the cost of the asset rather than shown immediately in the income statement. This is appropriate as it is a reassessment of the period for which the entity will be able to enjoy use of the asset, and therefore is an increase or decrease in the value of the right-of-use asset. This is a practical way of reflecting that the extension might also be viewed as creating a new asset and lease liability arising from the right to enjoy the leased item during the extension period.
Would requiring reassessment of the lease term provide users of financial statements with more relevant information? Please explain why.
Certain user groups will have an interest in changes to lease terms and, since future lease outflows reflect current and future liquidity, some disclosure would seem to be needed. It may, however, be misleading to users to require detailed reassessments each period, if these are not based on firm decisions or very specific changes in circumstances. A highly subjective management assessment each year of the exact probability of each of a range of possible outcomes is unlikely to provide much benefit to a reader, and this level of benefit is unlikely to outweigh the cost implications.
Question 15
The Boards tentatively concluded that purchase options should be accounted for in the same way as options to extend or terminate the lease.
Do you agree with the proposed approach?
If you disagree with the proposed approach, please describe what alternative approach you would support and why.
Treating a purchase option in the same way as proposed for an option to extend, that is by including it in the initial measurement if it is considered to be the most likely option, is consistent with the remainder of proposals and appears to be the best way of representing the substance of a lease: if there is a significant upfront payment with a low rental and eventual purchase price, then the lessee is highly likely to take the option. The accounting should be similar to that arising if the lessee had just purchased the asset, with finance, at the outset.
Chapter 7: Contingent rentals and residual value guarantees
Contingent rentals
Question 16
The Boards propose that the lessee’s obligation to pay rentals should include amounts payable under contingent rental arrangements.
Do you support the proposed approach?
If you disagree with the proposed approach, what alternative approach would you recommend and why?
We agree with the proposed approach, on the basis of consistency with financial instruments accounting (where amortised cost measurement requires an expected cash flows approach), though we have some concerns, described below, about the measurement of the contingent rentals. We also observe that this will be another area where application is difficult in practice, and therefore where a high level of practical guidance will be needed within, or as an appendix to, the standard.
Question 17
The IASB tentatively decided that the measurement of the lessee’s obligation to pay rentals should include a probability-weighted estimate of contingent rentals payable. The FASB tentatively decided that a lessee should measure contingent rentals on the basis of the most likely rental payment. A lessee would determine the most likely amount by considering the range of possible outcomes. However, this measure would not necessarily equal the probability-weighted sum of the possible outcomes.
Which of these approaches to measuring the lessee’s obligation to pay rentals do you support? Please explain your reasons.
We agree with the IASB proposal that the measurement should be based on a probability weighted estimate of amounts payable, as this may limit structuring opportunities, and is also congruent with the direction of IAS 37.
It seems very important that on questions such as this the Boards make every effort to reach agreement so that only one method is proposed.
Question 18
The FASB tentatively decided that if lease rentals are contingent on changes in an index or rate, such as the consumer price index or the prime interest rate, the lessee should measure the obligation to pay rentals using the index or rate existing at the inception of the lease.
Do you support the proposed approach? Please explain your reasons.
While the proposed approach will be easier to apply than anything more complex, it does not appear to represent the situation that a lessee is in when they commit to an arrangement where they expect their payments to increase over time.
We believe that it would be more appropriate to require a best estimate at the outset of future rentals, which is used for the original recording of the asset; subsequent adjustments to these estimates should then be recognised directly in profit or loss. This recommendation is driven by the recognition of the asset, which should be recorded initially at the best possible estimate of cost at that point (which should equate to the fair value of consideration given) and not subsequently adjusted except for by amortisation, impairment, and the effect of a substantive change in the lease obligation arising from, for example, the lessee’s exercise of a break or extension clause.
Question 19
The Boards tentatively decided to require remeasurement of the lessee’s obligation to pay rentals for changes in estimated contingent rental payments.
Do you support the proposed approach? If not, please explain why.
As described above, we support the requirement for remeasurement of the liability with respect to changes in contingent rental payments, providing that the initial measurement of the lease liability has already included a best estimate of these payments.
Question 20
The Boards discussed two possible approaches to recognising all changes in the lessee’s obligation to pay rentals arising from changes in estimated contingent rental payments:
(a) recognise any change in the liability in profit or loss
(b) recognise any change in the liability as an adjustment to the carrying amount of the right-of-use asset.
Which of these two approaches do you support? Please explain your reasons.
If you support neither approach, please describe any alternative approach you would prefer and why.
We suggest that the first option, recognising changes in the liability through profit or loss, is the more appropriate for ensuring that the amount shown as an asset is most informative to users. It is also consistent with the existing guidance in IAS 39 for the reassessment of expected cash flows on debt held at amortised cost, where differences arising are recognised in income.
Ongoing adjustments to an asset carrying value other than through systematic depreciation would lead to confusion over the asset’s nature, and would also reduce comparability between a lease-driven right to use an asset and the asset itself acquired through a financing arrangement. While we appreciate the Boards’ desire to have a separation between these two situations, an ongoing measurement difference of this type does not appear helpful.
Residual value guarantees
Question 21
The Boards tentatively decided that the recognition and measurement requirements for contingent rentals and residual value guarantees should be the same. In particular, the Boards tentatively decided not to require residual value guarantees to be separated from the lease contract and accounted for as derivatives. Do you agree with the proposed approach? If not, what alternative approach would you recommend and why?
We agree that there are insufficient grounds for requiring separation of residual value guarantees from a lease contract if no other variable terms are separated. If the goal of the new standard is to have a widely applicable standard which is, as far as possible, consistent with other standards, then effectively removing or at least significantly reducing requirements to engage in complex accounting such as identifying, separating and valuing embedded derivatives is to be encouraged. Instead, if it is considered likely that payments will be made under a residual value guarantee, these should be included in the initial measurement of the liability and asset, as for extension options.
It should be noted, though, that the requirement to estimate, at the start of a lease, the likelihood of making a payment under such a guarantee, and the expected value of that payment, is non-trivial and may cause difficulties for preparers. As such, the Boards should consider providing additional guidance on the practicalities of making such an estimate. If periodic re-estimation is also to be required, as for changes in contingent rentals, again it will be necessary to prescribe the circumstances under which this is acceptable, in order to reduce the possibility of profit management.
Chapter 8: Presentation
Question 22
Should the lessee’s obligation to pay rentals be presented separately in the statement of financial position? Please explain your reasons.
What additional information would separate presentation provide?
We suggest that the lease liability should be presented separately in the statement of financial position only if it is so material that it is necessary for an understanding of the financial statements.
Question 23
This chapter describes three approaches to presentation of the right-of-use asset in the statement of financial position. How should the right-of-use asset be presented in the statement of financial
position? Please explain your reasons.
What additional disclosures (if any) do you think are necessary under each of the
approaches?
We consider approach (b) to be the most technically appropriate, presenting the right of use asset as an intangible asset. Additional disclosures in the notes to the accounts could then distinguish for users between the types of assets that the rights cover.
This may, however, be harder for a user to understand from the face of the statement of financial position, as the value of the right of use asset is derived from the tangible asset which is the subject of the lease. .Accordingly, if the decision on where such assets should be classified is based on pragmatic ease-of-use considerations, we would agree with the Boards’ tentative decision to include the asset in the category where the leased asset would have been included.
It may also be helpful to add disclosures on the value of underlying leased assets so that in situations of relatively short leases where the initial measurement of the asset is considerably below its list price, a user can tell what level of value of asset base the company is operating from: this is particularly relevant for any industries where return on investment is considered a key performance indicator.
We would strongly discourage further consideration of option (c) as it allows for a disaggregation between two types of leases, which is contrary to the general approach set out in the discussion paper.
On classification, we feel that it would be helpful if the Boards would provide additional guidance on the distinction between current and non-current assets. Short term leases where the right of use asset is included within intangibles may be mismatched with a liability included in current liabilities, leading to issues with working capital measurement: it may be useful to users if this issue is recognised in any eventual accounting standard.
Chapter 9: Other lessee issues
Question 24
Are there any lessee issues not described in this discussion paper that should be addressed in this project? Please describe those issues.
The most notable missing area is guidance on sub-leases, which is a further reason for the Boards to accelerate the standard-writing process for lessors.
Further guidance would also be helpful for lease incentives, sale and leaseback transactions, renegotiation of leases, accounting for costs associated with entering into leases, and separating out arrangements which are only partially leases (for instance, rental of a property with ancillary services also being provided by the lessor or its agent).
Chapter 10: Lessor accounting
Our responses to the questions on lessor accounting are given below, however as described above we believe that this needs to be dealt with more thoroughly now, with the aim of releasing a standard which covers accounting by both lessees and lessors.
Question 25
Do you think that a lessor’s right to receive rentals under a lease meets the definition of an asset? Please explain your reasons.
If it is accepted that the lessee’s obligation to pay rentals for the whole lease life constitutes a liability, then symmetry would dictate that the lessor’s right to receive those rentals should be treated as an asset, though there is a separate debate to be had on the desirability of symmetry between lessee and lessor accounting. Full consideration also needs to be given to the consistency of these proposals with those contained in the discussion paper on revenue recognition which would appear to have a definition of an asset which differs from that included in the leases discussion paper.
Question 26
This chapter describes two possible approaches to lessor accounting under a right-of-use model: (a) derecognition of the leased item by the lessor or (b) recognition of a performance obligation by the lessor.
Which of these two approaches do you support? Please explain your reasons.
We support the first approach, of derecognition of the whole or part of the leased asset by the lessor. This has two benefits. First, it provides a clear message to users of the accounts that the asset in question is no longer available for use by the lessee in its current form. Secondly, as expressed in paragraph 10.9 of the discussion paper, the lessor does not have a liability because it has no direct future outflow of economic benefits, only an obligation to make the asset available; essentially, the lessor has disposed of part or all of the asset. A complex model where the underlying asset is retained on balance sheet while both an asset and a liability with a conceptually obscure meaning would not achieve clarity of communication with users.
Question 27
Should the Boards explore when it would be appropriate for a lessor to recognise income at the inception of the lease? Please explain your reasons.
This issue would seem to be more appropriately explored as part of the projects on revenue and derecognition.
Question 28
Should accounting for investment properties be included within the scope of any proposed new standard on lessor accounting? Please explain your reasons.
As investment properties are already addressed in IAS 40, there is no need for them to be scoped into a new leasing standard: it seems more efficient to leave all guidance in respect of investment properties in one place. This is an area for industry-specific consultation, as property investment groups have business models which may be more compatible with IAS 40 than with any more general leasing standard.
Question 29
Are there any lessor accounting issues not described in this discussion paper that the Boards should consider? Please describe those issues.
The specific lessor accounting issues that would merit further consideration are similar to those described above for lessees. More generally, though, we feel that a close examination of the conceptual thinking behind lessor accounting must be undertaken, and agreement reached on this, before the standard for lessee accounting proceeds further.
1 BDO International is a world wide network of public accounting firms, called BDO Member Firms, serving international clients. Each BDO Member Firm is an independent legal entity in its own country. The network is coordinated by BDO Global Coordination B.V., incorporated in the Netherlands, with an office in Brussels, Belgium, where the International Executive Office is located.