International Accounting Standards Board chairman Hans Hoogervorst said in a speech Wednesday the IASB is aware of concerns about the potential costs of the converged lease accounting standards that the IASB has been developing with the U.S. Financial Accounting Standards Board, and he assured the audience that those costs would be kept to a minimum.
With the proposed standard, many companies such as airlines will be bringing leases onto their balance sheets for the first time.
“The leases standard is controversial for several reasons,” Hoogervorst said at an Accounting Standards Board of Japan seminar in Tokyo. “It is intellectually complex; many companies would like to keep their leases off-balance sheet or they are concerned about implementation costs. Some of these problems we can fix, others will be more challenging. First of all I would like to point out that the overwhelming majority of users have told us they agree with our analysis that leases contain a heavy element of financing. They do not like the present situation, in which they have to make their own estimates of the hidden leverage underlying lease contracts. They simply want to see leases on the balance sheet and want the rigor and comparability that only an accounting standard can offer. That said, we have also heard the concerns from preparers regarding the cost of implementing the changes. We take these concerns very seriously. As we take our final decision in the next couple of months you can rest assured that we will do our utmost to keep these costs at a minimum.'
Hoogervorst pointed out that the IASB and FASB have already made some decisions designed to reduce the implementation costs of the new standards, such as the exclusion of short-term leases and most variable lease payments from the requirement, and the likelihood of focusing most of the changes on lessee accounting.
“We will seek further improvements by trying to exclude as much as possible what I call 'small ticket' items," he said. "One possibility is whether to permit our requirements to be applied to a portfolio of leases—for example, if an entity leases 100 photocopiers—then those leases could be accounted for as one item. We may also look to further simplify the distinction between what we call type A’ and type B’ leases. We will probably also limit the changes to lessor accounting, as many do not consider lessor accounting to be especially broken. These are all decisions we will look to take in the coming months.”
Hoogervorst also listed several of the benefits that the new leasing standards would bring to investors, as well as financial statement preparers and companies.
“We have found out that many investors, while making their adjustments to balance sheets actually exaggerate the implicit leverage in leases,” he said. “So paradoxically, the leases standard will make many companies look better in the eyes of investors! Moreover, I am also convinced that the leases standard will serve as an eye-opener to some executives. When we brought the pension liability to the balance sheet many years ago, there were quite a few executives who for the first time realized the full extent of their pension obligations. Similarly, I expect that more than a few executives are not fully aware of the implicit leverage caused by leases. The leases standard will help them to make better-reasoned decisions between purchasing and leasing.”