The Financial Reporting Council (FRC) has made it clear it cannot support the IASB's plans for changes to accounting for leases, saying the level of complexity in the proposals needs to be 'substantially reduced' or it will be difficult for users to understand financial statements.
The FRC's comments - available HERE - are made in its response to the IASB's consultation on ED/2013/6 Leases.
The regulator says it agrees with the ED's focus and, in particular, with 'the need to report useful information about the amounts, timing and uncertainty of cash flows arising from a lease.'
However, the FRC says it has 'significant concerns regarding the dual approach to measurement and the complexity this introduces into the proposals'. As well as making it harder for users to understand the financial statements, the FRC says the 'extensive and very detailed' record-keeping and disclosure requirements are likely to be expensive for preparers. It says it doubts 'whether the benefits of the proposals outweigh the costs arising from the complexity'.
The FRC maintains that the dual approach proposed in the ED is 'difficult to apply in practice as it requires a high degree of judgment in determining whether the lessee is expected to consume more than an insignificant portion of the economic benefits embedded within the underlying asset'.
There are also concerns about how different users will interpret terms such as 'insignificant', 'substantially all' and 'major' used in the ED. The FRC says this approach to classification may give rise to situations whereby the accounting treatment for two similar leases is different, which has the potential to confuse users of the financial statements.
If the dual approach is maintained, the FRC says the distinction between finance leases and operating leases in IAS 17Leases should be retained to reduce complexity and increase understandability. It warns that under the ED proposals there is the possibility for lessor to apply three different accounting treatments to the same asset during its life.
The FRC wants the IASB to clarify when a change in the lease term should be accounted for as a reassessment of the lease term and when it should be accounted for as a new lease, and expresses concerns over the term 'significant economic incentive'. With regard to variable lease payments, the FRC wants the IASB to provide further guidance for the term 'in-substance' fixed lease payments, saying the examples provided in the ED are insufficient.
The IASB concluded a series of roundtables on the issue earlier this month.
A spokesman for the organisation said that staff are currently analysing the feedback received through outreach activities, roundtable meetings, and comment letters.
'The boards plan to discuss at a public meeting all of the feedback they have received on the revised Exposure Draft by the end of 2013, following which they will begin redeliberating the proposals,' the spokesman said.
Consultation for the revised ED closed on September 2013 - the ED is available HERE
