Ernst & Young recommends IASB and FASB increase impact assessment and field-testing timeframe on “Leases” exposure draft
London, 2 December 2010 - Ernst & Young yesterday provided comments in a letter to the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) that the proposals in the Boards’ joint exposure draft Leases require significant changes, additional field testing and stakeholder consultation before an operational standard can be achieved.
Ernst & Young’s Global IFRS Leader, Ruth Picker says: “We support the work the Boards have done on working towards a converged leasing standard and recognizing leases on balance sheet if done in a practical and principled manner. However, there are conceptual and practical issues with the model proposed with respect to the recognition and measurement of the assets and liabilities by both lessees and lessors. Moreover, we do not believe the lessor model has been thoroughly developed and that more work is necessary before a final standard is issued.”
Recognition and measurement
Ernst & Young is concerned about the conceptual basis for a lessee recognizing a liability for lease payments that do not represent an unconditional obligation and similarly for a lessor recognizing a receivable for amounts other than those that the lessor has an unconditional right to receive. The model requires significant use of estimation in determining both the length of the lease term and amount of the rental payments due, which would require a significant amount of judgment to be applied and pose a risk to reliable estimates. Ernst & Young has proposed that amounts recognized be limited to all non-cancellable and unavoidable payments owed by the lessee.
Ernst & Young does not believe that the proposals related to lessor accounting are as fully developed as the proposals for lessee accounting. The Boards should undertake efforts, including additional fieldwork, to better understand the financial statement effects of the proposed model.
Ruth Picker adds: “A new standard on leases will impact nearly all entities and the consequences of some aspects of the proposed model are only beginning to become apparent. The Boards need to give careful further consideration to the proposals for both lessees and lessors and provide more time for field-testing and for constituents to comment on them.”
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