09 September 2013

ESMA commented to EFRAG on IASB ED Leases

ESMA disagrees with EFRAG’s proposal to delay the finalisation of this ED and to require only relevant disclosures on lease arrangements instead of replacing IAS 17. ESMA believes that the need for better recognition, measurement and presentation requirements cannot be achieved simply by improved disclosure requirements. According to the CFA report “Financial Reporting Disclosures” this type of substitution is one of the key sources of complexity in financial statements. Further, paragraph 18 of IAS 1 – Presentation of Financial Statements does not allow entities to rectify inappropriate accounting policies by notes or explanatory material.

ESMA agrees with the IASB’s decision to propose a dual model for accounting for leases as this better reflects the significant differences in the economics of leases depending on the substance of the contract and ESMA considers it an improvement to the 2010 ED. In addition, ESMA believes that the lessor accounting model has been improved so that most equipment lessors will recognize a lease receivable and a retained interest in the underlying asset and ESMA agrees with withdrawing the performance liability proposal. However, ESMA is concerned that structuring opportunities and issues of enforceability might occur for the lessees, as further explained in paragraph 9 in the Appendix to this letter.

ESMA does not agree with EFRAG that assets and liabilities arising from type B leases should not be recognised in the statement of financial position. ESMA does agree with EFRAG that the calculation of amortisation on the right-of-use asset in the case of a type B lease is not consistent with current accounting literature, but accepts this will improve the presentation of lease costs in the statement of comprehensive income.

ESMA disagrees with extending the scope exemption proposed by EFRAG as ESMA agrees with the definition of short-term leases proposed in the ED.

ESMA noted that the IASB proposed some practical solutions like the unwinding of the residual asset and the determination of the amortisation of the right-of-use asset by the lessee for a type B lease. These solutions have in common that they will be easier for issuers to apply, but they are not consistent with the principles in other IFRSs and lack conceptual justification. Therefore, ESMA urges the IASB to ensure that entities are not allowed to apply these solutions by analogy to other possible situations not specifically addressed by the IFRSs.

ESMA agrees with EFRAG that, in order to promote consistent application and limit potential issues of enforceability that might arise, the IASB should develop additional guidance on the assessment of the right to control the use of an asset or when protective rights prevent a lessee from being able to direct the use of the asset. Furthermore, ESMA would like to ask the IASB to clarify further the notions of “substantially all”, “major part” and “insignificant”.

Full comment letter

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