08 December 2016

Accountancy Europe: Response to EFRAG´s consultation on the endorsement of IFRS 16 Leases

The Federation of European Accountants commented on EFRAG’s Preliminary Consultation Document to assist constituents to participate in the development of its endorsement advice on IFRS 16 Leases to the EC.

The endorsement of the Standard should be done swiftly and at the latest by the first quarter of 2017, as projected by EFRAG, to allow sufficient time for implementation, or even early adoption of IFRS 16 by entities that wish to apply IFRS 16 at the same time as IFRS 15 Revenue from Contracts with Customers.

Without diminishing the Federation´s support to swift endorsement, the Federation observes that IFRS 16 will create some implementation challenges due to the fact that it requires judgement to be applied in some areas (also highlighted in the EFRAG draft endorsement advice). Still, those implementation challenges do not appear to us more significant than those existing in applying some other standards. That being said, in addition to the application challenges that exist currently under IAS 17, and that will have a more significant impact due to the IFRS 16 accounting (lease term and discount rate), the Federation confirms that it has identified some new application challenges around the:

• Definition of a lease versus the definition of a service - the new definition of a lease requires more careful reflection to classify arrangements that comprise a lease (formerly IFRIC 4). Assessing whether an arrangement meets the definition of a lease might involve significant judgement for some arrangements in some industries (e.g. energy, telco…), in particular for the arrangements where the “how and for what purpose the asset is used” could be.

• considered as “predetermined”. The “involvement in the design” of the asset can also be a challenging aspect of the standard in those cases. Consequently, if the distinction between a lease and a service is in most cases easy to perform, it might be difficult to do and audit in some specific businesses. Still, this difficulty is no more important than certain other areas where judgement is required to be applied when financial statements are being prepared.

• Definition of ‘‘in-substance fixed payments’’– the decision whether a contingent payment is an in-substance fixed lease payment requires significant judgement, especially since the standard provides only restricted guidance on how to interpret the term. 

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