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The EBF's primary concerns are as follows:
Project objectives
The objective of the project is to improve the quality and comparability of financial reporting, by providing greater transparency about leverage, assets used in operations and the inherent risks. The EBF does not believe that these objectives have been met. The proposals would require information in respect of leases to be presented in different balance sheet and income statement lines, and so would decrease transparency. Nor does the EBF believe that the dual model accurately or consistently represents the risks in different leases. If the proposals are not an improvement on IAS 17 ‘Leases’ in terms of the understandability of the information provided, the EBF does not believe they should be pursued.
Conceptual issues
Disclosures
The proposal contains extensive disclosure requirements for both lessees and lessors. New systems would be required to capture and monitor the data, and would require a significant ongoing effort. These requirements are more extensive than if an asset has been acquired by hire-purchase or by loan financing, for example. If the new presentation is meant to improve transparency about lease assets and related risks, the EBF questions why such extensive disclosures would also be required.
Cost/benefits
The proposal is lacking a cost/benefit analysis validating that the proposed new rules will lead to substantial improvements, in comparison with retaining and revising IAS 17. Implementing the proposal will require significant systems changes and resources to comply, yet the EBF does not believe that the proposal will result in more decision-useful information compared to the current standard.
Regulatory implications
There also remains uncertainty about the classification of the right of use asset which will have wide reaching regulatory implications. This uncertainty is an important concern for the European banking industry. Banks often act as lessee in significant lease contracts, particularly of property e.g. bank branch networks and office buildings. Today, banks are not required to hold any regulatory capital for such leases which are classified as operating leases. However there is concern that the new assets should be treated as intangible assets, potentially resulting in a 100% deduction from regulatory capital. The industry is in need of certainty that the right of use asset is a tangible asset, and while this is not a focus for the IASB, the EBF would appreciate if the IASB could be sensitive to this issue, and make the intention of the standard clearer. For example, the ED refers to amortization, as for an intangible, but otherwise references to IAS 16, as for tangible assets.
In light of the substantial concerns expressed above, the EBF strongly encourages IASB to further reconsider the current proposal. In this respect and considering that the IAS 17 standard works well, the EBF recommends – in consistency with EFRAG’s view – improving supplementary disclosures within the current model under IAS 17 in the short term, whilst more work is done within the conceptual framework on the nature of the right of use asset and the residual asset, on whether economic compulsion is relevant to the determination of a liability, the difference between executory contracts and leases, the presentation of interest on financial instruments, and further consideration is given to the relevance of the rate of consumption of an asset to its accounting.