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ESMA agrees that improvements to lessor accounting are necessary in particular to reflect better the risks that a lessor incurs with the ownership of a leased asset.
Therefore, ESMA welcomes the IASB’s efforts to improve financial reporting for both lessees and lessors as ESMA believes that the model and principles proposed under the ED will result in a more faithful representation of the financial position of entities that enter into lease contracts. By requiring the recognition of assets and liabilities arising from all lease contracts except for short-term leases, ESMA believes that financial statements will serve as a better basis for determining financial ratios (i.e. leverage), thus contributing to increased transparency for users of financial statements.
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 recognise 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.
ESMA notes that the IASB has 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.
In order to promote consistent application and limit the potential issues of enforceability that might arise, ESMA encourages the IASB to 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. In addition, ESMA would like to ask the IASB to clarify further the notions of “substantially all”, “major part” and “insignificant”.
ESMA welcomes IASB’s and FASB’s commitment to achieving the goal of convergence between the two sets of standards and encourages both Boards to continue their efforts to achieve a single set of accounting requirements.