Businesses voice stiff opposition to lease proposal

BY KEN TYSIAC
September 18, 2013

The converged proposal on financial reporting for leases faces significant opposition from businesses from around the globe.

Friday was the final day for the public to submit comment letters on the reproposal to FASB and the International Accounting Standards Board (IASB). An analysis of comment letters on the proposed standard submitted by business and industry respondents that would be considered financial statement preparers (excluding accounting firms) revealed little support and substantial opposition to the proposal.

Of the 268 letters analyzed, 212 expressed a decidedly negative opinion of the proposal, which would place leases on the balance sheet and create a dual-recognition model for lessees. Just 25 letters indicated substantial support for the proposal, and 31 letters did not express a clear positive or negative overall opinion of the proposal. Additional letters continued to be posted to FASB’s site after this analysis; as of Wednesday morning (Eastern time in the United States), 528 comment letters had been posted.

The objections from businesses came from various industries and nations:

  • China Telecom said the standard is difficult to understand, apply, and implement, and that the differences between lessor and lessee accounting are logically unsound.
  • Swiss oil and gas offshore drilling contractor Noble Corp. said the proposal introduces unnecessary judgments and complexity into revenue recognition, and reduces transparency and comparability of information.
  • Finnish banking company FFFS said the proposal is unnecessarily complex, will not improve transparency, and does not reflect the economics of leases.
  • U.S. retailer Dollar General said the proposal does not solve the problems with complexity and lack of comparability that exist in current lease accounting.
  • Wesfarmers Limited, one of Australia’s largest listed companies with operations in retail, mining, insurance, chemicals, and energy, said IAS 17 should be retained for leases because on-balance-sheet recognition of leases (including property) is conceptually inconsistent with the accounting treatment of economically similar arrangements.
  • North American railcar manufacturing and leasing company Trinity Industries stated its objections in bold, underlined type: “[W]e do not agree with the changes that are proposed in the Exposure Draft.
  • Delta Airlines noted that former IASB Chairman Sir David Tweedie once said that one of his ambitions is to fly in an aircraft that is on an airline’s balance sheet. But Delta concluded that although the ED is consistent with Tweedie’s objective, the benefits of this particular proposal do not outweigh the costs.


John Hepp, CPA, a partner in Grant Thornton’s National Professional Standards Group, said the opposition will make it difficult for the boards to move forward with the proposal. He said there’s a possibility the IASB would move forward, although he predicted the model would be aligned more closely with the original 2010 ED if the IASB does move ahead alone with an approach that is not converged.

“I have a hard time seeing the FASB going forward,” Hepp said. “… Would they be able to get four votes to go forward with the current exposure draft? It’s touch and go. It would depend on, what’s the alternative. If the alternative would be to just abandon the project, maybe.”

FASB voted 4–3 to issue the proposal for exposure. But former FASB Chairman Leslie Seidman, who voted in favor of issuing the ED, has retired from the board; her spot on the board is now occupied by former SEC Chief Accountant James Kroeker. FASB’s own Investor Advisory Committee (IAC) also has opposed the proposal.

The proposal calls for lessees to report a straight-line lease expense in their income statement for most real estate leases. In most equipment and vehicle leases, lessees would recognize a lease as a nonfinancial asset measured at cost, less amortization. This would result in a total lease expense that generally would decrease over the lease term

The boards have expressed a desire to have a final standard in place by 2014, although implementation is not expected to occur earlier than fiscal years beginning Jan. 1, 2017.

Common objections expressed in the comment letters included:

  • Complexity and increased costs for preparers. “Industrywide in the United States, we believe this change will probably cost preparers hundreds of millions dollars if not over a billion dollars to implement and annually maintain records for this proposed accounting standard,” wrote U.S. health care company Allergan.
  • Lack of significant improvements for financial statement users. “The limited benefit for sophisticated users does not justify the tremendous cost of implementation when there is virtually no benefit for unsophisticated users,” said U.S. diversified energy company PNM Resources.
  • Failure of the proposal to faithfully represent the economics of leasing. The right-of-use asset concept “distorts the reporting of the economics of the operating lease bargain,” wrote U.S. finance corporation Residco.


A popular alternative method suggested by many commenters is to improve transparency through simply using current standards with enhanced disclosures.

“We feel that enhanced disclosure requirements alone can sufficiently address the concerns with current lease accounting,” said U.S., U.K., and Canadian truck leasing service Ryder.

The enhanced disclosures tactic also was advocated by the IAC—FASB’s investor advisory group. But keeping the current standards in place fails to achieve one of the objectives of the project, which is creating international convergence of the FASB and IASB standards.

Some businesses with international operations are eager for the consistency that a converged standard could deliver.

“We believe it is critical that the boards develop full convergence for all aspects of accounting for leases,” Ford Motor Co. said in its comment letter.

Some objections were expressed to the proposal’s suggestions to bring leases onto the balance sheet and use a dual-recognition approach, although many commenters also supported those concepts. The proposal also did receive some support.

  • U.K. and Finnish independent regional airline group Flybe indicated its broad support because it said the proposal removes inconsistencies and anomalies, achieving a greater consistency for lease arrangements.
  • Chinese oil and gas producer Petrochina said the proposal will provide users with more objective information—but called on the boards to simplify presentation and disclosure to reduce complexity and costs.
  • U.S.-based Washington Real Estate Investment Trust said the revised proposal adequately addressed its concerns with the original proposal.


But even some companies that expressed a positive view of the proposal asked for additional time for transition. And many of the comments were similar to those of global oil and gas company Chevron.

“[T]he boards have gone well beyond the original objective of improving transparency around lease obligations, resulting in unnecessary complexity and excessive costs for financial statement preparers, with little resulting benefit for financial statement users,” Chevron said.

Ken Tysiac ( ktysiac@aicpa.org ) is a JofA senior editor.

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