EFRAG’s views on ED Leases Final comment letter 15 December 2010

EFRAG position EFRAG agrees with A single right of use model for all lessees, subject to the development of robust criteria for distinguishing between leases and contracts that are in substance service arrangements. EFRAG has a number of concerns We do not support the hybrid model for lessors and believe that a single partial derecognition model should be applied. We believe that the derecognition model should be amended to depict the return that lessors earn on the total investment in the lease, which includes both the receivable and the residual asset. We disagree that amounts payable under options to extend and contingent rentals are included in the measurement of lease assets and liabilities. We believe that options should be recognised and measured separately. We propose to apply the partial derecognition approach also to sale and leaseback transactions. We support a full retrospective transition approach when practicable. EFRAG cover letter

EFRAG position Will the proposals result in more relevant information? EFRAG acknowledges that the right of use model is consistent with the conceptual premise that an asset is a bundle of rights and it can be supported, subject to the development of robust criteria for distinguishing between leases and contracts that are in substance service arrangements. Lessee’s accounting model (Question 1)

EFRAG position One accounting approach for lessors EFRAG supports a single partial derecognition model for lessors. EFRAG believes that the performance obligation model is not consistent with the conceptual premise that the asset is a bundle of rights. Lessors’ accounting model (Question 2)

EFRAG position An exemption for short-term leases EFRAG supports the short-term lease exemption granted to lessors. EFRAG believes that the simplification granted to lessees is not sufficient. EFRAG supports granting a short-term lease exemption also to lessees. Short-term leases (Question 3)

EFRAG position Boundary between leases and service arrangements EFRAG believes that the boundary between leases and contracts that are in substance service arrangements will be difficult to determine. EFRAG thinks that the IASB should further clarify and improve the criteria to distinguish leases from service arrangements. EFRAG believes that the criteria to identify a lease put excessive weight on the physical delivery or access to the underlying physical asset. The criteria should instead focus on the benefit or the right-of-use that is actually transferred with the lease itself. Boundary between leases and sales/purchases EFRAG advises to align the criteria to identify a sale/purchase with those in the Revenue Recognition proposals. However, EFRAG believes that if there was a single derecognition approach for lessors (as EFRAG supports) it would be unnecessary to distinguish between a lease and a sale/purchase. Definition of a lease (Question 4)

EFRAG position Exemption for investment property at FVTPL EFRAG agrees with the exemption for investment property carried at fair value through profit and loss in accordance with IAS 40. Leases of intangibles should be included in the scope EFRAG disagrees with the decision that the proposals should not be applied to leases of intangible assets. Interaction with IFRIC 12 EFRAG advises to include a scope exemption for public-to-private arrangements that are in the scope of IFRIC 12 Service Concession Arrangements Scope of the proposals (Question 5)

EFRAG position Identification of separate components EFRAG agrees that an entity should separate services that are distinct based on the criteria in the Revenue Recognition proposals. When a contract includes both lease and non-distinct service components, EFRAG believes that the lessee should assess which is the predominant component, and treat the whole contract correspondingly. When a contract includes both lease and non-distinct service components, EFRAG believes that the lessor should always separate the service components regardless of the accounting approach that the lessor is applying. Service and lease components (Question 6)

EFRAG position Options should be valued separately EFRAG disagrees that amounts payable under options to extend a lease should be included in the measurement of the lease assets and liabilities. EFRAG believes that purchase options that are not bargain purchase options should be treated as options to extend – that is, that they should be recognised and measured separately. EFRAG believes that options to purchase the underlying asset and/or extend the lease term should be accounted for, but their measurement should reflect their values rather than the gross cash flows resulting from the exercise. Include virtually certain extensions only In the event that amounts payable under options to extend were to be included in the measurement of lease assets and liabilities, EFRAG would support including only those amounts that are virtually certain, as required in IAS 17. Purchase options and Lease term (Question 7 and 8)

EFRAG position Performance and usage-based contingent payments EFRAG believes that contingent rentals that are under the control of the lessee, such as those based on either use or performance of the underlying asset, are not liabilities for the lessee or assets for the lessor; therefore EFRAG believes that these contingent rentals should not be included in the measurement of the lease assets and liabilities. Use of most likely outcome EFRAG agrees with the inclusion of contingent rentals based on an index or rate, but would include them based on the most likely outcome (and not on an expected outcome basis). Contingent rentals (Question 9)

EFRAG position Impact of reassessment If the EFRAG’s position on options and contingent rentals were not followed: EFRAG agrees that it would be onerous to require a periodic reassessment of changes in the obligation and receivable arising from changes in the lease term or contingent payments. EFRAG agrees that lease assets and liabilities should be remeasured only when changes in facts and circumstances indicate that there may have been significant variations; EFRAG that when the a lessor applies a derecognition approach, remeasurement of usage-based contingent rentals should be charged to profit and loss. Reassessment (Question 10)

EFRAG position A different approach for sale and leasebacks EFRAG supports the application of the partial derecognition model also to sale and leaseback transactions. Under this model the parties recognise the sale of the residual asset and the financing of the right-to-use retained by the seller/lessee. If the IASB model were to be confirmed, EFRAG disagrees with the requirement that the buyer/lessor shall apply the performance obligation model to the leaseback transaction. EFRAG supports a partial derecognition model for all leases. Sale and leaseback transactions (Question 11)

EFRAG position PresentationEFRAG supports the presentation requirements for the statement of comprehensive income and the statement of financial position. Linked presentation of performance obligation If the IASB were to confirm the performance obligation model, EFRAG would not agree with its linked presentation in the lessor’s statement of financial position. Interaction with IAS 7 requirements EFRAG notes that the presentation requirements for interest payments in the statement of cash flows conflict with the current requirements in IAS 7. EFRAG believes that changes in the cash flow statement should be addressed in the Financial Statements Presentation project. Presentation (Question 12, 13 and 14)

EFRAG position Extensive disclosure requirements EFRAG welcomes the requirement in paragraph 71 of the proposals that an entity is not obliged to provide all the disclosures but should consider the level of disclosures appropriate to identify and explain the amounts recognised in the financial statements arising from leases; and describe how leases may affect the amount, timing and uncertainty of future cash flows. Disclosures (Question 15)

EFRAG position Transition requirements EFRAG supports a full retrospective approach of the new proposals unless impracticable, in accordance with the requirements of IAS 8. Extend the outreach activities on assessment of costs and benefits EFRAG encourages the IASB to expand its outreach activities to collect additional information on the costs associated with the implementation of the proposals and their benefits. Transition and Costs and Benefits (Question 16 and 17)

EFRAG position Initial direct costs EFRAG advises the IASB to use consistent concepts and wording across the different projects that are affected by this issue (revenue recognition, insurance contracts and leases). IAS 36 and performance obligation approach EFRAG does not support the performance obligation approach. Moreover, EFRAG believes that it is unclear how IAS 36 Impairment of Assets should be applied to the underlying asset. Subsequent measurement of residual asset EFRAG believes that the residual asset in the derecognition approach should be remeasured to provide an appropriate presentation of the return earned by the lessor on the lease transaction. Other matters (Question 18)