Reactions to the Leases Exposure Draft Mark Venus 5 November 2010

Reactions to the Leases ED The Leaseurope position Leasing in Europe Project motivations Lessee accounting Lessor accounting Boundaries Fudges and approximations

Reactions to the Leases ED Leasing in Europe Real estate Machines & industrial equipment ICT Commercial vehicles Cars Rolling stock, ships, aircraft Other Excluding real estate, if real estate is included, average of €35,000 Sources: Leaseurope 2009 Annual Survey of European Leasing and SME Access to Finance, Flash Eurobarometer, conducted by TNS Sofres/EOS Gallup Europe on behalf of the European Commission, 2005, covers EU15 % of new volumes 2009 €209 billion new leases granted in 2009 More than 5 million individual contracts Average contract size of €27,000 Types of assets leased: Industry responsible for financing 20% of all European equipment investment Crucial for business of all sizes to be able to access the assets they need: 6% 9% 19% 31% 45% 50% 51% 0%10%20%30%40%50%60% Capital (venture) Capital (private) Factoring Loans < 3 years Loans > 3 years Overdraft Leasing and renting Types of finance used by European SMEs

Reactions to the Leases ED Leaseurope position on motivations Some leases are structured, but leasing is not a structuring industry IAS 17 does not have bright lines, but its application is influenced by FAS 13 and the 10% and 75% rules The right answer would be to Remove bright lines from FAS 13 Tighten up IAS 17 disclosure requirements A few thousand structured leases should not call into question millions of standard equipment leases

Reactions to the Leases ED Lessee accounting in the ED All leases on lessee balance sheet (right of use), with corresponding financial liability  Operational complexity Rentals in optional extension periods and contingent rentals are included in the measurement on an estimated basis  Accounting complexity Purchase options are excluded and accounted for when exercised  OK Asset is depreciated straight line (generally) and liability amortises like a loan  Acceleration of lease costs

Reactions to the Leases ED Leaseurope position on lessee accounting Leases for fungible and readily exchangeable equipment should be considered as service contracts Leases for less than 12 months should receive the same treatment Rentals and optional period and contingent rentals (those not linked to a rate or index) do not constitute lessee liabilities and should be ignored Asset and liability should depreciate via the annuity method to remain aligned (except non standard payment patterns)

Reactions to the Leases ED Lessor accounting in the ED Short term  Operating lease accounting Performance Obligation  Retain the underlying asset, create a new asset (receivable), and a new liability (performance obligation) De-recognition  Recognise a receivable and reduce value of underlying asset accordingly, leaving a residual value Transfer of control and all but a trivial portion of risks and benefits  Recognise an asset sale and a financing operation Investment property  Apply IAS 40 unless using historic cost option

Reactions to the Leases ED Leaseurope position on lessor accounting Performance Obligation is an accounting aberration Does signing a contract create a new asset ?? How does impairment of the underlying asset work ?? Leave IAS 40 as it is All other leases can be catered for by De-recognition Accruals accounting for short leases and leases that are service contracts Rentals in optional periods and contingent rentals are not assets, and should be excluded

Reactions to the Leases ED Boundaries in the ED Lease versus purchase ED proposes that leases that transfer control and all but trivial amount of risks and benefits are NOT leases, but sales of the underlying asset Lease versus service ED reproduces IFRIC 4 guidance around the notion of specific asset and transfer of control Leases of intangibles Leases of all intangibles are scoped out, contrary to existing IAS 17

Reactions to the Leases ED Leaseurope position on boundaries Leases are not sales and purchases and should not be accounted for as such  Danger: recognition of property rights, supervisory issues and tax status Lease versus service boundary must be more clearly defined & scope to consider leases of fungible and exchangeable assets as being service contracts must be introduced  Gain: limitation of lessee complexity and right of use Intangibles should be ‘in’  Convergence with US should not imply regression

Reactions to the Leases ED Fudges and approximations in ED Nature of RoU (intangible/tangible): issue avoided Disclosures Major expansion of requirements Inconsistent with an ‘improved’ model Term option penalties: taken into account, but not defined Residual value guarantees: inconsistent treatment between lessors and lessees Impairment issue under Performance Obligation avoided Sale and lease back: a different definition of ‘sales’ Inconsistent with right of use model Cost/benefit analysis: superficial treatment only

Reactions to the Leases ED Conclusion ED is probably unworkable as it stands, IASB should take the time to get it right, which is feasible Beyond the conceptual flaws Working group not used properly Reality of the leasing market not catered for Lip service paid to cost benefit to date and too little time going forward Project driven by convergence agenda

Reactions to the Leases Exposure Draft Mark Venus 5 November 2010