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“The review of IAS17, the current international standard for leases, is probably one of the most important issues the European leasing industry faces today.

“Today’s model for lease accounting contains a number of flaws that the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) intend to address. However, in doing so, they should be careful not to over-engineer accounting treatment for leases. The European leasing industry would not like to see a standard that is so complex that it may overshadow the economic benefits of the products they provide.”

Those words are taken from Leaseurope’s first press release on lease accounting in December 2008. They are every bit as relevant in 2015 as they were then. The IASB says that it will finalise its new accounting standard by the end of 2015, and in the US the FASB will also publish its own (separate) standard at the same time.

In 2008 Leaseurope set out to provide high-quality, constructive industry input to the standard setters. This was needed in part to offset the rhetoric of those who argued then - and continue to argue - that the whole purpose of leasing is to allow companies to mislead users of their financial statements.

More importantly, we wanted the standard setters to have practical industry insight so they could address the issues with the existing accounting model without causing unnecessary cost or uncertainty for lessees.

Slow and bureaucratic

Developing a new accounting standard is a slow and bureaucratic process that takes place mostly in public. Over the course of the last six years or so, and including three separate consultation periods, the standard setters have edged towards a new accounting model for leases that has at least some logic to it.

The “right of use” model captures on the lessee’s balance sheet the value of the committed lease payments, which will often (but certainly not always) approximate to the value of the equipment in use.

Is this useful information for users of financial accounts? It’s probably best to leave the investors to answer that, but it’s clear that there are mixed views among them.

This isn’t the place to expound on our concerns about the “right of use” model other than to note that the IASB in the end shelved the plans to extend it to lessor accounting, so we have the quite bizarre situation that lessee and lessor accounting will follow two different and inconsistent accounting approaches. As many large companies are both lessees and lessors (as they sub-let property) that dichotomy seems bound to lead to problems and a need for yet more changes in the future.

If we have a new model for lessees that makes at least some sense, we also have seen some useful simplifications made to it in response to the many concerns raised following the publication of the second “exposure draft” of the new Standard in 2013.

In particular, we expect that lessees will now prepare their accounts based on their existing lease agreements and in general they will not have to go through a complicated process of estimating the probability that things could change in the future.

More complex

Until the new standard is published we won’t know precisely how complex the final rules will be for lessees but it’s already clear that accounting for leases will be more complex than it is today.

That extra complexity might not matter too much for the largest companies with large accounting departments and sophisticated systems for controlling assets. It seems a much bigger deal for small and medium-sized businesses. The IASB may not care as its new Standard is only intended for use by the largest companies.

However it is highly likely that over time (it could be anything up to 10 years) the new accounting model for leases will find its way into the national accounting standards that are used by SMEs across Europe. In the UK there will also be major knock-on effects on the corporate taxation system that links to the accounting rules, likely to impact firms of all sizes.

The risk is that new accounting rules that could create major new regulatory burdens for SME lessees could slip in unchecked because the immediate impact is only on larger companies. Leaseurope will be lobbying the European Commission on this point over the rest of 2015.

For now our best hope of further improving the proposals seems to be through continuing to help the IASB to come up with a logical and practicable way of determining whether an agreement should be treated as a lease for accounting purposes.

New reporting problems

In Leaseurope’s meetings with the IASB and the European Financial Reporting Advisory Group (that will vet the new Standard before it is considered for use in Europe by the European Commission) we have shown that the current definition of leases will cause significant new reporting problems. There is still far too much ambiguity about whether agreements will be reported as leases or services. Small differences between agreements could lead to very different accounting treatments.

In a paper issued in February the IASB clarified its thinking on lease definition. The paper shows that where a lessor can benefit by substituting assets - for example switching a car during the life of a contract - this might now allow the agreement to be accounted for as a service. Unfortunately the details were still sparse.

Leaseurope met the IASB in March to discuss how clearer guidance could be provided on whether many assets - such as cars and office multi-function devices - will be treated as leases or services (and therefore excluded from the new lease accounting rules). We have since provided more information to the IASB on how the right to substitute works in the European equipment leasing market today and why even a low level of substitution can deliver important economic benefits to both the lessee and lessor.

The 2008 Leaseurope release ended by noting that it is essential that the entire European leasing community, including lessees, are involved in this debate. This is just as relevant in 2015 as it was then. We may be approaching the end of the process but the new Standard is still far from a done deal.

Julian Rose is an Adviser at Leaseurope