The boards tentatively decided to base the scope of the proposed new lease accounting standard on the scope of the existing lease accounting standards. Do you agree with this proposed approach?

If you disagree with the proposed approach, please describe how you would define the scope of the proposed new standard.

The G100 considers that the DP reflects a ‘quick-fix’ approach to addressing some of the issues relating to accounting for leases given the emphasis on accounting by lessees for leases within the scope of IAS 17 “Leases”. However, if there is to be convergence with US GAAP, differences in the scope of IAS 17 and SFAS 13 will need to be resolved. The G100 supports the scope being consistent with IAS 17 because it also includes leases of intangible assets.
 

Please explain how you would define those leases to be excluded from the scope of the proposed new standard.

In principle, the G100 believes that the standard should apply to all lease agreements. The use of concepts such as core leases and short-term leases invites the type of deficiencies which are asserted in respect of the finance/operating lease classifications. However, because of the practical issues involved in administering a large number and wide range of short-term lease agreements particularly for those relating to administrative activities, some pragmatism would be beneficial on cost-benefit grounds, for example, non-material leases with a term of less than one year.
 

Although the G100 agrees with the rights-of-use approach and the analysis rights ad obligations on which it is based, the proposals are unclear as to how this approach interacts with the current work in relation to the accounting concepts particularly the definition of assets and liabilities.
 

1. an asset representing its right to use the leased item for the lease term (the right-of-use asset)
2. a liability for its obligation to pay rentals.

Do you support the proposed approach? If you support an alternative approach, please describe the approach and explain why you support it.

Subject to the response to Question 3, conceptually the G100 agrees with the rights-of-use approach to the recognition of assets and liabilities arising under lease agreements.
 

Do you support this proposed approach? If not, why?

The G100 supports an approach which considers the transactions as a whole and not separating different components of the lease. When making a decision to lease or not, management considers the transaction on an integrated basis. Identifying and accounting for different components is likely to be costly and give rise to practical difficulties which would not be justified on cost benefit grounds.
 

If you disagree, please explain why and describe how you would initially measure the lessee’s obligation to pay rentals.

Yes. The G100 believes that the incremental borrowing rate should be used as the discount rate. We consider that using the incremental borrowing rate (while acknowledging difficulties in determining it in respect of a much broader range of leases than is presently the case, such as in respect of individual retail sites) is likely to be easier to implement in respect of those leases presently classified as operating leases and which will be included in the scope of the proposals.
 

If you disagree, please explain why and describe how you would initially measure the lessee’s right-of-use asset.

Yes. Recognition at cost at the inception of the lease is consistent with current practice.
 

If you disagree with the boards’ proposed approach, please describe the approach to subsequent measurement you would favour and why.

The G100 agrees that the lease asset and the lease liability should be measured at amortised cost.

The G100 does not support the existence of options in accounting standards. Where a company wishes to measure lease assets at fair value it could apply the revaluation model in IAS 16 ‘Property, Plant and Equipment’. However, the characterization of a rights of use approach is one of an intangible asset and there are significant constraints on applying the revaluation model to intangible assets.

The G100 considers that the liability should also be recognized at amortised cost and does not support recognition of the liability at fair value.

If the boards decide to require the obligation to pay rentals to be revised for changes in the incremental borrowing rate, should revision be made at each reporting date or only when there is a change in the estimated cash flows? Please explain your reasons.

No. While some lease contracts allow lease payment amounts to be varied from time to time during the term of the contract the factor used to estimate the revised amounts is not the incremental borrowing rate of the lessee. As the borrowing rate in the contract does not change during the life of the contract we do not support remeasurement to reflect changes in the incremental borrowing rate because in substance the lease contract is a fixed rate contract.
 

Do you agree with the proposed approach taken by the boards? If you disagree, please explain why.

Yes. Given the different treatments under IAS 37 and IAS 39 specifying the basis of measurement will resolve uncertainty as to the appropriate approach and provides consistency in methodology.
 

Would you support this approach? If so, for which leases? Please explain your reasons.

The G100 believes that the rights have the nature of an intangible asset and decreases in value should be described as amortization and not as rental expense.
 

Do you support the proposed approach? If you disagree with the proposed approach, please describe what alternative approach you would support and why.

Yes. The G100 agrees that the asset and liability should be measured on the basis of the most likely lease term. However, we note that the existing requirements of IAS 17 ‘Leases’ relating to the inclusion of lease options that are reasonably certain of exercise would be simpler to apply and would result in fewer remeasurements.
 

Do you support the proposed approach? If you disagree with the proposed approach, please describe what alternative approach you would support and why.

Would requiring reassessment of the lease term provide users of financial statements with more relevant information? Please explain why.

No. The G100 considers that reassessment each reporting date for all leases is impractical. Where reassessment does occur for material leases such as a change in the lease term (either by taking up an option period that had previously not been considered most likely or by choosing not to take up an option period that had been considered most likely) the carrying amount of the asset (and the liability) should be adjusted.

The G100 does not believe annual reassessment of the lease term would in general provide useful information to users. Frequent changes could cause confusion on the part of users as period to period reassessments may be driven by current assessments that may not be relevant at the time the decision is actually made and will result in significant administrative burdens.
 

Do you agree with the proposed approach? If you disagree with the proposed approach, please describe what alternative approach you would support and why.

The G100 supports the proposals on the grounds that there should be consistent accounting for items which are, in substance, similar.
 

Do you support the proposed approach? If you disagree with the proposed approach, what alternative approach would you recommend and why?

In principle, the G100 supports the approach based on the most likely payment as explained in DP7.21 for the reasons given.

However, in view of the significant uncertainties in the estimation process the G100 believes that a pragmatic approach such as recognition of contingent rentals on an accruals basis in long-term contracts can be justified in order to achieve reliability and consistency in the remeasurement.

Which of these approaches to measuring the lessee’s obligation to pay rentals do you support? Please explain your reasons.

In principle, the G100 supports the approach explained in DP7.21.
 

Do you support the proposed approach? Please explain your reasons.

The G100 supports the approach favoured by the FASB including using the index or rate existing at the inception of the contract.
 

Do you support the proposed approach? If not, please explain why.

The G100 agrees. We believe that changes in contingent rentals should be recognized and the treatment in the profit and loss should depend on the type/basis of the contingent rentals.
 

1. recognize any change in the liability in profit or loss
2. recognize any change in the liability as an adjustment to the carrying amount of the right-of-use asset.

Which of these two approaches do you support? Please explain your reasons.

If you support neither approach, please describe any alternative approach you would prefer and why.

If the proposals proceed, the G100 agrees with (b) and believes the treatment should depend on the nature of the contingent rental involved.
 

If the proposals proceed, the G100 agrees with the approach in DP7.46(c) but has concerns about the treatment of some types of contingent rentals.
 

What additional information would separate presentation provide?

The G100 agrees with the FASB approach as outlined in DP8.8 particularly as option renewals, purchase options and estimated contingent rentals are included in the measurement of the liability, which is different to the measurement of other liabilities. Additionally, the nature of the repayment/settlement obligations is different from those for other borrowings.
 

How should the right-of-use asset be presented in the statement of financial position? Please explain your reasons.

The G100 agrees with the approach in DP8.16 to present lease assets separately from owned assets.

What additional disclosures (if any) do you think are necessary under each of the approaches?

The G100 believes that the extent and detail of the disclosures should be reviewed and tested against usefulness criteria. The G100 is concerned about the proliferation of disclosures and the consequential information overload and believes that there is an urgent need to develop a set of principles against which proposed disclosures are tested.
 

The G100 believes that the nature and potential impact of the proposals is such that:

• an extended implementation period and transitional requirements are highly desirable;
• the practicality and cost-benefit of the proposals require significant review; and
• the DP does not address where cash flows relating to lease agreements would be classified in the statement of cash flows.

The G100 agrees that the lessor has a receivable.
 

Which of these two approaches do you support? Please explain your reasons.

The G100 considers that the approach described in Option (a) is appropriate.
 

Yes. Revenue recognition by lessors is currently outside the scope of both the leases and revenue recognition discussion papers. If there are to be significant changes in accounting standards dealing with these topics it is highly desirable that there be consistency of accounting for lessors.
 

While it need not be considered within the scope of the leases project the issues should be addressed at some stage if consistency is to be achieved in the recognition and measurement of the lease receivable and the amount of the lease asset both of which are measured on the basis of expected cash flows.
 

No.