LeasesMr Andrew LeeAccounting Standards Council of SingaporeSeptember 30, 2010

Outline of the Agenda

Introduction Presentation of AOSSG Discussion Paper:

Key issues in ED Leases

Questions and Answers Discussion of key issues in Q1 to Q6

Other issues Conclusion

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Presentation of AOSSG Discussion Paper

1. Lessor accounting model

2. Contracts that represent purchases or sales of the underlying asset

3. Measurement of lease term and lease payments

4. Purchase options

5. Contracts with service and lease components

6. Investment properties

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Q1: Lessor accounting model

Single derecognition approach is generally preferred Better represents the economic substance of the

arrangement and is consistent with lessee accounting

Hybrid approach – retains a fine and artificial line and the consequential arbitrariness in lease accounting Need further clarification on the determination of “exposure

to significant risks and benefits” Need to address lease accounting for land and building

AOSSG recommendation: Adopt a single derecognition approach to reduce arbitrary judgement

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Q2: Contracts that represent purchases or sales of the underlying asset (“in-substance purchases or sales”)

Mixed views: Some view that it is not necessary to scope out accounting for

in-substance purchases/sales from the leases standard, while others are agreeable to the scope exclusion

Concerns: How to distinguish between “all but trivial amount of risks

and benefits” (for in-substance sales) and “significant risks or benefits” (for derecognition approach)?

Criteria in paragraphs B9 and B10 in ED are inadequate and rule-based can result in arbitrary distinctions

“Control and all but trivial amount of risks and benefits” – to unify the principles in leases, revenue recognition and consolidation standards

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Q2: Contracts that represent purchases or sales of the underlying asset (“in-substance purchases or sales”)

Concerns: Long-term leases of land with indefinite extension options:

do they qualify as in-substance purchases/sales? Otherwise to provide guidance for amortisation of right-of-use asset.

AOSSG recommendations: Scope exclusion for in-substance purchases/sales can be

removed to reduce complexity If scope exclusion in ED remains need to strengthen

criteria for distinguishing in-substance purchases/sales To unify the principles in leases, revenue recognition and

consolidation standards

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Q3: Measurement of lease term and lease payments

Lease term: generally agree on “longest possible lease term that is more likely than not to occur” including effects of extension and termination options Reflects management’s intent and represents possible outcome

Lease payments: generally object to “expected outcome” technique “Expected outcome” technique complex to apply, and

requiring only a reasonable number of scenarios may be subject to abuse

AOSSG recommendation: Permit the use of “most likely” approach if more relevant and decision-useful (especially for single-item or small-portfolio situations)

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Q4: Purchase options

Generally supportive that purchase options be accounted for only when exercised Purchase options are fundamentally different in substance

from renewal options Concerns that ED proposal might place undue emphasis

on legal form over substance AOSSG recommendation: Final standard to clarify that

it is the underlying characteristics of the lease option, rather than the terminology used, that should be assessed in the accounting for the lease option

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Q5: Contracts with service and lease components

Generally agree that contracts with distinct service and lease components should be bifurcated

Generally disagree with the ED proposal in relation to contracts with no distinct components

AOSSG recommendation: Contracts with no distinct service and lease components should not be bifurcated If truly non-distinct components, bifurcation is not

possible Entire contract accounted for as a lease only if it has been

specifically assessed that the underlying substance of the entire arrangement meets the definition of a lease

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Q6: Investment properties

Generally supportive of the scope exclusion for investment properties measured at fair value – more decision-useful information

Concerns on incomparability in accounting for leases using fair value and cost model

AOSSG recommendation: to scope out all investment properties from leases standard and address those issues under IAS 40

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Questions and Answers

1. Lessor accounting model 2. Contracts that represent purchases or sales of the

underlying asset 3. Measurement of lease term and lease payments4. Purchase options 5. Contracts with service and lease components 6. Investment properties

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Any other questions for discussion?

Conclusion

Summary of discussion Overall highly supportive of the general approach of the ED

proposals However high administrative burden and implementation

costs to preparers AOSSG recommendations support the use of principles-based

approaches which reflect the underlying substance of the contracts, and aim to reduce arbitrary judgement and complexity in application hence improving decision-usefulness

Allow ample time for implementation of changes to ensure smooth transition

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