A History of Lease Accounting & the Need for Change

1. A History of Lease Accounting & the Need for Change Warren McGregor IASB member The views expressed in this presentation are those of the presenter, not those of the IASB

2. History • 1976 – FAS 13 • 1982 – IAS 17 • 1996 – G4+1 Recognition by Lessees of Assets and Liabilities Arising under Lease Contracts • 1999 – G4+1 Leases: Implementation of a New Approach • 2002 - Improvements project

3. History • July 2006 – IASB & FASB add Leasing Project to agendas • December 2006 – Joint Working Group formed • February 2007 – First working group meeting held • 2007 - Boards begin deliberations

4. Why do we need a new leasing standard? • Current accounting standards are based on whether the lessee is economically like an outright owner • This is inconsistent with the IASB’s & FASB’s concept of an asset; any entity that controls future economic benefits should recognise an asset – not just owners

5. Why do we need a new leasing standard? • Small distinctions result in fundamental differences in accounting • Operating leases off-balance sheet • Finance leases on-balance sheet • Distinctions are arbitrary – causes lack of comparability

6. Why do we need a new leasing standard? • IAS 17 & FAS 13 are out of date and inconsistent with other standards and with current thinking • Lease accounting literature is voluminous and complex, particularly in the US • Opportunity for convergence

7. Why do we need a new leasing standard? • Leasing transactions are significant • SEC Report – approximately $US 1.25 trillion (undiscounted) under non-cancellable operating leases not recognised on issuer balance sheets

8. Why do we need a new leasing standard? • The omission of assets and liabilities from lessee’s financial statements means they are incomplete • Users routinely make estimated adjustments to take account of operating leases

9. What will the leasing project cover? • Fundamental revision of all aspects of lease accounting: • Lessee accounting • Lessor accounting • Ultimately all types of leases will be covered; but initially focus will be on scope of existing lease standards

10. Next steps • Board deliberations & working group meetings • Discussion paper (DP) to be issued in 2008 • DP to include: • Preliminary views of the boards • Invitation to comment • Work on exposure draft to begin once responses received on DP

11. Questions?