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  • 9½ Years: The story of a difficult relationship Posted on 28 September 2015

    This article was written for Leasing Life magazine

    9½ Weeks starring Kim Basinger and Mickey Rourke wasn’t rated by the critics so it might seem odd to find a reference to this 1986 film about psychosexual stimulation here in Leasing Life.

    This article isn’t actually about a fictional relationship lasting 9 ½ weeks but instead a real one lasting 9½ years. It is, of course, the relationship between the International Accounting Standards Board (IASB) and the leasing industry.

    It all started innocently enough when the IASB began its project to create a new lease accounting standard in May 2006. 9½ years later, in or around this November, the IASB is expected to publish the final version of its new lease accounting standard.

    The relationship between the IASB and the leasing industry is about to get quite intense, but let’s look first at what’s happened since 2006.  

    From the first project meeting, the IASB’s plan was to put all leased property and equipment on lessee’s balance sheets. Off-balance sheet operating leases would be scrapped. To achieve this the IASB eventually selected a ‘Right of Use’ accounting model.

    The essence of the Right of Use model is this: If Business A has the ‘Right of Use’ of something owned by Business B, that’s equivalent to Business A owning that thing for the period it is using it rather than Business B.

    It’s not very difficult to find flaws in the Right of Use argument for today’s operating leases.

    If a firm leases 100 specific cars, or 100 specific copiers, these would be reported as Right of Use assets on the firm’s balance sheet. However what happens if the same firm enters into a contract for a ‘fleet solution’ that happens to use 100 cars, or a ‘copying solution’ that happens to use 100 copiers? Subject to various complicated details these often wouldn’t be Right of Use assets and wouldn’t be on the firm’s balance sheet.

    The new standard that is supposed to improve comparability between similar transactions might therefore have quite the opposite effect.

    For the last nine years the relationship between the leasing industry and the IASB has been a fraught but mostly civil one. Discussions have often been along the following lines:

    IASB: “Hi, leasing industry. We care so much about you. We always want to know what you are thinking. Talk to us, write, come and visit us. Just remember that investors are far more important than you are.”

    Leasing industry: “We respect you but we feel you haven’t really got to know and understand us yet. We’re not that complicated. Let’s spend some quality time together. Trust us and let us help you”.

    Meanwhile the investors are watching on from the side thinking:

    Investors: “It’s so nice of the IASB to offer to improve lease accounting. We don’t really understand most of what the IASB is saying, but leasing isn’t a big deal for us anyway so if the IASB so enjoys doing this, let them! Besides we could look a bit stupid if we said we weren’t in favour of greater transparency.”

    There have been a few tricky moments. In one speech the current IASB Chairman accused the leasing industry of cooking the books. That hurt. However on the whole lessors haven’t lost too much sleep. It’s only accounting after all.

    The changes also seemed so far off. Even now the changes they will only affect the largest companies in the first few years, although there could be big knock-on changes to how UK lease taxation rules work for all businesses.

    The final standard in November is likely to be more complicated than the existing accounting rules. It could be open to different interpretations and lead to quite different treatments for similar agreements. 

    Just as lessees get to grips with how to crunch the numbers for their accounting statements, they could find themselves having to prepare significantly more detailed notes to their accounts than today.

    The risk is that these new regulatory burdens could make leasing too much bother. Some firms might decide to own rather than lease. Some might never get around to investing in new equipment. Extra regulation doesn’t seem likely to lead to a happy ending for firms, their owners and the wider economy. It’s even unclear whether the new Standard will give investors any more useful information.

    From here there’s only one place this relationship can go, and that’s to counselling. The IASB’s new rules will have to be approved for use in Europe by the European Commission. The EC’s advisory body, the European Financial Reporting Advisory Group will assess whether the changes are in the European public interest.

    How will this story end?

    9½ weeks finishes with a stormy breakup. Of course we’re too professional to allow that to happen. Lessors will try to help customers deal with the new standard if it’s approved by the EC and implemented in Europe.

    A parody to 9½ Weeks called 9½ Ninjas! was released in 1991. Somehow this story doesn’t seem to need parody.

    In 1997, there was a sequel, Another 9½ Weeks, starring Mickey Rourke and Angie Everhart. A sequel seems inevitable if the Right of Use model is found not to work. Let’s just hope it won’t take 9½ more years for the lease accounting story to finally come to an end.

    Julian Rose is Director, Asset Finance Policy (www.assetfinancepolicy.co.uk) and runs the Asset Finance 500 broker directory website (www.assetfinance500.uk). All views expressed in this article are his own.

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