Sir David Tweedie, Chair of the IASB, has often quipped that he looks forward to the day when he flies on an aeroplane that is actually on the balance sheet of the airline rather than accounted for as an operating lease arrangement - and that day seems, at long last, to be approaching

I am currently looking at the IASB’s proposals for the future of lease accounting – basically the removal of the accounting distinction between operating leases and finance leases i.e. all lease arrangements would create both an asset and a liability, currently only finance leases result in this treatment.

I was reminded at CIMA’s Financial Reporting Development Group (FRDG¹) meeting on Thursday that the UK’s Accounting Standards Board proposed the removal of this artificial distinction over ten years ago.  Reading the discussion paper, I wondered why it has taken so long for the IASB project to reach the same conclusions.  Yes, there are still some tricky questions regarding optional extension periods and contingent rental arrangements still to be resolved but these are marginal issues relative to the main principle which seems very straight forward to me.

But the leasing industry is big business with a great deal of work put into structuring arrangements to fall either one side or other of the line separating operating leases from finance leases.  And perhaps this sheds some light on the reasons why it has taken so long for the IASB to remove this distinction or, to be precise, to propose to remove it.

I imagined that this thought was going to be reinforced by what I heard from a representative of the European leasing industry speaking at a meeting of the Accounting Working Party of the European Federation of Accountants (FEE).  However, it was refreshing not to hear a rearguard action defending the operating lease.  Instead, there was a reasoned assessment of the IASB’s proposals and acceptance of change.  Yes, there were still issues for the leasing industry regarding options and contingent rentals (the requirement to annually reassess the assumptions for these aspects was felt to be extremely burdensome) but overall the focus seems to be on finding a form of presentation that does not, in their words, overshadow the true economic benefits of leasing.

The consultation paper deadline for comments is 17 July 2009 and CIMA will be responding.  The views of FRDG are that the change should be welcomed although it would be preferable to maintain the distinction for the lease of assets or combinations of assets immaterial to the main business activity (photocopiers etc) and short-term leases of less than one year in duration (with no pattern of linked rollover).  The leases scoped out would be treated in the same way as current operating leases.  Do you agree with this approach, do you have other comments?  I’d welcome your input via this blog or the CIMA consultation database at http://www.cimaglobal.com/cdb.

Quite a few acronyms this time, sorry about that but it seems to be a growing trend in the world of accounting regulation but, before you get too annoyed with me, there are many more that I could throw at you EFRAG, ARC, FRC, IFRIC, UITF, FASB, SEC……