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Lessor Accounting Revenue Recognition and Performance Measurement

Lessor Accounting Revenue Recognition and Performance Measurement. Leaseurope One day Business Seminar. Henk Uunk Manager Financial Accounting & Reporting ING Lease Holding N.V. 5 November 2007. Lessor Accounting Content. 1. Introduction

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Lessor Accounting Revenue Recognition and Performance Measurement

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  1. Lessor Accounting Revenue Recognition andPerformance Measurement Leaseurope One day Business Seminar Henk Uunk Manager Financial Accounting & Reporting ING Lease Holding N.V. 5 November 2007

  2. Lessor AccountingContent • 1. Introduction • Expectations on Revenue Recognition and Performance Measurement • Examples • Revenue Recognition • Performance Management • Conclusions • Questions and Closing remarks

  3. Lessor AccountingIntroduction • Leasing is people’s business • Lease people are pragmatic • Leasing is a pragmatic business

  4. Lessor AccountingIntroduction -2- • Leasing is a pragmatic business, thus: • - Full focus on the customer • - Straight forward product, on-balance at Lessor • Leases are arranged upfront: • Lessee : - fixed period • - flexibility in lease rentals • Lessor : - matched funding (interest and liquidity) • - asset-play at end of lease: • supplier / vendor / lessee / open market

  5. Lease AccountingIntroduction -3- • Upfront arranged and • with a clear view on the • CASH FLOW • of the whole transaction • + • A CONSTANT PERIODIC RATE OF RETURN

  6. Lessor AccountingExpectations • - Cash Flow + Constant Periodic Rate of Return; • therefore: • Is Revenue recognition for the lessor a constant ? • Cash Flow + Constant Periodic Rate of Return + Asset-play; • therefore: • How is Performance of the lessoraffected: • dependant on periodic valuation issues or • would performance only be affected at end-of-lease? • Are Service elements affecting performance ?

  7. Lessor AccountingExamples

  8. Lessor AccountingExamples -2-

  9. Lessor AccountingRevenue Recognition • Known CASH FLOW + known CONSTANT PERIODIC RATE OF RETURN • thus: • Revenue recognition for the lessor is a constant for the lessor ? • Finance lease: Focus on Finance  Debtor quality • Operating lease: Focus on Asset and Services  • Value assessment + continuity of providing services

  10. Lessor AccountingRevenue recognition -2-

  11. Lessor AccountingRevenue recognition -3-

  12. Lessor AccountingRevenue recognition -4-

  13. Lessor AccountingPerformance Measurement • Cash Flow + Constant Periodic Rate of Return + Asset-play; • therefore: • How is Performance of the lessoraffected: • - dependant on periodic valuation issues or • - would performance only be affected at end-of-lease ? • Are Service elements affecting performance ?

  14. Lessor AccountingPerformance Measurement -2- • Are Service elements affecting performance ? • Service elements are vital to the performance ! • Again using the example of Car leasing: interest margins can be merely circumstantial and, due to competition, may be close to nil, with overall profit dependant on the surcharges on other service elements. • Market in fact dictates overall prices and the lessor is free to choose which element to offer at low charge. A rebate given to a customer can be regarded as a profit-give-away or as a reassessed Residual value. • Mind you: an Operating Lease is RENT, not Finance. • The test on whether a lease is an Operating Lease therefore can become highly academic and disclosing interest percentages … ?

  15. Lessor AccountingPerformance Measurement -3- • Any other elements relevant for Performance ? • Think of After-tax results ! • Again an item where one of the essentials of leasing is disrespected! • Semi-government bodies, hospitals, etc, with the full consent of local tax authorities, benefit from using lease transactions to the benefit of (local) communities. • IFRS needs to be fundamentally redesigned to overcome the problem of transactions that before-tax never will be profitable.

  16. Lessor AccountingConclusions • There are various issues identified during this presentation that IFRS should fundamentally reconsider: • Should all leases be put on-balance as only around 5% lead to classification discussions ? • Should IAS 16 be applied to lease transactions (negative revenue recognition at beginning of lease transaction) for lessor accounting? • Can an Operating Lease be tested effectively whereas we know that surcharges on service elements are discretionary applied by lessors ? • Impairment testing should be considered on portfolio level by IFRS, else actual practise will overrule IFRS • After-tax is a fundamental issue in certain tax areas; IFRS is distorting market conditions rather than guiding the market.

  17. Lessor AccountingQuestions and Closing remarks • Before allowing your questions, let me make some Closing remarks: • A fundamental reconsideration of IAS 17 should not rule out that Leased Assets will become a separate item in the balance sheet. • Disclosures on lease transactions may be more informative than putting all leases on-balance. • When not creating a separate item of Leased assets in the balance sheet, disclosures on leased assets should not be onerous (compared to other assets). • - = -

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