Leases

1. Leases Mr Andrew Lee Accounting Standards Council of Singapore September 30, 2010

2. 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

3. Presentation of AOSSG Discussion Paper • Lessor accounting model • Contracts that represent purchases or sales of the underlying asset • Measurement of lease term and lease payments • Purchase options • Contracts with service and lease components • Investment properties

4. 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

5. 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

6. 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

7. 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)

8. 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

9. 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

10. 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

11. Questions and Answers • Lessor accounting model • Contracts that represent purchases or sales of the underlying asset • Measurement of lease term and lease payments • Purchase options • Contracts with service and lease components • Investment properties

12. 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