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13 September 2013

Comment letter on Exposure Draft for Leases

Thank you for the invitation to comment on the Exposure Draft for Leases. This letter represents the view of the Finnish Commerce Federation.

Finnish Commerce Federation is a nationwide organization whose mission is to promote Finnish commerce. We work to improve the operating conditions for companies active in wholesale and retail trade, to stimulate co-operation within the sector and to enhance the commercial and employer interests of our members.
Store site network is one of the most important success factors for the retail sector. The decision whether to acquire a certain property or to lease a property depends on multiple factors. These include the company’s willingness to take full control over a certain property over its whole life cycle. The lease contracts made with retail companies are in general for a fixed period of time. These lease contracts do not usually transfer the risk related to the ownership of the asset to the lessee.

We do not support the proposed lease accounting due to the following key reasons:
1.    Instead of improving the existing IAS 17 Leases including a well-known classification of lease contracts to finance and operating leases, the ED Leases introduces a new classification of lease contracts to Type A and Type B leases. We propose that the existing standard based on existing classification criteria should be improved as we believe that this would give a more faithful representation of leasing transactions. The current classification of lease contracts corresponds to the substance of the transactions.

2.    The exposure draft’s underlying assumption that all leases are to a certain extent financing transactions, does not meet the facts with all lease contracts.

3.    We are concerned whether the right-of-use asset meets the current definition of an asset under IFRS and whether the new asset class fulfills the current recognition, measurement and impairment models and requirements within the existing IFRS standards.

4.    The proposed single lease expense for Type B leases is in contradiction with the proposed presentation of a financial liability in the balance sheet. Also, the proposed application of the lessee’s incremental borrowing rate as the discount rate will result in false measurement of the present value of the lease liability.

5.    The implementation of the proposed standard would require significant one-off costs as system design as well as significant continuous process costs including resources for data update and validation due to the large amount of different types of lease contracts.

6.    Many local GAAPs and local tax accounting models for lease accounting are based on the existing IAS 17 standard. We believe that the proposed new model would lead to double accounting as it is unlikely that local GAAP and tax accounting rules would follow changes proposed in the ED.
As a summary, we have concerns related to the proposed lease accounting model as a whole. Therefore, we encourage the Boards to retain the existing IAS 17 Leases, and to improve the principles related to the classification of finance and operating leases. We support the Boards’ view that when a lease contract is a financing transaction, a lease liability should be recognized in the lessee’s balance sheet. We believe that improved classification criteria coupled with improved disclosure requirements would enable the users of the financial statements to understand the amount and timing of cash flows arising from both finance as well as operating leases.

Juhani Pekkala
Managing Director