The accounting treatment of leasing under IAS 17 has been criticized for not providing the users of financial statements with a faithful representation of lease transactions. The main criticism concerns the possibility of structuring lease contracts into operating leases that are not recognized on the balance sheet. Already in 1996, a project was initiated by international standard-setter to improve the accounting treatment of leasing. This led to the IASB and FASB publishing an Exposure Draft in September 2010 where the concept of operating and finance leases from IAS 17 was replaced with a model in which leases are accounted for according to a right-of-use model. The Exposure Draft received heavy criticism through comment letters, because many respondents questioned whether it would give users a more faithful representation and because many respondents argued that the cost would far outweigh the benefits. In the past two years, the IASB and FASB have published a number of tentative decisions to respond to these concerns. The purpose of this thesis is to analyze the benefits for users and costs for manufacturers. In regards to simple leases, the right–of-use model provides users with a more faithful representation than under IAS 17, because the accounting for rights and obligations in leases is more consistent with the Conceptual Framework when it comes to recognizing assets and liabilities on the balance sheet. However, for more complex lease transactions the conclusion is less clear. It is problematic that the new standard will lead to the reorganization of service elements in lease contracts on the balance sheet, because of the definition of a lease and the strict requirements on how to separate service components from lease components. This however, in our opinion, is better than the alternative that would lead to structuring and off balance sheet lease assets and liabilities. In the new standard, payments in options to extend a lease shall be recognized on the balance sheet if the lessee has a significant economic incentive to exercise the option. In some situations, this will lead to assets and liabilities on the balance sheet that do not meet the requirements in the Conceptual Framework. Regarding contingent lease payments, these are only recognized on the balance sheet when they depend on an index or a rate. In some situations, this will mean that significant assets and liabilities will not be recognized on the balance sheet. In our opinion, the IASB and FASB have not performed adequate research into the needs of users regarding their options to extend or terminate a lease and contingent lease payments. It is therefore not possible to conclude whether the new standard provides users with better information regarding options and contingent leases. What is certain; is that preparers will be required to use a significant amount of extra resources to comply with the new standard in comparison to the requirements under IAS 17. The IASB and FASB should therefore consider the benefits and costs carefully before issuing the new standard.
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