Write
a brief essay highlighting the difference between IFRS and accounting standards
for private enterprises and the contract-based approach noted in this chapter,
discussing the conceptual justification for each.
There are many
differences between IFRS and private enterprise GAAP and the contract based
approach with respect to measurement and reporting for leases. Primarily, ASPE has been written to follow
historical Canadian practice. ASPE has
also been designed with the primary user in mind of being the creditor, rather
than outside shareholders and creditors.
Given that generally creditors have access to management; the disclosure
has also been simplified. The contract
based approach has been designed to eliminate the requirement to arbitrarily
classify a lease into operating or capital.
Under this approach, all leases are treated the same and will impact the
statement of financial position and the statement of comprehensive income in
the same manner. Any perceived
manipulation to keep leases off the balance sheet is eliminated.
In most areas of
lease accounting, IFRS and ASPE are converged.
There are some subtle differences that are highlighted below:
a) ASPE and IFRS use the classification approach
for leases – either operating or capital.
ASPE refers to capital leases and operating leases for lessees, and
operating, sales-type or direct financing leases for lessors. IFRS uses the term “finance leases” or
operating leases for lessees or lessors.
In contrast, the contract based approach does not require classification
of leases, since they are all treated the same.
b) ASPE has three criteria to assess for
determining lease treatment and numerical thresholds are provided to assist
with this. IFRS requires that the
criteria be applied more judgmentally, with no “bright lines” of numerical
thresholds provided. In addition, IFRS
has one more criteria to assess which looks at the uniqueness of the asset
specifically designed for use by only the lessee. The only aspect that the contract based
approach would assess is to determine if the lease is in substance a purchase
or sale, and if so, would not be recognized under the lease recognition and
measurement standards.
c) For an operating lease, both ASPE and IFRS
would recognize the lease payments as they are made, either to income or
expense for the lessor and lessee, respectively.
d) For the contract based approach for the
lessee, the rights to use the asset are recognized as an intangible asset and
contractual lease obligations are recognized as a liability. Both of these amounts are determined using
the present value of the lease payments.
Amortization of the intangible right and interest expense on the
obligation is recognized over the term of the lease. The concept behind the contract based
approach is that a contractual obligation has been entered into on the signing
of the lease, and this obligation should be reported on the statement of
financial position. As the right to the
asset is used, amortization is reported; and as the obligation is paid, the
obligation is reduced. In this way, it
does not matter what type of lease is entered into, and judgment is no longer
required to determine if the lease should be treated as operating or a finance
lease. The contract based approach uses
the lessee’s incremental borrowing rate. For the contract based approach for
the lessor, the treatment is similar as described above except a lease
receivable and offsetting performance obligation is reported.
e) For capital (finance) leases, both IFRS and
ASPE recognize the present value of the lease payments as a lease obligation
and leased asset for the lessee. As the lease term progresses, the asset is
amortized and interest expense is recognized on the lease obligation. Payments reduce the lease obligation. IFRS uses the interest rate implied in the
lease when it can be reasonably determined, or the lessee’s incremental
borrowing rate. ASPE uses the lower of
the implied lease rate or the lessee’s incremental borrowing rate. Under the contract based approach, the
treatment is the same as described above since no differentiation is made
between operating and finance leases.
f) For the lessor, ASPE has two other
recognition criteria which IFRS does not specifically require under the lease
standards, but does by default under revenue recognition. Accounting treatment is the same under both
standards.
g) There are differences in what would be
included in the lease payments. IFRS and
ASPE have similar standards, but the contract approach would also require that
contingent payments under the lease agreements be estimated.
h) Disclosure is minimized for ASPE. For IFRS, more extensive disclosure is
required including reconciliations and additional information about terms of
the leases.
