‘The decision-usefulness of the IASB’s standard setting during the financial crisis using the example of IAS 17 – Lease’
“We are in the middle of the worst financial crisis in recent memory.” wrote Stephen Schwarzmann (2008). Since the middle of 2007 the media’s dominating topic has been the global financial crisis, whose roots lay in the U.S. capital market – in fact one of the best-regulated financial markets in the world. In times when capital knows no borders and all the single foreign capital markets are interconnected, it took less time until the impact of the American ‘credit crunch’ reached the rest of the world and unbalanced even the most powerful banks. In spite of market’s cross-border linkage a huge variety of different (or even contrary) accounting standards exists. Against this background the Internationals Accounting Standards Board (IASB) in cooperation with its U.S. counterpart the Financial Accounting Standards Board (FASB) tries to cope with this crisis by amending existing and setting new standards. That should guarantee showing the true economies of entities for their report’s users.
This paper will reflect the current developments of the European standard setters regarding ‘IAS 17 – Leases’. First of all the problem areas of the old standard will be shown, then the amendments will be highlighted. The focus lays on the amendments in lessee accounting and they will be evaluated by means of expert opinions whether these actions are effective and decision-useful to the public.
In February 2006 the International Accounting Standards Board (IASB) and its US counterpart the Financial Accounting Standards Board (FASB) issued the ‘Memorandum of Understanding’ (MoU) which includes a work plan that should bring the convergence of international standard setting forward - the joint lease project is part of this agreement (FASB, 2008). At their July meeting 2008 the IASB discussed further amendments to IAS 17. To evaluate the possible advanced usefulness of financial information due to these amendments it is necessary to look first at the problems the ‘old’ standard (might) has been causing.
IAS 17 (as well as FAS 13 and SSAP 21) distinguishes between two types of leases (Perrin, 2008). The first category is ‘financial leases’ where “… substantially all the risk and rewards of ownership of the leased item…” were transferred to the lessee - the outcome is that the leased items are shown as assets and the future lease payments as liabilities in the lessee’s balance sheet (Deloitte, 2008). The second category is ‘operating lease’ which does not meet the characteristics of financial leases. This type is accounted in a way that neither assets nor liabilities are shown at the lessee’s balance sheet and only the leasing rates are debited as expenses to the profit and loss account. The keyword in this context and the main reason for the ongoing discussions is the adjective ‘substantially’ in the ‘risk and reward approach’ (Eckl, 2008). This leads to subjective judgements (Perrin, 2006). The lessor can structure leasing contracts so that the financial leases fulfil the characteristics of operational ones and do not appear on the surface of the lessee’s financial statement (Elliot and Elliot, 2008). In fact the lessee hides its liabilities from the user’s eyes and hinders them to see the economic truth of his firm.