IMPLICATIONS OF THE NEW EXPOSURE DRAFT ON LEASES

Abstract

This study serves to examine the development of the lease accounting standard and understand the impact of the second lease exposure draft (ED_2013) on Singapore listed companies. Through a study of the entire catalogue of lease accounting standards, it was found that these standards were underpinned by a common purchase model, albeit in various different forms. Driven by a contradiction with the accounting conceptual framework, the new exposure drafts issued in 2010 and 2013 follow a new right-of-use model in a bid to bridge the inconsistency. Using data collected from publicly available annual reports, an exercise was conducted on a segment of Singapore listed companies to examine the effects of ED_2013. The three main groups of examination were the Straits Times Index (STI) component stocks, construction sector and commerce sector firms. It was found that balance sheet and key financial ratio impacts were significant for the top 25% affected companies of all three groups. In particular, the commerce sector was most impacted due to their greater extent of off-balance sheet financing activities. A market survey was conducted to complement the exercise with the objective of understanding the perspectives of preparers of financial statements on ED_2013. The responses indicated huge potential costs that companies could face in implementing the new standard, which is likely to be far greater than what the benefits could bring to users. In addition, the survey also revealed that local companies are still generally unprepared for the implementation of a new standard.