I am writing on behalf of leading European retail companies represented in the European Retail Round Table (ERRT).

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1 -.. : European Retail Round Table International Accounting Standards Board (IASB) IFRS Foundation Publications Department 1st Floor, 30 Cannon Street London EC4M 6XH United Kingdom Copy: European Financial Reporting Advisory Group (EFRAG) Brussels, 13 September 2013 ERRT comments on Exposure Draft (ED/ Leases) Dear Sirs, I am writing on behalf of leading European retail companies represented in the European Retail Round Table (ERRT). Operating leases are key parts of the retail business; retailers use them as an alternative to acquisition to gain flexibility based on contingent rents, options to renew or breaking options. We expressed our concerns on the previous exposure draft in a letter dated 15 December 2010, and welcome the opportunity to comment on the new Exposure Draft (ED/2013/6 Leases). We still maintain very serious concerns about the IASB's Lease proposal. We believe that significant efforts are being made with this new ED to try to resolve some of the problems identified by many entities in relation to the 2010 ED but we do not believe they will result in an improvement in the quality of financial information in the retail sector. We strongly believe the Lease project (1) runs counter to the natural understanding of the retail business, (2) renders the preparation of financial statements more complex and expensive (3) will result in a lack of reliability and comparability in information for users and (4) breaks many fundamental principles of the present IFRS. Specifically, proposals for property leases are conceptually flawed and introduce numerous inconsistencies and adopting this model would be detrimental to the usefulness of financial statements. We recommend that property leases, are not recognised on Balance Sheet and that lease payments are recognised in the Income Statement on a straight line basis. European Retail Round Table, squj e de MeeOs 35, B-1000 BrusselS Tel: Fax: errt@errt.org Web site: EEIG Reg No 256 VAT BE RBS NY IBAN: BE

2 1. The Lease project runs counter to the natural understanding of the retail business The lass has shown in different projects its interest in IFRS reflecting the business model. We strongly support it in this endeavour but consider that the Exposure Draft on leases does not fulfil this objective because the accounting proposals do not faithfully depict the economic events they purport to represent. Operating leases are used in the retail business as a way to gain flexibility, allowing the lessee to avoid the risk associated with the evolution of the commercial value of the asset. This type of lease affords a way in which the retail business can maximise the duration of their tenancy while retaining as much flexibility as possible, benefitting from terms and conditions which will be amended through the lease life and whose value is based on prevailing market expectations. The ED intends to require the lessee to adopt a position about the very uncertainty he is trying to avoid. It essentially means incorporating into the balance sheet the uncertainty the lessee is actually avoiding through an operating lease. These accounting entries will not reflect the retail industry business model. 2. The Lease Project renders the preparation of financial statements more complex and expensive While the benefits of the proposed approach are highly debatable, the costs will significantly increase. There can be no doubt about the increase in the administrative burden arising from the monitoring and evaluation of lease contracts for accounting, legal and tax purposes. Property lease contracts in the retail business are widely heterogeneous, characterised by different clauses to adapt to varying business needs (lease terms, rental expense, options to extend, breaks, etc.). In addition to the implementation costs, the need to conduct a regular assessment of lease estimations will result in significant ongoing costs. Reassessment will entail significant resources as - although revisions will made in the event of "a change in relevant factors" - it will be necessary to monitor if relevant factors have changed and if the change is enough to trigger reassessment. Moreover, the retail business demands continuous renegotiations and amendments in contracts. Additionally, the disclosure requirements are lengthy, onerous and will detract user attention from other areas of the financial statements. 3. The Lease Project will result in a lack of reliability and comparability in information for users The present Lease project pursues the objective of recording all leases liabilities on the balance sheet. We believe that this objective increases the complexity, volatility and uncertainty of the financial information resulting in a lack of comparable information between preparers, especially in property leases in the retail business. We highlight the risk of providing potential misleading information arising from the subjective assessment of the vast and highly diverse data pertaining to thousands of lease contracts across multiple geographies. In particular, some categories of primary users of the financial statements, such as the investment community, would expect to have information about assets and liabilities recognized on the balance sheet which is clearer, less subject to judgmental estimates and less prone to volatility. Nevertheless, the new lease project will mean: 2

3 Significance of estimates and a significant increase in assets and liabilities, Lack of reliability due to long term estimates, Volatility of assets, liabilities and expenses, and Complexity. All these factors highlight the risk of providing false comfort to users of financial statements. They will believe this information provides a faithful representation of the underlying financial reality of the business whilst, in fact, they are actually in receipt of partial information governed by estimates based on highly subjective criteria, with a lack of comparability amongst preparers and subject to considerable volatility, resulting therefore in the significant potential to mislead. Additionally, users will only have partial and incomplete information regarding the whole portfolio of leases, since variable contingent rents, short term leases and whole lease term payments will not be included. Finally, the 2013 ED excludes from assessment the variable contingent payments, as it considers "cost and complexity of estimating and measuring all variable lease payments would outweigh the benefif. We do agree, nevertheless, this implies a very different treatment for the balance sheet of a lessee depending only on whether there is a contingent payment or not. This will mean, once again, lack of comparability amongst different companies. 4. The lease project breaks many fundamental principles of the present IFRS and demonstrates internal inconsistencies The lease project provides an artificial view of the Financial Statements of a typical retailer for property leases. The conceptual framework relating to the Type B model has been necessarily amended to correct the negative implications of the first draft, creating an important list of inconsistencies with the rest of IFRS, and even internally within the ED itself. They occur because of the recognition on the balance sheet of leases which are not financing in nature. The application of principles for financing to non-financing transactions has compromised the project due to the different issues arising either in the P&L (front loaded costs in the first ED) or in the Balance Sheet (meaningless asset value in the second ED). Inconsistencies with present IFRS Liability recognition. We are convinced that an operating lease is an executory contract. From our point of view there is no past event on inception of the lease and the lessor has to fulfil its obligations through the term of the lease. Therefore, we still consider that the liability recognition is inconsistent with the conceptual framework. We find no reason to recognize this executory contract as a liability and not other different executory contracts like long-term maintenance contracts or other long-term service contracts. Measurement. The ED considers payments coming subsequent to the exercise of options to extend periods as included in the measurement of the liability and the right-of-use assets. We consider it inconsistent with the requirement for contractual obligation (las 32) and present obligation (las 37) in order to record a financial liability. 3

4 Flaws and inconsistencies within the 2013 Lease Project Inconsistencies between balance sheet, income statement and cash flow treatment. The flawed financial approach in the ED results in significant inconsistency under the Type B model as leases will be recorded into balance-sheet as if they are financing in nature, whilst for the income statement and cash flow they will be accounted for as operating items. This inconsistent treatment will compromise the value of financial ratio analysis as applied to financial statements (for instance liabilities recorded on balance sheet though with no financial cost). Amortisation of right-of-use assets. The amortisation for Type B leases does not follow any pattern of economic consumption of the asset (inconsistent with las 16). The amortisation of right-of-use assets will be just the difference between the straight line lease cost and the unwinding of the lease liability. This proposed approach will give rise to an amortisation charge which increases over the life of the asset. Therefore, the net book values of the asset will be meaningless as it exhibits a shape due to the back loading in the amortisation schedule which is unrelated to the economic value. In addition, this amortisation pattern may result in unnecessary impairment. Property leases. The ability to direct the use as a requirement needed to control the use of a property lease does not apply in the case of an operating lease. The typical property lessee has a set of rights established under a contract which defines what can and cannot be decided relating to the use of the asset: timetable, access, refurbishments, business allocation, products allowed to be sold in the premise. Therefore, we consider that a lot of constraints are included in the lease contract to guarantee that the lessor retains control over the use of the underlying asset. Additionally, a property lease is not expected to "consume" an asset but uses an asset or enjoys an asset. The use/enjoyment of a period out of a long life property is not fairly represented by recognising an amortising asset on the balance sheet. Furthermore, there are often very few alternative sites available and a lessee enters into a lease due to business requirements rather than financing requirements. In a lot of cases, the property owners will dictate the terms of the lease based on their long term commercial objectives such as only looking for a return on its investment. Therefore property leases are predominantly non-financing transactions and recognising a financing lease liability does not truly reflect the commercial substance of property leases. Inconsistency between lessor accounting and lessee accounting for Type B leases. There is a severe inconsistency in the accounting treatment for Type B leases since the lessor "shall continue to measure and present the underlying asset subject to a Type B lease in accordance with other applicable Standards" and not derecognizing the underlying asset, while the lessee has to recognize an asset for the right of use. Therefore, an asset under Type B lease will appear on two Balance Sheets and furthermore the assets will be amortised at different rates. We strongly believe in a single model approach for property leases. This would mean that neither assets nor liabilities would be recorded for lessors and lessees for these operating leases. Consequently, the accounting would be consistent for lessors and lessees and would reflect the reality of the business operations. 4

5 CONC!...USION 1 We do support the Type A model for financial leases 2. Proposals for property leases are conceptually flawed and introduce numerous inconsistencies. Adopting this model would be detrimental to the usefulness of financial statements. 3. We recommend that operating leases, and especially property leases, are not recognised on Balance Sheet although an improvement in current disclosures should be required. In our view, the lass should adopt a simplified approach by not recognising properties leases on balance sheet but require mandatory additional information, where companies would disclose the amounts of their lease expenses using market yields, as investors and analysts currently do in their financial models to assess the return on capital across the players in the retail industry. This would provide consistency and comparability in the assessment of the performance of retailers in the same markets and will remove the distortions that would result in retailers using different assumptions which may change from one year to the next and therefore also distort comparability over accounting periods. Given the seriousness of the concerns that we have raised, we recommend that a robust consultation and consideration of alternative proposals is undertaken before any new accounting model is finalised. We would welcome the opportunity to discuss any aspects of the matters raised in this letter. ~ffi~ Dennis Kredler Director General European Retail Round Table (ERRT) 5