Mr Hans Hoogervorst Chairman of the International Accounting Standards Board 30 Cannon Street London EX4M 6XH United Kingdom Our Ref. Phone Fax E-mail Date BS/HDF +49-89-35757-1550 +49-89-35757-1555 bjoern.schneider@linde.com 2 Sept, 2013 +49-89-35757-1587 +49-89 35757-1555 Hans-Dieter.Fladung@linde.com Re: ED/2013/6 Leases Dear Hans, The Linde Group is a world-leading gases and engineering company with approximately 62.000 employees working in more than 100 countries worldwide. In the 2012 financial year it achieved sales of EUR 15.3 billion. Linde offers a wide range of compressed and liquefied gases as well as chemicals and is therefore an important and reliable partner for a huge variety of industries. Linde s engineering division is successful throughout the world, with its focus on promising market segments such as olefin plants, natural gas plants and air separation plants, as well as hydrogen and synthesis gas plants. The Linde Group is listed in the leading German share index (DAX) and prepares its consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the European Union. The Linde Group welcomes very much to have the possibility to comment on the IASB s Exposure Draft ED/2013/6 Leases. We are happy to see that you amended the definition of lease taking into account the cross cutting issues with respect to the control principle stipulated by IAS 18 and IFRS 10. We think this is a big step ahead for IFRS aligning some principles underlying the cornerstones of accounting: (1) the question by whom an asset shall be accounted for, (2) when to recognise profits and (3) what to account for (assets or rights in assets). Anyway, we would consider it necessary for the existence of a lease that a contract shall contain a noncancellable contract term in order to represent a lease under which the right to use an asset is conveyed. Actually, you tackle this on the level of valuation rather than in the definition. We would nevertheless consider it appropriate to reflect this already on the level of definition because it deals with the basic recognition criteria. Furthermore, we would deem it helpful if you allowed lessees to refrain from the recognition of a right-of-use asset in the cases of Type B leases. This treatment would align lessee accounting with lessor accounting and Linde AG, Klosterhofstrasse 1, 80331 Munich, Germany Phone +49.89.35757-01, Fax +49.89.35757-1075 Registered Office: Munich, Court of Registration: Munich, HRB 169850 Supervisory Board: Manfred Schneider (Chairman), Executive Board: Wolfgang Reitzle (Chairman), Aldo Belloni, Tom Blades, Georg Denoke, Sanjiv Lamba
Page 2 means a significant simplification in the application of the new standard for lessees (although we acknowledge that the cases of application should be rather seldom (except for property leases where they should represent the prototypical pattern)). We would consider it helpful if Type B lease payments would generally be recognised as lease expense when incurred and that no right-of-use assets have to be accounted for. We furthermore would always consider property leases as Type B leases. Please find our detailed comments attached to this letter. If you have any questions or remarks, please do not hesitate to contact us. We would be happy to discuss any of our comments with you at your convenience. Yours sincerely, Bjoern Schneider Head of Group Accounting & Reporting Dr. Hans-Dieter Fladung Head of IFRS Competence Centre & External Reporting
Page 3 Appendix I: Answers to the questions raised in the ED Question 1: identifying a lease This revised Exposure Draft defines a lease as a contract that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration. An entity would determine whether a contract contains a lease by assessing whether: (a) fulfilment of the contract depends on the use of an identified asset; and (b) the contract conveys the right to control the use of the identified asset for a period of time in exchange for consideration. A contract conveys the right to control the use of an asset if the customer has the ability to direct the use and receive the benefits from use of the identified asset. Do you agree with the definition of a lease and the proposed requirements in paragraphs 6 19 for how an entity would determine whether a contract contains a lease? Why or why not? If not, how would you define a lease? Please supply specific fact patterns, if any, to which you think the proposed definition of a lease is difficult to apply or leads to a conclusion that does not reflect the economics of the transaction. We very much concur with the proposed rules for the identification of a lease especially with respect to the alignment of control as prerequisite for the recognition of an asset position. We find that the alignment with IAS 18 /IFRS 10 regarding control as overarching principle for the recognition of assets / consolidation of entities very much enhances the cohesiveness of IFRS as a whole. Furthermore we find it extremely helpful that you give such extensive, well structured and well understandable guidance in par 6 24. We see room for improvement of the definition of a lease with respect to the existence of a non-cancellable lease term: Under the current IAS 17 it was not necessary to include the existence of a non-cancellable lease term in the definition of a lease because the leased asset itself was recognized (or not) but not a right to use the asset. For the recognition of the leased asset the existence of a non-cancellable lease term was not necessary since the general recognition criteria were fulfilled. The answer to the question whether a leased asset shall be recognized on the balance sheet of the lessee or not was dependent on the transfer of risks and rewards. Either the risks and rewards incidental to the ownership of a leased asset were with the lessee (finance lease) or not (operating lease). Under the proposed IAS 17 ED things are different and de-recognition of a receivable on lessor side / recognition of a right-to-use asset on lessee side will be obligatory. Therefore it is necessary to include a noncancellable lease term in the definition of a right of use, otherwise the right-of-use would not meet the definition of an asset from the perspective of the lessee (in this context it is worthwhile to mention that we do not agree with the proposed changes to the framework regarding asset definition). We consider it necessary that the IASB includes in the definition of a lease that the right-of-use asset shall be conveyed for a noncancellable lease term.
Page 4 Furthermore we would not consider the criteria of IAS 18 met with respect to day one gains if there was no noncancellable lease term. You try to fix this on the level of measurement but we consider it necessary to already include this on the level of definition of a lease in the light of the accounting consequences that you stipulate in the ED. Additionally, we highly recommend adding a definition (as already existing in the current IAS 17) or a guideline for inception of a contract as you do for commencement date. In practice, there may be several dates which could be relevant for lease accounting. Question 2: lessee accounting Do you agree that the recognition, measurement and presentation of expenses and cash flows arising from a lease should differ for different leases, depending on whether the lessee is expected to consume more than an insignificant portion of the economic benefits embedded in the underlying asset? Why or why not? If not, what alternative approach would you propose and why? The distinction made under the standard follows the IASB s purpose of making lessees account for leases on balance - irrespective if there was a consumption of more than an insignificant portion of the underlying asset or not. We do not think that accounting for a right-of-use asset is necessary and appropriate in all cases and we would prefer a more simplified approach: For all non-property leases: a) If the lease provides for the consumption of more than an insignificant portion of the underlying asset (which could also be all leases > 1 year non-cancellable contract duration): recognition of a right-of-use asset by the lessee and recognition of depreciation / interest expense according to the rules foreseen for Type A leases in the ED. b) If the lease provides only for the consumption of an insignificant portion of the underlying asset (e.g. all non-cancellable lease terms < 1 year): no recognition of a right-of-use asset; treatment of lease payments as lease expense as incurred. Exactly the same should apply for lessor accounting the other way around. For all property leases: No recognition of a right-of-use asset; treatment of lease payments as lease expense as incurred.
Page 5 We see no real use in the Type B leases except for a wrong statement of the asset base and a straight lining of the expense line (which is inappropriate if lessee is obliged to account for a right-of-use asset that is subject to a financing transaction, both rather leading to the effects of a leveraged buy than to rent expense). Furthermore, we would see the need for more guidance for the presentation of the right-of-use asset (which line of the balance sheet?) and the lease liabilities especially for Type B leases (why should they be presented separate from Type A liabilities). Then we expect problems in the accounting application (tracing depreciation in sub ledger for fixed assets to the general ledger rent expense ) in the case of Type B leases (bundling the expenses in a line rent expense within the P+L). We find it definitely easier to account only for Type A leases (recognize and asset and depreciate straight line with respective recognition in the P+L) and recognize lease expense according to the effective interest method. In addition, we think that there is not room for an adjusted depreciation of the right-of-use asset in the case of Type B leases ( progressive depreciation ); this will certainly lead to problems with regards of impairment testing because the asset base will be rather overstated whereas the revenue generated with the help of leased assets might be constant or assuming a certain degree of technical obsolescence even declining in time. This would be continuous triggering event for impairment testing. If this was the purpose of the IASB please include respective amendments to IAS 36. In general, we would consider the right-of-use asset an intangible asset rather than a tangible fixed asset and we would remove the policy choice with respect to the respective presentation. Question 3: lessor accounting Do you agree that a lessor should apply a different accounting approach to different leases, depending on whether the lessee is expected to consume more than an insignificant portion of the economic benefits embedded in the underlying asset? Why or why not? If not, what alternative approach would you propose and why? The proposed rulings for lessors should be consistent with the ones for lessees. Otherwise, it appears that the exception for lessors is only made in order to give relief to the lease industry as mass applicants of the new standard.
Page 6 Question 4: classification of leases Do you agree that the principle on the lessee s expected consumption of the economic benefits embedded in the underlying asset should be applied using the requirements set out in paragraphs 28 34, which differ depending on whether the underlying asset is property? Why or why not? If not, what alternative approach would you propose and why? Please refer to the comment under Question 1. Question 5: lease term Do you agree with the proposals on lease term, including the reassessment of the lease term if there is a change in relevant factors? Why or why not? If not, how do you propose that a lessee and a lessor should determine the lease term and why? Yes, we agree with the proposed lease term. Question 6: variable lease payments Do you agree with the proposals on the measurement of variable lease payments, including reassessment if there is a change in an index or a rate used to determine lease payments? Why or why not? If not, how do you propose that a lessee and a lessor should account for variable lease payments and why? We agree with these proposed rules regarding the lease payments to be taken into account. Nevertheless, more guidance or a principle would help to define what in-substance fixed payments are. Otherwise there will be judgement on what is a in-substance fixed payment.
Page 7 Question 7: transition Paragraphs C2 C22 state that a lessee and a lessor would recognise and measure leases at the beginning of the earliest period presented using either a modified retrospective approach or a full retrospective approach. Do you agree with those proposals? Why or why not? If not, what transition requirements do you propose and why? Are there any additional transition issues the boards should consider? If yes, what are they and why? The transition rules appear consistent and appropriate. Question 8: disclosure Paragraphs 58 67 and 98 109 set out the disclosure requirements for a lessee and a lessor. Those proposals include maturity analyses of undiscounted lease payments; reconciliations of amounts recognised in the statement of financial position; and narrative disclosures about leases (including information about variable lease payments and options). Do you agree with those proposals? Why or why not? If not, what changes do you propose and why? The disclosures appear exhaustive given the fact that the items are now as aimed for on balance and should as such already provide a significant increase in decision usefulness. We would appreciate more guidance on the applicability of materiality regarding the information to be provided (in general not limited to this ED). Under the current IAS 17 the depreciation amount in the P+L was equal to the depreciation/amortisation amount in the asset register. Under the proposed IAS 17 ED for Type B leases the lessee has to recognise a single lease cost item in the P+L. This amount cannot be reconciled to the amortisation amount in the asset register (as required by the IASB in para. 61) as it includes also the interest expense for the lease liability. Therefore a lessee is required to disclose an additional reconciliation in the notes. This might also have an effect on major KPIs.
Page 8 Non-public entities (FASB-only): Question 9 (FASB-only): non-public entities To strive for a reasonable balance between the costs and benefits of information, the FASB decided to provide the following specified reliefs for nonpublic entities: (a) To permit a nonpublic entity to make an accounting policy election to use a risk-free discount rate to measure the lease liability. If an entity elects to use a risk-free discount rate, that fact should be disclosed. (b) To exempt a nonpublic entity from the requirement to provide a reconciliation of the opening and closing balance of the lease liability. Will these specified reliefs for nonpublic entities help reduce the cost of implementing the new lease accounting requirements without unduly sacrificing information necessary for users of their financial statements? If not, what changes do you propose and why? N/A Question 10 (FASB-only): related party leases Do you agree that it is not necessary to provide different recognition and measurement requirements for related party leases (for example, to require the lease to be accounted for based on the economic substance of the lease rather than the legally enforceable terms and conditions)? If not, what different recognition and measurement requirements do you propose and why? N/A Question 11 (FASB-only): related party leases Do you agree that it is not necessary to provide additional disclosures (beyond those required by Topic 850) for related party leases? If not, what additional disclosure requirements would you propose and why? N/A
Page 9 Question 12 (IASB-only): Consequential amendments to IAS 40 The IASB is proposing amendments to other IFRSs as a result of the proposals in this revised Exposure Draft, including amendments to IAS 40 Investment Property. The amendments to IAS 40 propose that a right-ofuse asset arising from a lease of property would be within the scope of IAS 40 if the leased property meets the definition of investment property. This would represent a change from the current scope of IAS 40, which permits, but does not require, property held under an operating lease to be accounted for as investment property using the fair value model in IAS 40 if it meets the definition of investment property. Do you agree that a right-of-use asset should be within the scope of IAS 40 if the leased property meets the definition of investment property? If not, what alternative would you propose and why? We are generally convinced that the right-of use-asset should not be treated according to the rules for the underlying asset. It should be accounted for as an intangible asset rather than a tangible asset. As long as there is no consistent swing to the accounting for property rights.