The International Accounting Standards Board is sure to get plenty of argument over its proposals for improvement of the financial reporting of lease contracts. The board had set out to simplify the rules for reporting leases but its critics say it has come up with a solution that is no less complicated than the current rules.The IASB is proposing what it calls a "right of use" approach, which would result in the liability for payments arising under the lease contract and the right to use the underlying asset being included in the lessee's balance sheet. Launching the leases exposure draft on Tuesday, the chairman of the IASB, David Tweedie, said in a statement: "Much of the estimated US$640 billion of lease commitments fails to appear on the balance sheets of lessees, thereby giving a false impression of companies' liabilities and gearing."Our proposals would result in better and more complete financial reporting information about lease contracts being available to investors and others."Things get complicated when it comes to lessors. They would be required to determine whether a lease was to be treated under a "performance obligation" approach or a "derecognition" approach. Under performance obligation the lessor would recognise the leased asset, an asset for the lease rentals and a liability for permitting use of the leased asset.KPMG accounting standards partner Kris Peach said the performance obligation approach was similar to the treatment of an operating lease under the current rules. Derecognition is more like a finance lease.Peach said: "Under the derecognition approach, the lessor would not recognise the leased asset but recognise an asset for the lease rentals and a residual value asset for its interest in the leased asset at the lease end."These approaches are similar to the old rules but there are a number of differences. Financial institutions will have to classify all their leases. That is a big, complex task and it does not meet the objective of simplifying the standard."Peach said it was unclear how the Australian Prudential Regulation Authority would handle lessors' capital requirements under the new rules. "The performance obligation approach includes two asset calculations and a liability. APRA could set the capital requirement against the net asset value or the gross. It has not said yet what approach it would take."The IASB is taking comment on the exposure draft up to 15 December.