Leases

Definition of a lease

The Boards started their discussion with components of the definition of a lease.

The Boards discussed how broad the definition of a lease should be and, more generally, how would the proposed definition interact with the scope of the leases Standard, given the tentative decision made in December 2009 that the proposed new leases requirements should exclude intangible and biological assets.

Some of the Board members were concerned that a broad definition of a lease could lead to reconsideration of the scope. Other Board members were concerned that such decision would send mixed signals to constituents how to apply the guidance, especially in the context of possible application of the guidance by analogy in line with IAS 8. One FASB member urged the Board to develop a comprehensive leases package including intangibles and biological assets. The FASB Chairman noted that such guidance would be part of a future project.

Eventually, the Boards agreed that the overall definition of leases should be broad, with a narrow scope of the Standard. The Boards also agreed to include a question regarding possible application of the guidance by analogy in the invitation for comments.

The Boards agreed to define a lease as a type of 'contract'. Both Boards preferred the term 'contract' instead of 'agreement' as they believed that it was consistent with other projects.

The Boards agreed that definition of a lease state that a lease is for a period of time. One Board member noted that some leases might be based on different criteria (for example, miles). Nonetheless, other Board members thought that even if a different base was agreed, the time factor would be still present and thus time should be used in the definition.

The Board agreed that a consideration is a necessary element in the definition of a lease.

After a significant discussion the Boards agreed that for a lease to exist, the lessor must convey the right to use a specified asset. The Boards agreed that additional guidance was necessary to describe the meaning of specified asset (in the context of a pool of assets or class of assets) in order to distinguish between supply of products/services and the right to use. Some Board members were also concerned with the relation between the leases project and the revenue recognition project.

Finally, the Boards considered when a lease conveys the right to use the underlying asset. The Board agreed that such condition is fulfilled when the purchase has the ability to control physically the use of the underlying asset either through operations or physical access. The Boards also agreed that such condition would be fulfilled in case of 'de-facto control' of an asset (not based on contractual terms). The Boards also noted that pricing mechanism can be an indicator of such control (payment for something different than products/services provided).

Some Board members were concerned that such a definition of a lease would blur the differences between leases and in-substance purchases. The staff will present a paper on such distinction for one of the following meetings.

Financial Statement Presentation – Statement of Comprehensive Income

The Boards considered and confirmed their decisions regarding the exposure draft that would propose to eliminate the option to present a separate income statement and statement of comprehensive income.

The IASB Chairman noted that the current proposal would be extremely controversial and urged the Boards to consider a wording that would reflect the nature of the proposal (continuous statement) and avoid the rumours regarding what the Boards decided not to do (eliminate the notion of net income).

The Boards decided that an entity must display total comprehensive income and its components in a continuous statement of comprehensive income, containing two sections: profit or loss and other comprehensive income.

Some Board members were concerned that this discussion is difficult to explain and the Boards have more important issue to be solved than to engage in the fight over this issue (given it was a source of major controversy last time it was proposed by the IASB).

Other Board members were concerned with the confusion created as by the EPS measure that would be based on net income and not based on the bottom line. They argued that 'Earnings' were not used anywhere else in the Statement of Comprehensive Income and thus EPS measure might mislead the users. The Boards disagreed and confirmed the decision as proposed. They argued that any changes to EPS would be extremely controversial.

Finally the Boards confirmed all the related decisions made at a previous meeting. The Boards also agreed that the amendment shall not influence which items should be reclassified between net profit or loss and the other comprehensive income and how those reclassifications were presented under IFRSs and the US GAAP.

One IASB member expressed his concerns that this narrow project was planned to be published at the end of March, whereas the comprehensive Financial Statement Presentation (FSP) proposals would be published later in April and suggested combining them. Other IASB members responded that this is a narrow project that should be finalised irrespective of the decisions made in the comprehensive Financial Statement Presentation project. Moreover this narrow amendment is connected with the decisions made in the scope of the financial instruments and post-employment befits projects. The Boards agreed that the Basis for Conclusion would explicitly state that rationale.

Replacement of IAS 39: Hedge Accounting

The Boards considered the objective of hedge accounting. The Board members expressed a variety of preferences. Some Board members supported the objective proposed by the staff as a compromise between the two views discussed at the January meeting; others were concerned that the objective was very ambiguous as it represented the combination of the two. Consequently, the Boards agreed not to develop an objective of the hedge accounting for the time being and to re-discuss the question when the initial decisions on more detailed level were made.

The Boards continued their discussion with the designation of risk components ('bifurcation by risk'). The IASB in principle agreed that bifurcation-by-risk should be permitted on the basis of proper identification and measurement of risk components. Some IASB members were concerned whether a principle based on identification and measurement of risk components could be operational, but they supported it from a conceptual point of view as a basis for exploring the approach.

The FASB members engaged in a long discussion that reflected the FASB members' opinions on the FASB ED: Accounting for Hedging Activities. Some FASB members argued against permitting bifurcation-by-risk. They believed that their model of financial instruments accounting based on fair value would accommodate some of the hedge accounting issues. Other FASB members disagreed. Finally both Boards agreed in principle to explore the bifurcation-by-risk accounting considering both models of accounting for financial instruments (IFRS 9 and the FASB proposals respectively).

The Boards also initially agreed that they would first consider the financial items related bifurcation-by-risk before proceeding to explore the application to non-financial items. From the discussion it seemed that the issue of basis risk was more important for the IASB than for the FASB.

This summary is based on notes taken by observers at the joint IASB-FASB meeting and should not be regarded as an official or final summary.