• Discussed with SAC: July 2001
• Discussed at May 2003 IASB Meeting
• Discussed at November 2003 IASB Meeting
• Discussed at January 2004 IASB Meeting
• Discussed at April 2004 IASB Meeting
• Discussed at June 2004 IASB Meeting
• Discussed at March 2006 IASB Meeting
• Discussed at April 2006 Joint IASB-FASB Meeting
• Discussed at July 2006 IASB Meeting
• Discussed at March 2007 IASB Meeting
• Discussed at April 2007 Joint IASB-FASB Meeting
• Discussed at May 2007 IASB Meeting
• Discussed at June 2007 IASB Meeting
• Discussed at October 2007 IASB Meeting
• Discussed at July 2008 IASB Meeting
• Draft Discussion Paper discussed at 7 October 2008 Working Group meeting
• Discussed at November 2008 IASB Meeting
• Discussed at January 2009 IASB Meeting
• 19 March 2009 Discussion Paper published
  Comment deadline 17 July 2009
• Discussed at May 2009 IASB Meeting
• Discussed at June 2009 IASB Meeting
• Discussed at July 2009 IASB Meeting
• Discussed at September 2009 IASB Meeting
• Discussed at October 2009 Joint IASB-FASB Meeting
• Discussed at November 2009 IASB Meeting
• Discussed at December 2009 IASB Meeting
• Discussed at 5 January 2010 Special IASB Meeting
• Discussed at January 2010 Joint IASB-FASB Meeting
• Discussed at 2 February 2010 Special Joint IASB-FASB Meeting
• Discussed at February 2010 Joint IASB-FASB Meeting
• Discussed at March 2010 Joint IASB-FASB Meeting

Timetable

• Click for IASB Project Timetable

Leasing is a global business, and differences in accounting standards can lead to considerable noncomparability. This project would seek to improve the accounting for leases by developing an approach that is more consistent with the conceptual framework definitions of assets and liabilities. The project would result in an amendment or replacement of IAS 17, Leases.

An earlier G4+1 Study had recommended capitalising property rights inherent in all leases.

Discussion at the IASB's May 2003 Meeting

At its May 2003 meeting, the Board indicated that this is an active research project being conducted jointly with the UK Accounting Standards Board. The Board discussed a project plan, which will be discussed with the Standards Advisory Council in June prior to being finalised by the Board in July.

Discussion at the IASB's November 2003 Meeting

P> The Board discussed the basis of a conceptual model for leases. It was proposed that the basis for lease accounting should be the analysis of contractual rights and obligations and the identification of resulting changes to assets and liabilities.

The staff, based on the above, made the following recommendations:

• Application of consistent asset and liability recognition principles in respect of assets owned, assets held under finance leases, and assets held under operating leases should provide more relevant, reliable, and comparable financial information than recognition principles that result in assets and liabilities only being recognised in respect of finance leases.
• Conceptually, the recognition of changes in assets and liabilities should not be limited to contracts that convey ownership rights or rights that are economically similar to outright ownership. The conveyance of rights to future economic benefits should be the focus of the conceptual model.
• Legal performance or transfer of legal ownership are not the most relevant points for recognising changes in assets and liabilities. The transfer of control of future economic benefits to the lessee, usually by delivering the leased property, is an economically significant act of performance by the lessor and an appropriate recognition point for changes in assets and liabilities.
• Assets and liabilities that arise from contractual rights and obligations under a lease should reflect the conveyance of the right of use and control of associated future economic benefits for the period of the contract (rather than conveyance of the whole of the physical property). It was recommended that only those future economic benefits controlled by the lessee are recognised (being the right to use the property for the lease term) and not to use the whole of asset approach (where the lessee recognises an asset equal to the entire value of the leased property and a liability being the obligation to return the leased property at the end of the lease term.)
• If a lease contract is freely cancellable by the lessee, the asset and liability amounts recognised by lessor and lessee should reflect both (i)the conveyance of the right of use up to the date at which the lease can be cancelled by the lessee and (ii)the lessee's option in respect of periods beyond that date.
• If a lease contract is freely cancellable by the lessor, the asset and liability amounts recognised by lessor and lessee should reflect both (i)the conveyance of the right of use up to the date at which the lease can be cancelled by the lessor and (ii)the lessor' s option in respect of periods beyond that date.

The Board agreed that the staff should continue researching the project based on the above recommendations.

The staff noted that they would anticipate an exposure draft in early 2007, although a discussion paper may be issued.

Discussion at the January 2004 IASB Meeting

It was noted that the Board had previously discussed the foundations for a model for lease accounting based on the analysis of contractual rights and obligations and the identification of resulting changes to assets and liabilities.

The Board continued by considering accounting for cancellation and renewal options in leases applying this model where the options are under the control of the lessee.

The Board considered the following examples using a ten year lease with an option to cancel after three years.

Example A: Lessee has an option to renew at a market rent at year 3.

The staff proposed that in the first three years the lessee and lessor had unconditional rights to use the equipment, receive payment, and have the equipment returned at the end of the lease and corresponding obligations.

In years four to ten they had a conditional right and obligation to receive and make payment. In addition there is an unconditional right to make use of the equipment and an unconditional obligation to 'stand ready' to provide the equipment.

The Board agreed with the staff's analysis.

Example B: Lessee has an option to renew at year 3 at a rent that is predetermined at the beginning of the lease.

The staff proposed the same analysis as for example A but noted that the call option may have an initial value.

In addition the staff noted an alternative view to recognise the entire 10 year lease term on delivery of the equipment if it is considered probable that the Lessee will keep the equipment for the full term.

The Board indicated a level of discomfort with the alternative view.

Example C: Lessee has an option to cancel at year 3; a cancellation payment is required.

The staff proposed the same analysis as for example B but that the cancellation payment is accrued over the first three years and deducted evenly from the payments in years four to ten if the lease is not cancelled.

Example D: Lessee has an option to cancel after a minimum period of 12 months; no cancellation payment is required.

The staff proposed a similar analysis to example A. The staff noted that the lessor may expect renewals and this may indicate the existence of an intangible asset.

Example E: Lessee has an option to renew at year 3 at a rent that is predetermined at the beginning of the lease and below the expected market rent (this type of arrangement is sometimes referred to as a 'bargain renewal').

The staff proposed the same analysis as for example B.

The staff noted the following example related to rentals contingent on the lessee's usage:

A lessee enters a three-year lease on a motor vehicle at an annual rental of CU 10,000. In addition, an extra CU 1 per mile is payable if the lessee exceeds 60,000 miles. The excess mileage charge reflects fair compensation for the additional wear and tear of the vehicle.

The staff proposed the following analysis:

• The lessee has an unconditional right to use the vehicle for 3 years or 60,000 miles and an unconditional obligation to pay CU 30,000 to the lessor.
• The lessee does not have an obligation to pay more than CU 30,000. The lessee has an unconditional right to obtain use of the vehicle for more than 60,000 miles. However, the lessee's actual right to use the car for more than 60,000 miles is conditional on the lessee assuming another liability.
• The lessor has an unconditional right to receive CU 30,000 and to have the vehicle returned when the lease comes to an end.
• The lessor has a conditional right to receive consideration for excess mileage. The lessor also has an unconditional obligation to stand ready to make the excess mileage available to the lessee at a predetermined price.

The staff believes that the call option over additional use represents a present unconditional right of the lessee (so may be an asset) and a present unconditional obligation of the lessor (so may be a liability). However the option may have little value at inception of the lease.

In addition the staff noted an alternative view will be considered of accounting for the expected value of the contingent rent payments at inception of the lease.

The Board expressed concerns as to both of the above views.

Discussion at the April 2004 IASB Meeting

The IASB (in conjunction with the staff of the UK Accounting Standards Board) explored further steps in a model for lease accounting based on the analysis of contractual rights and obligations and the identification of resulting changes to assets and liabilities. This approach could require the recognition of assets and liabilities by both the lessor and the lessee. The discussion focused on the accounting for lease payments that are variable either in whole or in part.

The outcome of these discussions will be a discussion paper on lease accounting that will take preliminary views for a future IASB exposure draft. Therefore, the document will not be neutral in its view of accounting positions. While there were significant discussions, only one vote was taken. That is, when a rent is set at 80% of market plus a variable return, the initial asset and liabilities should be measured based on market rent.

The Board further noted that the decisions in this project should be consistent with those decisions make in the revenue recognition project. Further discussions are expected.

Discussion at the June 2004 IASB Meeting

The Board discussed subsequent accounting for amounts recognised as assets and liabilities under leases. They noted that their previous discussions had concluded that the assets arising under lease agreements tend to be rights associated with the lease agreement, rather than physical assets, and that accounting should recognise those rights and obligations. Accordingly, the term depreciation was not considered appropriate, and Board members found it helpful to think of the charge as an allocation of rights of use over the period of the usage.

The Board discussed examples of subsequent accounting in the case of:

• Straight forward leases.
• Leases with lease payments that are conditional on external price changes.
• Leases with lease payments that are conditional on the lessee's usage.
• Leases with lease payments that are conditional on the lessee's revenues.
• Leases with renewal options.

The Board noted that it would be possible to make subsequent accounting adjustments to the value of the rights arising under the lease without necessarily being on the fair value model.

The Board asked the staff to prepare a paper considering the accounting for the rights of use (considering the appropriateness of IAS 16 and IAS 38) and the liability (in accordance with IAS 37 or IAS 39) for discussion at a future meeting.

Discussion at the March 2006 IASB Meeting

The Board held a preliminary discussion of a potential joint IASB/ FASB project on leasing transactions. The IASB and FASB are currently developing a project proposal that would then be subjected to each Board's agenda review process (in the IASB's case this would include a discussion at a future meeting of the SAC).

The staff asked the Board for its preliminary views on the potential agenda proposal, including the assessment of the agenda criteria, the proposal for a working group and the outline project timetable; for any further points that should be made to the SAC in its consideration of the agenda proposal; for its views on the form a joint project with FASB could take; whether and when consultation through an advisory working group or focus groups would be appropriate, and the form such consultation could take.

Discussion at the April 2006 Joint IASB-FASB Meeting

The staff presented the Boards with a paper that provided a summary of the discussions previously held by the two Boards and presented three possible approaches for a potential leasing project to be carried forward. The intention of this session was thus for the Boards to decide which of the three following approaches the Boards would support for taking the project forward:

• Option 1 - Add a joint project to the agenda with the first phase primarily involving the staff working with a working group of leasing experts and a group of users of financial statements with the intent to bring a complete package for Board consideration in the first half of 2007 (this was the staff's preferred approach).
• Option 2 - Add a modified joint project to the agenda with the IASB taking the lead.
• Option 3 - Defer an agenda decision on lease accounting until some of the projects on the Boards' agendas have been completed or substantially completed with a view to making the project a joint project at that time.

FASB members were reluctant toward option 2 as they were concerned about capacity problems. Furthermore they knew that there would be opposition in the US with moving forward this project letting IASB take the lead, as the intention is to progress this as a joint project.

Option 1 would not be a project not requiring significant Board resources in the first phase. It would however involve the staff spending time researching the project and developing ideas. This research phase might include:

• Discussing lease accounting issues with a working group of leasing experts and a group of users of financial statements.
• Identifying and analysing the conceptual and practical issues involved in further developing the ideas in the G4+1 Special Report.
• Developing a lease accounting model that is consistent with the current frameworks and developing standards.
• Holding voluntary education sessions for Board members.

The output of this would be a staff research paper.

Based on the discussion, the Boards voted for Option 1, with IASB members agreeing unanimously and FASB member disagreeing. The IASB expects to make a formal agenda decision in June 2006, which would allow time for consideration also by the SAC and the IASCF Trustees.

The staff was asked to come back with a proposed timetable for the project.

Discussion at the July 2006 IASB Meeting

Under the IASB-FASB Memorandum of Understanding, the two Boards have agreed to consider and decide on the scope and timing of a potential leasing project. Staff had two questions for the Board. The first was whether the Board agreed with staff's proposal to add a leasing project to the Board's agenda. The Board agreed with this proposal.

The second question was whether the Board had any comments on the project plan and timetable. Staff proposed to work towards issuing a discussion paper jointly with the FASB in the third quarter of 2008. The Board recognised that this was a fairly ambitious timetable, but did agree to it.

There was general agreement that the project should address the accounting by both lessor and lessee. At a later stage, it may be possible or necessary to split the project into two parts: one dealing with lessor accounting, and one dealing with lessee accounting. For example, it may be that more work needs to be done on lessor accounting, but that a discussion paper on lessee accounting can be issued more quickly.

December 2006: New IASB-FASB joint working group on leases

On 8 December 2006, the International Accounting Standards Board and the United States Financial Accounting Standards Board announced the membership of a new international working group that will help the boards in their joint project on lease accounting. The joint project involves comprehensive reconsideration of all aspects of lease accounting and is expected to lead to a fundamental changes in how lessees and lessors account for leases. The boards expect to publish a joint discussion paper in 2008 expressing their preliminary views. Click for Press Release (PDF 51k).

Discussion at the March 2007 IASB Meeting

The IASB held its first substantive discussion on the joint project on leasing. The FASB staff joined the meeting by video link for this session.

Identification of assets and liabilities arising in a simple lease

The staff presented a paper identifying the rights and obligations arising on the lessor's and lessee's side in a simple non-cancellable lease arrangement (the example). The current and proposed working definitions of assets and liabilities in the Conceptual Framework project were applied to the identified rights and obligations.

The Board unanimously agreed that the following rights and obligations in the example meet both the current and proposed definitions of assets and liabilities:

Lessee:

• Right to use the machinery during the lease term
• Obligation to make specified payments over the lease term

Lessor:

• Right to receive payments during the lease term
• Right to the economic benefits deliverable from the use of the machinery in the period after the lease term (residual rights)

The Board unanimously agreed that the following rights and obligations in the example do not meet the both the current and proposed definitions of assets and liabilities:

Lessee:

• Obligation to return the machinery at the end of the lease term

Lessor:

• Right to return of machinery at the end of the lease
• Obligation to permit the use of the machinery during the lease term

Even though the Board unanimously agreed to the outcome of the staff analysis some Board members pointed out that the example used ignored many of the complexities of real life leasing transactions. In particular the following comments were made:

• There should be a distinction between the right to use the machinery and the right to use the economic benefits (of the machinery).
• The economic benefits derived by the lessor may be different to those derived by the lessee and this might have implications when calculating fair values.
• Attention should be paid to the question when these rights and liabilities arise. Particularly the Board questioned the statement in the paper that 'under a non-cancellable lease the right to use the machinery and the obligation to pay for its use is unconditional once the machinery has been delivered to the lessee'.
• The obligation to return itself is not a liability but if the machinery has to be returned in a certain condition liabilities may arise.

The staff observed that all these issues will be taken into consideration at a later stage.

Analyses of accounting models for a simple lease

The Board discussed four accounting models:

The right of use model

This model is based upon the premise that once the physical item has been delivered, the lessee has an unconditional right to use that machinery during the lease term.

The lessee recognises as an asset its right to use the machinery during the lease term and a liability for the rentals payable under the lease. The lessee only recognises as an asset its right to use the machinery for the lease term. It does not recognise any rights in respect of the physical item beyond the lease term. Consequently, the lessee does not recognise a liability under the simple lease example in respect of its obligation to return the physical item as this obligation does not give rise to an outflow of economic benefits from the lessee.

The lessor recognises two assets: its right to receive rental payments (a contractual right under the lease); and its interest in the machinery (the residual property rights).

The whole asset model

The whole asset model is based on the premise that during the lease term, the leased item is under the control of the lessee. Accordingly, this model recognises the leased item in full as an asset of the lessee, i.e. both the right to the economic benefits during the lease term and the possession of the asset at the end of the lease term. In effect, the full economic value of the machinery is recognised. To correspond to these assets, the lessee recognises two liabilities; a liability for the payments to be made over the lease term and a liability representing the lessee's obligation to return the asset at the end of the lease term. Where the lease is for substantially all of the leased item's expected useful life, the obligation to return the item at the end of the term is comparatively insignificant. For a short-term lease the obligation to return will be more substantial.

The lessor recognises as an asset its right to receive payments under the lease and an asset representing its right to have the machinery returned at the end of the lease term. The lessor does not recognise its contractual obligation to permit the use of the machinery during the lease term. Instead, the lessor derecognises the machinery.

The executory contract model

Under this model, all leases are treated as executory contracts. It is based upon the premise that the lessee's right to use the machinery is conditional upon making payments under the lease ('day-to-day lease'). Similarly, the lessee's obligation to make payments is assumed to be conditional upon the lessor granting the lessee quiet enjoyment of the machinery throughout the lease term. The model is therefore very similar to the operating lease model used in current accounting standards.

The model adopted in current IFRSs

In contrast to the other three models the current accounting treatment of leases is based on a hybrid model classifying leases as either finance leases or operating leases.

The Board saw no merits in further developing the whole asset model and the executory contract model and decided to focus on the right of use model.

Discussion at the Joint IASB-FASB Meeting in April 2007

The Boards discussed the scope of the Leases project. The staff suggested two possible approaches: a 'narrow' approach and a 'broad' scope. The narrow scope would accept the scope in the current set of standards – FAS 13 Accounting for Leases and IAS 17 Leases, plus EITF 01-8 and IFRIC 4, both called Determining whether an Arrangement Contains a Lease.

Board members expressed support and frustration in equal measures. Some thought that the scope was crucial and needed to be examined rigorously now. These Board members saw that putting off significant questions until later was sub-optimal. The scope should be thoroughly considered at the outset. If it is not, constituents would criticise the Board for not doing so.

Others wanted the leasing model fixed and then tested against a wider scope subsequently. One FASB member objected that the project seemed to be addressing the wrong kinds of transactions and should have as a priority the lease of intangible assets.

Other Board members noted that the staff's preferred approach (narrow scope) was pragmatic, especially given that the project would address both lessor and lessee accounting.

One FASB member thought that leasing crossed over so many other contentious issues, including revenue recognition, that to do a narrow-scope project would be a waste of time and resources.

With the exception of one FASB member, the Boards agreed to a narrow scope approach to the Leases project. They appeared to support the idea that once a model was developed it should be tested against other types of arrangements to determine whether it would be suitable for those arrangements.

Discussion at the May 2007 IASB Meeting

\ Leases [Education Session]

The Board discussed an analysis of a lease contract in which the lessee has either an option to extend the term of the lease for an additional period, or an option to terminate the lease early.

The staff analysis aimed to assess the terms and conditions of a standard lease and attempted to re-characterise a long-term lease with an option to cancel early as a short-term leased with an option to extend; and to identify the assets and liabilities that arose. At a conceptual level, several Board members noted that the manner in which a lease is described should not affect the assets and liabilities recognised.

Although no decisions were requested or made at this session, Board members indicated that they favoured the staff undertaking further exploration of two possible approaches:

• Approach 1 – The lessee obtains the right to use the asset up until the option exercise date and an option to extend the lease; and
• Approach 2 – The lessee obtains a right to use for the full lease period and an option to terminate the lease.

Many Board members thought Approach 1 was the most conceptually pure and preferred it, but were willing to explore Approach 2 further. It was noted that some participants in the Leases Working Group were concerned that Approach 1 was potentially open to abuse and structuring. However, Approach 2 also had problems associated with it-particularly in the measurement of options. However, measurement difficulties should not, at this stage, preclude further examination of the Approach.

The Board indicated that it was highly unlikely to support either an approach under which the lessee obtains a right to use either for the full lease period or for the period to the option exercise date; or one under which the lessee obtains a right of use whose measurement is based upon the expected value of the payments under the lease. Both of these were criticised for being too intent-based, lacking a clearly-articulated measurement attribute and for departing from the previous assessment of the assets and liabilities identified in the lease.

Discussion at the June 2007 IASB Meeting

The FASB staff joined the meeting by video link for this session.

The Board discussed several issues regarding initial recognition and measurement of assets and liabilities under a simple non-cancellable lease arrangement with a fixed term, no options to extend or purchase and no residual value guarantees (the example).

Measurement of the lessee's liability to the lessor

Initial measurement

The Board discussed two approaches for the initial measurement of a lessee's liability for its obligation to make payments to the lessor:

• Present value calculated by discounting expected cash flows using the interest rate implicit in the lease, if this is practicable to determine; if not, the lessee's incremental borrowing rate is used.
• Fair value.

Subsequent measurement

The Board discussed three approaches for the subsequent measurement of a lessee's liability for its obligation to make payments to the lessor:

• Fair value
• Amortised cost using the effective interest method
• Amortised cost using the effective interest method with an option to fair value.

The Board unanimously agreed that the lessee's liability to the lessor is a financial liability. A majority of Board members pointed out that the lease project should not amend the current measurement requirements for financial liabilities and that therefore the lessee's liability to the lessor should be measured in accordance with IAS 39 Financial Instruments: Recognition and Measurement, that is, initial measurement at fair value and subsequent measurement at amortized cost using the effective interest method with an option to fair value.

Measurement of the lessee's right to use the asset

The Board considered three approaches to determining the initial and subsequent measurement of a lessee's right to use an asset:

Approach 1: Intangible Asset Approach

A lessee's right to use the asset is deemed similar in nature to an intangible asset acquired outside of a business combination. Thus, the initial and subsequent measurements should be consistent with the Boards' existing standards on accounting for intangible assets acquired outside of a business combination (IAS 38 Intangible Assets).

Approach 2: Nature of the Leased Item Approach

A lessee's right to use the asset is deemed similar in nature to the item the lessee obtains the use of via the lease contract. Thus, a lease of property, plant and equipment (PP&E) should have initial and subsequent measurements consistent with the Boards' existing standards on accounting for PP&E acquired outside of a business combination (IAS 16 Property, Plant and Equipment). Similarly, a lease of an intangible asset (if within the scope of the revised standard) should have initial and subsequent measurements consistent with the Boards' existing standards on accounting for intangible assets acquired outside of a business combination (IAS 38).

Approach 3: Separate Accounting Model Approach

Either a lessee's right to use the asset is deemed different in nature from both an intangible asset and the nature of the item being leased or another measurement approach would result in more decision-useful information and the incremental benefits of that approach exceed the incremental costs. In either case, a separate accounting model should be developed for the initial and subsequent measurement of a lessee's right to use asset. The separate measurement approach considered was to require that a lessee's right to use asset be measured at fair value, with changes in fair value recognized in profit or loss (earnings).

A majority of eight Board members was in favour of approach B and noted that the 'possession of the asset' should determine the accounting treatment and that the treatment for leased and owned (bought) assets should be the same. The supporters of approach A or C pointed out that the right to use an asset is different from the (physical) asset and that this right should be treated differently. Those in favour of C indicated that they would prefer 'a fair value model'.

One Board member suggested that lessor accounting should be considered simultaneously in order to avoid inconsistent accounting treatments on the lessee and lessor side. However, lessor accounting was not discussed further at this meeting.

The Board tentatively decided that all three approaches should be included in the discussion paper with mentioning B as the Board's preferred approach.

Initial recognition of assets and liabilities in lease contracts

The Board deliberated whether assets and liabilities arising in the example should be recognised upon contract signing or upon delivery/acceptance of the leased item.

In principle the Board agreed to recognise assets and liabilities upon delivery/acceptance of the leased item. However, it was noted that between contract signing and delivery of the leased item the lease contract is a forward contract. No decision was made regarding the treatment of the forward contract but the staff was directed to analyse for discussion at a future meeting situations in which there is a long period between signing and delivery.

Discussion at the October 2007 IASB Meeting

Other Lease Obligations

At its meeting in March 2007, the Board tentatively concluded that a lessee's obligation to return the leased item at the end of the lease term does not meet the definition of a liability. However, a number of Board members noted that the terms of the lease contract might give rise to other obligations that meet the definition of a liability. For example, an obligation to return the leased item in a specified condition may meet the definition of a liability.

At the current meeting the Board analysed a number of lessee obligations to determine if they meet the definition of a liability and, if so, what should be the appropriate accounting treatment. In particular, the Board considered:

• Lessee obligations to incur costs to return the leased item.
• Lessee obligations to return the leased item in a specified condition.
• Lessee obligations to maintain the leased item.

The objective of the discussion was to provide feedback to the staff, rather than make formal Board decisions.

Lessee obligations to incur costs to return the leased item

The Board agreed that such obligations meet the definition of a liability. The Board noted that the treatment of the debit arising on recognition of the liability should be same as if the asset was owned.

Lessee obligations to return the leased item in a specified condition.

The Board were presented with three alternative views of when an obligation could arise in these circumstances:

• View A: At the end of the lease term.
• View B: When the leased item falls below the contractually specified condition.
• View C: When the leased item is delivered or made available to the lessee.

The majority of the Board members were inclined toward View B. One Board member noted that this may be at the beginning of the lease.

Lessee obligations to maintain the leased item

The Board were presented with two alternative views of when an obligation could arise in these circumstances:

• View A: When the leased item falls below the specified maintenance standard.
• View B: When the leased item is delivered or made available to the lessee.

The Board noted that these liabilities were similar to lessee obligations to incur costs to return the leased item and therefore the majority of the Board members were inclined toward View A.

Measurement of the liability – Initial measurement

The Board discussed initial measurement of liabilities, specifically whether they should be measured at fair value or at the expenditure required the settle the present obligation. The Board noted that other liabilities within the leases project have been recognised at fair value. Some Board members indicated that they did not believe there would be a difference between fair value and the treatment under IAS 37. No decisions were made.

Measurement of the liability – Subsequent measurement

The issue of subsequent measurement of such liabilities was not discussed.

Do lessee obligations give rise to assets for the lessor?

The Board briefly discussed whether terms in a lease contract that require a lessee to either return the leased item to the lessor in a specified condition or maintain the leased item would appear to create valuable rights for the lessor. The Board agreed that no additional asset would arise.

Variable Lease Payments

The Board briefly discussed agenda paper 12B.

In relation to lease payments with a variable factor based on price changes or an index, the Board agreed that the lessee has a liability that includes both fixed and variable components of the future rentals. No decisions were made in relation to subsequent measurement.

In relation to lease payments with a variable factor based on the lessee's financial or operating performance from the leased item the Board noted that this issue was similar to the 'sale of future revenues'. The Board noted that such sales were unlikely to be an obligation, however no decisions were made.

Discussed at the July 2008 IASB Meeting

The Board discussed in detail the revised project plan. The staff noted that the revised project approach takes into account the 'mid-2011 completion goal' discussed at the April 2008 joint Board meeting for projects that are part of the Memorandum of Understanding between the IASB and FASB (MoU).

The key proposals of the revised project approach were:

• to address lessee accounting and defer consideration of lessor accounting,
• to apply the current finance lease model to leases currently classified as operating leases, which means that the current finance lease model will be applied to all leases, and
• to remove the requirement for lessees to classify leases as finance leases or operating leases.

In addition, the staff presented analyses on the following issues that arise if the current finance lease model is applied to operating leases:

• options to extend or terminate a lease,
• contingent rentals, and
• initial and subsequent measurement of the lessee's asset and liability under the lease.

Several Board members expressed their disappointment that lessor accounting was scoped out but acknowledged that the time constraints make it impossible to address both lessee and lessor accounting. Some Board members stated that lessor accounting should not disappear from the IASB's agenda but should be addressed in a subsequent phase of this project.

By majority vote the Board agreed to the revised project plan in full.

Some Board members noted that residual value guarantees and the nature of the right-to-use asset should also be addressed in the discussion paper. The staff responded that residual value guarantees will addressed at the exposure draft stage and that issues regarding the right-to-use asset will be addressed in the discussion paper.

The Board then started its deliberations on the technical issues that arise if the current finance lease model is applied to operating leases.

Options to extend or terminate a lease

Without detailed discussion the Board decided that options to extend or terminate the lease should not be recognised separately from the right of use asset but that the assets and liabilities recognised by the lessee should be based upon an assessment of the lease term.

The Board did come to a conclusion on how the lease term should be assessed. The discussion was based on an example of a five-year lease that incorporates an option to extend the lease for an additional three years. Some Board members favoured a probability weighted approach, i.e. if the probability that the lease will be extended is 50% the estimated lease term would be 6.5 years. Other Board members disagreed to this approach since there would be no continuous range of possible outcomes. In addition, Board members expressed mixed views on whether the estimated lease term should be trued up on a regular basis. The issue was pushed back to staff for further elaboration. However, there was a consensus that all contractual, non-contractual financial and business factors should be taken into consideration when determining the lease term. The Board also decided that any new lease accounting standard should provide detailed guidance on the factors to be considered.

Contingent rentals

The Board decided not to retain the current accounting treatment for contingent rentals but to estimate contingent rentals at inception of the lease. Also the Board decided that the best estimate of contingent rentals determined in accordance with the methodology in IAS 37 Provisions, Contingent Liabilities and Contingent Assets should be used.

The FASB staff informed the Board that the FASB tentatively decided to also have an up-front estimate of contingent rentals but to use the most likely outcome when determining contingent rentals.

Initial and subsequent measurement of the lessee's asset and liability under the lease

The Board made the following decisions:

• The lessee's right-to-use asset should be initially measured at the present value of the 'expected lease payments'. The Board noted that the expected lease payments differ from minimum lease payments if they include contingent rentals.
• Accordingly, the lessee's liability should be initially measured at the expected lease payments.
• The discount rate used in calculating the expected lease payments should be the secured incremental borrowing rate.
• The payments for the lessee's liability should be apportioned between a finance charge and a reduction of the outstanding liability, consistent with the treatment of finance leases currently in place.

Regarding the subsequent measurement of the right-of-use asset the staff recommended allocating the depreciable amount on a systematic basis consistent with the depreciation policy the lessee adopts for depreciable assets that are owned. The right-of-use asset would be depreciated over the shorter of the lease term or the economic life of the leased item and for leases of items in which it is reasonably certain that the lessee will obtain title at the end of the lease term, the 'period of expected use' would be the economic life of the leased item. The staff noted that this recommendation is consistent with the current finance lease accounting model and is consistent with the basic approach to the project.

The Board seemed to agree. However, one Board member strongly demanded that further research work on the nature of the right-to-use asset should be undertaken before answering this question.

Lease classification

The Board decided to remove the requirement for lessees to classify leases as operating or finance and to develop a single model of accounting for all lease contracts.

Way forward

The Board intends to publish a discussion paper in November 2008.

September 2008: IASB-FASB leases working group will meet

The joint IASB-FASB Leases Working Group will meet on Tuesday 7 October 2008 at the FASB's office in Norwalk, Connecticut, USA. The principal agenda item for the meeting is discussion of a staff draft of the Leases discussion paper (DP). The draft DP – which has not been approved by the FASB or the IASB – would express a preliminary view of the two Boards in favour of replacing the current lease accounting model with a new model. The current model classifies leases as finance leases or operating leases, with the former accounted for as, in substance, financed purchases of the leased asset. Under the proposed new model, a lessee would recognise as assets and liabilities all material rights and obligations arising in all lease contracts, including those rights and obligations that arise under leases currently classified as operating leases.

Thus, a lessee would recognise:

• an asset representing its right to use the leased item for the lease term, and
• a liability for its obligation to pay rentals.

The operating and finance lease classifications would be eliminated. The observer note for the working group meeting includes a draft of the DP.

Click to Download the Observer Note from the IASB website (PDF 930k).

Discussion at the November 2008 IASB Meeting

(FASB staff joined the meeting by videolink.)

The purpose of this session was to resolve open issues before publication of a discussion paper (DP).

The issues addressed at this meeting were:

• Consideration of Lease Term, Purchase Options, Contingent Rentals and Residual Value Guarantees
• Subsequent Measurement of right-to-use asset and obligation to pay rentals
• Presentation of Leases
• Subleases

The staff said that while they hoped the Board would reach preliminary views on these issues before the DP is issued, to avoid significant delay of the DP an alternative approach could be to describe the unresolved issue, discuss alternative treatments, and ask respondents for their views in the DP.

Consideration of Lease Term, Purchase Options, Contingent Rentals and Residual Value Guarantees

Lease Term

The staff asked the Board whether assessment of the lease term is done for purposes of recognition or measurement. The example used was a lease contract over 10 years with a 5 year option to renew. The staff proposed two alternative approaches:

• Approach 1: Lessee recognises obligation to pay rentals, the uncertainty in the lease term is addressed through measurement.
• Approach 2: Lessee recognises obligation to pay rentals over a specified lease term. Uncertainty is addressed through recognition.

It was noted that the FASB voted for approach 2. The Board discussed various implications of both approached. Finally, the majority of the Board members voted in favour of approach 2.

Determining Lease Term under Approach 2

The staff highlighted that under approach 2 an entity would be required to establish a lease term for the purpose of recognition. Possible solutions to this issue presented were:

• Approach 2A: a probability threshold
• Approach 2B: a best estimate
• Approach 2C: a best estimate - most likely lease term

Some Board members expressed concern over the term 'best estimate' as it implied a certain degree of subjectivity. Again, the Board discussed certain implications and agreed with the staff recommendation that the most likely lease term (approach 2C) should be used.

Purchase options

The Board agreed with the staff recommendation that the possible exercise of a purchase option was reflected in the obligation to be recognized by the lessee and that it was to be included if exercise of the option was the most likely outcome.

Measurement of contingent rentals

The staff presented three possible approaches to measure contingent rentals:

• Best estimate
• Best estimate – most likely amount of contingent rentals
• Probability-weighted best estimate

Residual value guarantee

The Board decided to require that the initial assets and liabilities recognised by the lessee should reflect the obligation to make payments under a residual value guarantee.

Subsequent Measurement of right-to-use asset and obligation to pay rentals

The staff presented the Board with their approach to subsequent measurement of the lessee's right-to-use asset and obligation to pay rentals. The proposed accounting would be as follows:

• Amortise/depreciate right-of-use asset
• Apportion the lease payments between a finance charge and a reduction of the outstanding obligation
• Present interest expense and amortization/depreciation in the income statement.

The Board discussed the interaction with the conclusions reached in the financial statement presentation project.

One Board member noted that the proposed accounting would not meet the cohesiveness objective. The Board agreed, however, with the staff recommendation.

The staff continued to address the issue of reassessment of lease term. The staff proposed to continuously reassess the lease term. The Board agreed.

The staff then turned to the reassessment of the obligation to pay rental. The staff proposed to reassess the obligation to pay rentals at every reporting date. The Board agreed.

For the resulting change in the estimated lease payments the staff proposed a cumulative catch up approach by discounting the new cash flow estimates with the original effective interest rate. Some Board members expressed concern over the use of the original effective interest rate. The Board had a lengthy discussion on whether also rate changes should trigger reassessment, or whether remeasurement should only be triggered if cash flows changed. The FASB voted for a cumulative catch up approach. The Board voted in favour of a cumulative catch up approach. The staff continued to ask the Board where the changes in estimated rental payments should be recognised. The staff recommended treating all reasons for changes in rental payments similarly and reflecting the balancing journal entry in an adjustment to the right-of-use asset. The Board agreed.

Presentation of Leases

Presentation of the right-to-use asset

The staff presented the Board with possible alternatives of presenting the right-to-use asset in the statement of financial position:

• Approach A: presentation in line with the underlying asset
• Approach B: presentation as an intangible asset
• Approach C: different presentation for different types of leases

Staff noted that additional disclosures should accompany any of the presentation approaches. The staff recommended approach A. The Board agreed with no support for a concept of an 'in substance purchase'.

Presentation of the obligation to pay rentals

The staff recommended that the obligation to pay rentals should be presented as financial liabilities not being required to be presented separately from other financial liabilities. One Board member was concerned that the staff recommendation would not be in line with the cohesiveness principle. Staff responded that it did not consider the outcomes of the current financial statement project. The Board agreed to the staff recommendation.

The staff informed the Board that the presentation in the statement of financial position will drive income statement presentation, but that this would not be addressed at this meeting.

Subleases

The staff informed the Board that in sublease scenarios, the different accounting treatment for lessee (accounted for under the new model) and lessor (accounted for under the IAS 17 model) accounting would create problems. This resulted from the Board's decision only to address lessee's accounting in the project. The staff recommended deferring this issue until after publication of the discussion paper. The Board agreed and asked the staff to use the comment period to address the issue of subleases. FASB staff informed the Board that the FASB indicated that if this issue would not be resolved, they would not move on with this project.

Discussion at the January 2009 IASB Meeting

(FASB staff participated by video link.)

The staff informed the Board that the FASB has made the decision that lessor accounting (including subleases) should be further analysed and included as a high level discussion in the upcoming discussion paper (DP) with specific questions, but without changing the scope of the DP.

The staff noted that the FASB has also discussed whether in-substance purchases should be within the scope of the project, but decided no change in scope.

Furthermore, FASB discussed how a right-of-use model as proposed for lessees in the DP could be applied to lessor and decided that its DP should have a high-level discussion of lessor accounting.

The staff asked the Board whether it was willing to defer publication of the DP to include the outcome of the FASB staff analysis.

The Board discussed several aspects of these outcomes of the FASB discussion and the possible impact on the IASB's project, particularly on the timing and possible delays. Staff was asked how long the additional analysis by the FASB on lessor accounting would take. Staff responded that could be a matter of weeks, but possibly a month.

The chairman noted that this would cast doubt over the 2011 completion goal and expressed concerns over the massive changes of the Board membership at that point. He proposed that the IASB should go ahead with the DP as it stands and publish any output from the FASB as a supplementary DP. The IASB DP, to be issued shortly, should highlight that there is more to come.

The Board agreed.

Lessor Accounting

The staff informed the Board that FASB staff saw itself in a position to provide a high-level discussion and issues on lessor accounting. The staff indicated that this analysis would not contain preliminary views. The Board agreed to defer issuing the leases discussion paper if the lessor section could be done within the timeframe indicated. The FASB also committed resources to further develop lessor accounting proposals.

March 2009: IASB publishes preliminary views on leases

On 19 March 2009, the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) have published, for comment, a discussion paper (DP) Leases: Preliminary Views. Comments are requested by 17 July 2009. The DP is available on the 'Open for Comment' Section of the IASB Website. In the DP the IASB and the FASB propose a possible new model for lease accounting. The model is based on the principle that all leases give rise to liabilities for future rental payments and assets (the right to use the leased asset) that should be recognised in an entity's statement of financial position. Below are a few of the boards' preliminary views in the DP. Click for IASB Press Release (PDF 61k).

Deloitte's IFRS Global Office has published an IAS Plus Update Newsletter – Boards Issue Preliminary Views on Lease Accounting (PDF 129k).

Discussion at the May 2009 IASB Meeting

FASB staff joined the meeting via video link.

The staff introduced the paper by noting that the FASB staff is undertaking initial work on lessor accounting issues during the comment period of the Leases discussion paper. At this meeting the Board will be asked to consider analysis of rights and obligation in a simple lease contract.

The first question the staff asked the Board was whether the Board agreed that the lessor has an asset for its right to receive rental payments from the lessee. The Board unanimously agreed.

The Board then considered what is the credit? That is, does the lessor derecognise all or a portion of the leased item or does the lessor have a liability for the obligation to allow the lessee to use the leased item? The staff explained that under the first approach, the lessor is viewed as having transferred a portion of the leased term to the lessee (View A). Under the second approach, the lease contract is viewed as creating a new right, leaving the lessor's rights relating to the leased item unchanged. The leased item is treated as the lessor's economic resource and continues to recognise the leased item (View B).

Some Board members expressed support for view A, although the majority of Board members supported view B. There was disagreement amongst Board members as to which of the views is consistent with the framework. Those who supported View B expressed a number of concerns with View A, including the fact that they were concerned that following the approach in View A would give a day 1 profit. Those in support of View A were concerned that View B would result in entities (for example, banks) having assets on their balance sheet for which all the risks and rewards had passed on to someone else. Concerns were also expressed that View B was 'grossing up' the balance sheet and would potentially impact on ratios. It was noted, however, that this may be overcome by presenting the gross amounts on a linked (net) basis.

The (acting) Chair said he would like more time to reflect on the issues and requested the staff to consider the issues raised by the Board members, although it was noted that a significant majority of the Board members favoured View B.

Discussion at the June 2009 IASB Meeting

FASB staff joined by video conference.

Impairment of right-of-use asset

The staff opened the discussion by reminding the board that they have previously tentatively decided to requite initial and subsequent measurement of a right-of-use asset on an amortised cost basis. Consistent with other assets measured on an amortised cost basis it needs to be determined how a right-of-use asset will be reviewed for impairment.

The staff noted that they believe there are four options for impairment accounting for right-of-use assets:

1. require all entities to use IFRS approach
2. require all entities to use US GAAP approach
3. develop specific approach for right-of-use assets
4. require entities to refer to existing applicable standards (IAS 36 for IFRS preparers, SFAS 144 for US GAAP preparers)

The staff recommended the last alternative. The Board agreed with the staff recommendation.

Revaluation

The staff introduced the topic by noting that the discussion was about whether an option for revaluations should be included for right-of-use assets, not a requirement to revalue. The staff recommended that revaluation of right-of-use assets should be permitted. The staff further added that their recommendation did not change regardless of whether the right-of-use asset was considered to be intangible or tangible in nature. The staff believes that permitting revaluation may provide users of financial statements with more relevant information about the revalued assets than amortised cost based measurement. They also believe that revaluation will ensure consistency with other non-financial assets in IFRSs. The FASB staff did not agree with the IASB staff recommendation; the FASB staff recommended that revaluation of right-of-use assets should not be permitted. At their Board meeting the FASB agreed with the FASB staff recommendation.

One Board member asked the staff whether they thought the revaluation criteria would be IAS 16 or IAS 38? The Board member thought that the Board needed to decide this first as revaluation under IAS 38 requirements would be impossible as there is no active market. The Board member would favour no revaluation.

Another Board member supported the IASB staff recommendation. They thought that the appropriate standard to look to would be IAS 16, not IAS 38. The Board member did not see why financing a non-current asset by leasing rather than by an outright purchase should change whether a revaluation should be allowed.

Some other Board members thought that the right-of-use was an intangible.

Another Board member said that they agreed with the IASB staff recommendation. The Board should not revisit the current requirements. Whether IAS 16 or IAS 38 is applied depends on the nature of the asset you are leasing. A number of other Board members agreed with this notion.

In response to a Board member's question, the staff said that the FASB made their decision as it was consistent with current US literature. The FASB staff member added that the FASB think that rights-of-use are intangible. This is a difference.

The Board voted, and all favoured the IASB recommendation.

The staff summarised the discussion by saying that we should look to the nature of the underlying asset and apply that revaluation model. In that case the remainder of the questions in the paper were not required.

One Board member asked whether the staff thought that the revaluation should be applied to classes or assets or individual assets, as in IAS 40. The staff responded by noting that they need to consider the interaction between IAS 40 and the leasing proposals and will bring this back for Board consideration at a future meeting.

Initial direct costs

The staff introduced the discussion by stating that there are three possible ways of addressing how initial direct costs should be accounted for:

• (a) add initial direct costs to the carrying amount of the right-of-use asset
• (b) allocate initial direct costs between debt issuance costs and asset acquisition costs
• (c) recognise such costs as an expense as incurred.

The staff recommended (a), and the FASB at their meeting agreed with (c).

One Board member agreed with the FASB. Another noted that if the asset is revalued the initial direct costs would be expensed anyway. Another Board member said that they would like to get to the FASB answer. Another added that if the initial direct costs are added to the costs to the asset, then the asset would not equal the liability on initial recognition. It would also be inconsistent with the definition of cost in the discussion paper. A number of other Board members supported the IASB staff view.

The Board voted. The vote was split: 7 Board members favoured (a) while 7 favoured (c) - expense. The Chairman used his 'casting vote' (paragraph 35 of the 2009 IASCF Constitution) to make the vote 7 for (a) and 8 for (c).

Transition

The staff initially considered four ways of addressing how the new lease standard should be applied:

• Option A – retrospective application
• Option B – prospective application to new lease contracts entered into after the effective date
• Option C – measure all leases at fair value on the transition date
• Option D – measure all leases at the present value of the lease payments, discounted using the lessee's incremental borrowing rate on the transition date.

The staff recommended Option D. At their meeting, the FASB agreed with the staff recommendation. The Board also generally supported the staff view, subject to some modification.

Sale and leaseback

The final issue to be addressed was to obtain preliminary views from the Board on how a seller/lessee should account for a sale and leaseback transaction under a right of use accounting model. Lessors are also discussed in the staff paper; however, the Board would not be asked to reach a preliminary view on lessor accounting at this stage. The staff noted that they were not attempting to develop a general theory of derecognition for non-financial assets. The staff also noted that they have assumed that the sale proceeds received by the seller/lessee equal the fair value of the property sold and that the leaseback is at a market rate.

The staff said that the FASB preferred an approach where the entire asset was derecognised. They preferred to look at whether a sale had occurred, regardless of the existence of a leaseback. They would look at the existing control based assessment and consider the use of some specific criteria in making this judgement.

The staff then turned to the first question; whether the Board agreed with the staff recommendation that a seller/lessee should consider whether the entire asset qualifies for derecognition. Following some discussion, the Board agreed with the staff recommendation.

The second question posed by the staff was whether the Board would support (a) always derecognising the leased asset or (b) developing criteria to differentiate between transactions that qualify for derecognition and those that do not.

A number of Board members thought that they should use the revenue recognition (control) model. Following discussion the staff summarised by noting that the Board would look to the control model as to whether there is a sale or derecognition and look to revenue recognition for indicators as to whether this has occurred. The Board agreed.

The staff then asked the Board if they would like additional criteria beyond the revenue recognition criteria? The Board indicated that they did not; the revenue recognition criteria should be sufficient.

As a final question, the staff asked the Board if a sale is recognised, would they want to defer any gain associated with this. The Board indicated that they would not want to defer any gain.

Question 4 of the staff paper was not discussed.

Discussion at the July 2009 Joint IASB-FASB Meeting

The Boards discussed a staff paper on preliminary views on lessor accounting. At the May meeting the Boards tentatively decided that a lessor would recognise an asset representing its right to receive rental payments from the lessee (a lease receivable) and a liability representing its performance obligation under the lease.

The initial and subsequent measurement of the lessor's receivable

The Board agreed with the staff's proposal to measure lessor's receivable in line with the applicable requirements of IFRSs and US GAAP.

For initial measurement, the Boards agreed that little divergence is to be expected between the respective definitions as fair value is used under both systems (calculated as present value of future cash flows). Nonetheless, several members of the Boards raised the issue whether the lease receivable was a financial instrument or was to be scoped out from the financial instruments standard. The Boards were unable to agree on the answer. Several members were concerned about possible inconsistency between lessee and lessor accounting.

The Boards agreed that using the interest rate implicit in the lease for discounting the expected lease payments is appropriate.

Some Board members were concerned about the divergence between the proposed financial instruments standards by FASB and IASB and its impact on initial and subsequent measurement. On subsequent measurement, many of the Boards' members though that scoping out leasing from the financial instruments project would be necessary (as it is uncertain whether it would fulfil the basic loan feature and whether it can be assessed to be managed on a contractual yield basis) and its fair value could not be ascertained.

One Board member was concerned about the fluctuations of fair value of the receivable that can arise not only from the interest rate changes but also from the changes of the value of the underlying. As the Boards were unable to agree at this point if it would represent a receivable (as a financial instrument) or a right (within the meaning of revenue recognition project), the staff was directed to provide additional analysis. The Boards seemed to like the notion that in simple leases the receivable could be a financial instrument, whereas in more complex issues (contingent rent, options) the conclusions seemed to be the opposite.

The initial and subsequent measurement of the lessor's performance obligation

The Boards agreed that performance obligation should be measured at transaction price. Some Board members seemed to be concerned that this approach could instigate a Day 1 gain.

The Board also agreed with the subsequent measurement as reflecting decreasing in the entity's obligation to permit the lessee to use the leased item over the lease term. Some of the Boards' members noted that different principles for goods and services shall be developed in line with the principles within revenue recognition.

The presentation of a lessor's receivable and performance obligation

The Boards had divided opinions of how to present leases in lessor's accounting. The Boards were split between gross presentation of all three items (leased asset, lease receivable and performance obligation), lease receivable net of performance obligation, leased items net of performance obligation and a bifurcation between the present value and the estimate of residual amount. Several Board members noted that it is the old finance and operating lease issue. Other Board members noted that perhaps three distinct models of presentation would be required in order to capture the underlying economic reality (financing, provision of goods and provision of services). No decision was reached.

The Boards discussed various issues related to specific industries, requirements to Banks as lessors, real estate sector. The Boards were stuck in the debate of the recognition of the whole asset, rights previously not recognised being recognised, inconsistency between treatment of purchase finance and leases even though they represent the same economic reality.

The Boards concluded that significant issues of definition, scope and measurement would have to be revisited. The staff noted that the Board will be presented additional analysis (revenue recognition model versus financial instruments) in October, after taking into account the feedback from the constituents to the preliminary views discussion paper as well as input from the discussions at working group on leases in September.

Discussion at the September 2009 IASB Meeting

Comment Letter Summary

FASB staff joined the meeting by video link.

The Board discussed the summary of 290 comment letters received to the discussion paper Leases Preliminary Views. The Board did not take any decision during this session.

The staff highlighted the following issues where the majority of constituents expressed different preferences from those articulated by the Board:

• Lessor accounting – the decision to defer consideration of lessor accounting
• Probability-weighted estimate of contingent rentals payable
• Inclusion of the contingent rental in the lessee's obligation

The staff also highlighted the need for further guidance for distinguishing service contracts and leases in addition to that included in IFRIC 4 as this distinction would become much more pertinent under the new rules.

In addition, most constituents seemed to prefer a derecognition approach for lessor accounting. The Board considered the comments by the investment property companies that new leases accounting should not apply to lessors currently applying the fair value model in IAS 40. The Board agreed that it would assess the need for a separate model for the industry on one of the future meetings.

The Board considered the proposed timing of the new standard. It reaffirmed the timetable for lessee accounting with the ED expected in June 2010 and final standard in June 2011.

Regarding lessor accounting, the staff will provide additional analysis for the October meeting. The Board noted that the timetable for the lessor accounting would be based on the outcome of the discussions on the basic features of the lessor's accounting model. At that time, the Board will decide how to proceed with the lessor accounting (whether to issue a separate discussion paper or exposure draft on lessor accounting) and will decide on timing of the project.

One Board member was particularly concerned about the consistency between derecognition model for lessor accounting and the overall derecognition model that would be adopted as part of the IAS 39 replacement project. The Board agreed to address this issue as part of its deliberations.

Discussion at the October 2009 Joint IASB-FASB Meeting

Lessor Models under a Right-of-Use Approach

The staff began the leases portion of the meeting discussing potential models that could be used for lessors in accounting for leases. One model is the derecognition approach. Under this approach, the lessor is viewed as having transferred a portion or all of the leased asset to the lessee in exchange for a right to receive rental payments. The lessor derecognises the leased asset because it no longer controls the right to use that asset during the lease term. As such, the lessor derecognises the leased asset and recognises a receivable. The lessor continues to recognise those rights that have not been transferred to the lessee (the residual value of the asset).

Another model is the performance obligation approach. Under this approach, the lessor is viewed as having granted the lessee the right to use its economic resource (the leased asset) in exchange for the right to receive rental payments. The lessor does not lose control of the leased property and continues to recognise the leased asset. The lessor would recognise a receivable for the right to receive rental payments and a corresponding liability for the obligation to permit use of the leased asset.

The staff also discussed two other models: the current operating lease approach and the dual-model approach. The current operating lease approach would retain the current guidance for operating leases for lessors. The dual-model approach recognises that not all leases are the same and would provide guidance on when to use each model.

Both Boards decided on the performance obligation approach. Members supporting this approach noted that 'possession' of a leased asset is not synonymous with 'control' and that the derecognition approach confuses the underlying asset with a separable right to use the asset. The Boards directed the staff to perform further analysis on how this model would (a) be impacted by impairment, (b) affect manufacturing lessors, and (c) affect investment properties.

The Boards discussed the financial statement presentation of the receivable, leased asset, and obligation. Some Board members indicated that they may support a net presentation approach in which the receivable and obligation are netted, but no decision was made at this meeting. The Boards asked the staff to perform further analysis of possible presentation approaches under performance obligation approach.

Should lessees use the right-of-use approach?

The staff asked the Boards to confirm their prior decision that lessees apply a right-of-use approach for a simple lease contract. The staff did not ask the Boards to discuss the scope of the lease project, the definition of a lease, or leases with options and contingent rentals. These topics will be discussed at future meetings. The staff also acknowledged that the Boards will need to consider how lease accounting applies to short-term leases and immaterial leases. The Boards unanimously confirmed their decision to proceed with a right-of-use approach.

In-substance purchases/sales

The staff proposed that lease contracts that are purchases/sales of the leased item should be excluded from the scope of the new lease standard. The Boards agreed that sales/purchases should be excluded from the scope of the new lease standard.

The staff next recommended that an entity should consider applicable revenue recognition guidance in determining whether a sale/purchase of a leased item has occurred. The Boards expressed concern with this approach as there are different views on what 'transfer of control' means with regard to lease transactions, and therefore they rejected this recommendation.

The Boards agreed that the determination of whether a sale/purchase has occurred should be based on the specific terms of the lease. For example, Board members generally agreed that if title transfers at the end of a lease, then a sale/purchase has occurred. The Boards decided that the new lease standard should provide guidance on how an entity should determine whether a sale/purchase has occurred and directed the staff to develop criteria that would assist entities in this assessment.

The staff also asked Board members whether they supported creating a separate accounting model for transactions that were within the scope of the new lease standard but that had sales/purchases features. The Board members affirmed that only one model (the right-of-use model) should exist in the new lease standard and that another model for leases with some sales/purchases features should not be developed.

Timing of initial recognition

The staff proposed to the Boards that entities should recognise assets and liabilities from the lease transaction upon contract signing. Further, the staff recommended that between contract signing and delivery of the leased asset(s), the unit of account is the contract as a whole and that the contract position should be presented net in the statement of financial position. Upon delivery, the lease asset and lease obligation would be presented on a gross basis. The Boards agreed with the staff's recommendation.

Next, the staff recommended that entities should initially and subsequently measure the assets and liabilities (the net contract position) in a contract on a cost basis. The Boards agreed with the proposal but clarified that the cost would be subject to impairment under other applicable standards. In other words, if there was impairment on a lease contract between contract signing and delivery of the leased asset, the entity would 'write-down' the asset and the contract would be in a net liability position. If the lessee decided to cancel the contract, it would derecognise the net lease contract and record an obligation in the amount of the penalty to cancel the contract. The Boards also agreed with the staff to require additional disclosures in situations where the time between contract signing and delivery is long and/or the rights and obligations are significant.

Discussion at the November 2009 Joint IASB-FASB Meeting

Lessee accounting – Initial measurement

The Boards continued deliberating the Leases project by discussing the initial measurement of a lessee's obligation to pay rentals and the right-of-use model. The Boards reaffirmed their decision that the lessee's obligation to pay rentals should be measured at the present value of the lease payments. Two possible approaches to the discount rate were discussed:

• the interest rate implicit in the lease
• the lessee's incremental borrowing rate

Some Board members were concerned that the interest rate implicit in the lease was not consistent with the right-of-use model and would lead to considerable problems for the lessees. Most Board members preferred using the incremental borrowing rate on grounds that it is more operational. While acknowledging that such a decision would not create symmetry in the lessor/lessee accounting, most Board members noted that the lease accounting model being developed will not lead to lessor/lessee accounting symmetry, especially in more complex leases (due to different assessment of options and contingent rentals). Most Board members also noted that these two methods are not exclusive and in the simple examples should lead to the same result.

After a short discussion the Boards unanimously agreed that the lessee's incremental borrowing rate should be used to discount the lease payments. Nonetheless, the Exposure Draft will contain guidance on when the rate implicit in the lease might be indicative of the lessee's incremental borrowing rate. Moreover, some Board members said the definition of the rate implicit in the lease should be revised to conform to the right-of-use model. The staff will provide additional analysis of the definition on a future meeting.

The Boards also agreed that initial measurement of the lessee's right-of-use asset should be at cost, which is equal to the present value of the lease payments discounted using the lessee's incremental borrowing rate.

Finally, the Boards agreed that any initial direct costs should be added to the amount recognised as an asset. The Boards asked the staff to investigate any differences in the definition of direct cost between IFRSs and US GAAP, as some Board members expressed concerns that potential differences might exist (direct and incremental cost under IFRSs and direct cost under US GAAP).

Lessee accounting – Subsequent measurement of the obligation to pay rentals

The Boards agreed that the subsequent measurement of the lessee's obligation to pay rentals should be an amortised cost basis.

The Boards then considered the need for re-assessment of the incremental borrowing rate. The Boards first discussed re-assessment of the incremental borrowing rate for simple leases when cash-flows did not change significantly (that is, leases without options and contingent rentals). Most Board members agreed to prohibit incremental borrowing rate reassessment in such cases as they believed it is inconsistent with an amortised cost model.

Nonetheless, the Boards did not extend this analysis for more complex leases. In an indicative vote, both Boards tentatively agreed that if the cash flows changed significantly (for instance, due to options or contingent rentals), the incremental borrowing rate should be reassessed. The staff will provide additional analysis at a future meeting.

The Boards also agreed that there should not be an option to subsequently measure the lessee obligation to pay rentals at fair value. At that point one FASB member noted that such a decision might be reconsidered when scope of the Financial Instruments project is finalised, as he believed that all funding costs should be considered consistently. The IASB chairman also noted that the IASB has not yet considered scope of the Financial Instruments project. Consequently the Boards agreed to specify the required accounting for the lessee's obligation to pay rentals in the Lease standard, subject to modification of scope of the new IFRS 9 (and the FASB equivalent).

Lessee accounting – Subsequent measurement of the right-of-use asset

The Boards reaffirmed their respective decisions to require subsequent measurement of the lessee's right-of-use asset on an amortised cost basis.

The Boards continued their discussions regarding the decrease in value of the right-of-use asset. Some IASB members questioned the nature of the right-of-use asset and its implications. The Boards agreed that the right-of-use asset is an intangible asset and, consistent with this conclusion, they agreed that the decrease in the value of the right-of-use asset should be presented as amortisation rather than rental expense in the statement of comprehensive income. Some IASB members were concerned that such a decision would affect performance indicators (such as EBIDTA) without a change in economic substance. The Boards agreed that separate disclosure of the amortisation of the right-of-use might be warranted to facilitate analysis of underlying economic performance. In response the staff noted that disclosure requirements would be discussed at the December or January Board meeting.

Regarding impairment of the right-of-use asset, the Boards discussed using the existing applicable standards under US GAAP and IFRSs to recognise and measure impairment. The Boards agreed that convergence would be warranted in this area but noted that any potential impairment convergence project could only be part of the post 2011 agenda. The Boards also noted that a separate model for right-of-use asset would be impracticable, and a 'look-through' approach to the underlying assets would be impracticable as well. Therefore, the Boards agreed that the lessee should refer to existing applicable impairment standards to determine whether its right-of-use asset is impaired and a loss should be recognised (IAS 36 for IFRS preparers ASC 360-10-35 for US GAAP preparers).

The Boards continued to discuss the possibilities for revaluation of right-of-use assets. The IASB members discussed several practical issues connected to the revaluation issue:

• revaluation of the more complex lease with options
• identification of the asset that was to be revalued (and possible look-through approach)
• consistency between own and leased property (especially for investment properties)
• interaction with the earlier decision not to allow revaluation of the lessee's liability and scope of IFRS 9.

Finally, the IASB agreed that a lessee should refer to IAS 38 for revaluation of the right-of-use asset even though the conditions for revaluation of intangible assets are strict. The FASB reaffirmed that US GAAP did not permit revaluation of right-of-use assets.

Lessor accounting – Initial and subsequent measurement of the lessor's receivable and lessor's performance obligation

The Boards reaffirmed several past decisions. The Boards agreed to develop a specific approach for the initial and subsequent measurement of the lessor's right to receive rental payments within the Leases project. One FASB member nonetheless urged the staff to ensure consistency with the progress made on the revenue recognition project so as not to duplicate guidance.

The Boards also agreed that the initial measurement of the lessor's right to receive rental payments should be at the present value of the total expected cash flows discounted at the interest rate implicit in the lease. Some Board members noted that definition of the interest rate should be revised to clarify that the effect of contingent rentals and changes in estimated lease terms should be considered in measuring the interest rate implicit in the lease. The staff noted it would address those issues at a later stage.

The Boards agreed that any initial direct costs should be added to the lease receivable. The Boards asked the staff to ensure consistency in the definition of initial direct costs between IFRSs and US GAAP.

The Boards also agreed that the subsequent measurement of the lessor's receivable should be amortised cost using the effective interest rate. Nonetheless, at this point, the Boards noted that this decision depends on the progress on the Financial Instruments project (especially the scope of the FI project and applicability of the impairment model to lease receivables).

The Boards agreed that the initial measurement of the lessor's performance obligation(s) should equal the transaction price (that is, the customer consideration measured at the amount of the receivable).

The Boards also agreed that the subsequent measurement of the lessor's performance obligation should reflect decreases in the entity's obligation to permit the lessee to use the leased items over the lease term. One IASB member asked for further clarification on how this decrease would be articulated.

Lessee accounting – Leases with options to extend or terminate

The Boards discussed several approaches to treatment of options in leases (including component, disclosure, and measurement and recognition approaches). The Boards finally agreed to adopt the recognition approach (IASB split 10:4; FASB unanimous). Under this approach, options would not be recognised separately, and uncertainty about the lease term should be dealt with through recognition, that is, one of the possible lease terms is selected and the accounting is based on that lease term. Some Board members were concerned that this approach failed to capture the benefits of optionality for the lessee.

The Boards also agreed that the lease term should be the longest possible term that is more likely than not to occur. Nonetheless, some IASB members were concerned that such an approach would lead to an appearance of higher leverage than the underlying economic reality. Other IASB members noted that if the required information for alternative approaches (based on inceptive pricing) were available, full fair value of the options could be determined. Nonetheless, those Board members did not believe that these were available.

The Boards agreed that a lessee should consider all relevant factors in determining the lease term. Nonetheless, some Board members were concerned that the lessee-specific considerations were included (such as lessee intentions and past practice).

The Boards also agreed that an option to renew at a market rate should be considered when determining the lease term.

Finally, the Boards agreed that the lease term should be reassessed at each reporting date and that changes in the obligation to pay rentals resulting from such reassessment should be recognised as an adjustment to the carrying amount of the right-of-use asset. The Boards also agreed that a detailed examination of every lease is not required unless there is a change in facts and circumstances that indicates that the lease term needs to be revised.

Lessor accounting – Options to extend or terminate a lease

The Boards extended the agreed lessee approach to options on lessor accounting. Some Board members were concerned with prescribing a symmetrical approach between the lessor and lessee accounting. They noted that symmetry is illusory, as even though symmetrical considerations would be applied, the lessor and lessee might have different information and, thus, final accounting entries would not be symmetrical. Finally both Boards agreed with symmetrical considerations for lessees and lessors on options to extend or terminate (IASB with a bare majority of votes).

The Boards agreed that the lessor would recognise a lease receivable based on the longest term more likely than not to occur. The Boards also agreed that the lessor should be required to reassess the lease term at each reporting date similarly to requirements for lessees.

The Boards also agreed that any change in the lease receivable resulting from a reassessment of the lease term should be recorded as an adjustment to the performance obligation.

In addition, the Boards agreed that if a change in the lease receivable resulted from a decrease in the lease term results in an overstatement of previously recognised revenue, then that revenue should be charged to profit or loss in the current period.

Discussion at the December 2009 IASB Meeting

Contingent rentals and residual value guarantees

Lessee accounting

The Boards deliberated their revised proposed approach to the recognition of contingent rentals as expressed in the DP Leases in the light of the fact that most respondents to the DP disagreed with Boards' proposed approach.

The Boards acknowledged that the recognition of contingent rentals was the most controversial area of the DP but confirmed the view that as contingent rentals are included in a lease contract, it forms part of the lease obligation. Once a lessee has agreed to and signed the lease agreement, it has created a past event the gives rise to an obligation.

The revised approach considered by the Boards includes:

• recognition of all contingent rentals;
• no reliability criteria for the recognition of contingent rentals;
• the expected outcome technique be used in measurement of contingent rentals;
• if lease rentals are contingent on changes in an index such as consumer price index or prime interest rate, the obligation is measured using a forward rate;
• requiring the remeasurement of obligation for contingent rentals at each reporting date when there has been a material change in the obligation;
• changes in the obligation resulting from the lessee buying more or less of the right-of-use should be recognised as an adjustment to the asset. All other changes are recognised in profit or loss;
• residual value guarantees are recognised together with the obligation to pay rentals;
• residual value guarantees are measured in the same way as contingent rentals; and
• changes in the obligation resulting from changes in the residual value guarantee are recognised in profit or loss.

The majority of Board members expressed their support with for the revised approach; however, they disagreed with the proposed treatment of remeasurements of obligations for contingent rentals. As part of the deliberation on the matter, the following two additional methods were suggested:

• remeasurements that affect both the current and future periods are added to the asset and recognised through amortisation over the remaining term; or
• remeasurements are allocated pro-rata across the lease term and the portion allocated to future periods are added to the asset. The portion allocation to past periods is recognised in profit or loss.

The staff was instructed to analyse further the appropriate accounting for remeasurements, taking into consideration the alternative methods suggested and present the analysis at a future meeting. The Boards also did not vote on the treatment of changes in the residual value guarantee pending the outcome of the further analysis.

Lessor accounting

The Boards considered whether there should be symmetry with lessee accounting in the treatment of contingent rentals form the lessor's perspective.

One Board member questioned how there could be symmetry if the lessee and the lessor use different estimates to measure the lease obligation. The Boards clarified that symmetry relates to the principles to be applied and does not require the outcome to be the same.

Several Board members also expressed concern with developing a revenue model for lessors that is different to the revenue recognition model.

The Boards proposed that a reliability threshold should be instituted for the recognition of contingent rentals from the lessor's perspective.

With the exception of the reliability threshold, and pending the outcome of the analysis for treatment of remeasurements, the Boards agreed with the approach as proposed for lessees.

Scope – Intangibles and other possible exclusions

The Boards considered whether the scope of the proposed guidance on leases should exclude the following leases;

• exploration of natural resources such as minerals, oil and natural gas;
• biological assets; and
• intangible assets.

Several Board members remarked that although they agree with the direction that the staff is taking, they need to understand the reasons for excluding these leases from the scope. The Boards agreed that since there is a specific project to deal with extractive activities, and pending its outcome, these activities could not be included in the scope of this guidance.

The Boards further agreed that leases of intangible assets should be excluded from the scope but that the right to use an asset (that is, sub-leases) should be within the scope. It was agreed that since the accounting for leases is principally a cost-based measure, biological assets measured at fair value should also be excluded.

The Boards qualified that the decision to exclude these arrangements from the scope of the guidance is not an irrevocable decision and that these leases could later be included in the scope as other projects are finalised.

Scope – Non-core and short-term leases

The Boards considered whether an exemption from the proposed lease accounting should be provided for non-core leases and short-term leases.

The majority of Board members agreed to that an exemption for short-term leases should be provided. When discussing the criteria for the exemption there was uncertainty as to whether or not the criteria should be expanded to include a requirement that short-term leases should be immaterial, individually or collectively, in order to qualify for the exemption. The Boards had a long discussion about whether materiality should be specifically included in the criteria or whether the general materiality guidance would be sufficient to ensure that material leases are accounted for.

On the question of the time limit allowed for the exemption, the majority of Board members agreed that the exemption should be limited to leases with a contractual term less than one year without an option to renew the lease. Some Board members suggested a similar exemption for lessors.

Without much discussion, the Boards unanimously agreed the non-core leases should not be excluded from the scope of the proposed guidance.

Due to time constraints, the Boards did not consider the agenda papers dealing with the purchases and sales of the underlying asset or lessor accounting for investment properties. Those matters will be discussed at future meetings.

Discussion at the Special IASB Meeting 5 January 2010

Scope - Purchases and Sales of the Underlying Asset

The Boards started their discussion with identification of a principle that could be used to determine when a transaction was a purchase or sale of the underlying asset and thus should be excluded from the leases guidance.

Most Board members agreed with the staff proposal to base that principle on control: when a contract transfers control of the underlying asset, it is in fact a purchase or sale and should therefore be excluded from the scope of the leases standard.

Despite the unanimous support for that principle, several Board members expressed their concerns whether that principle would be operational and whether additional guidance that would encompass also risk and rewards type of guidance would not be required. Other Board members were concerned that control was to be defined in the same way as control in the revenue recognition project due to the specific nature of the leasing relationship with continuing involvement (which can be interpreted as a kind of a protective right). These members were concerned that without a more detailed specification (for example, identification of the control at the end of the lease term) the control principle would not be operational, as control is effectively shared for the lease term.

The Boards spent a considerable amount of time discussing the issue of the definition of control. Some Board members proposed to adapt the revenue recognition definition of control to include also a future ability to direct the use and receive benefits from the underlying asset or to include residual risk and rewards in the test. The Boards finally agreed with the concept of control but instructed the staff to try to find words that would better articulate that concept for the specific environment of leases. Following that decision the Boards decided to wait with the discussion on the perspective from which to assess the transfer of control for the next Board meeting, when the principle of control would be refined.

Some Board members were concerned that in case the definition of control differed in the revenue recognition and leases projects, some contracts might fall out of scope of both standards (and thus no guidance would apply to them).

The Boards agreed to include in the leases guidance indicators to help reporting entities determine whether control had transferred to the lessee. There was little disagreement among the Board members that control of the underlying asset was normally transferred in leases where title to the underlying asset transfers to the lessees automatically at the end of the lease or in leases that include a bargain purchase option. Nonetheless, some Board members were concerned how the bargain purchase option was defined and whether it should be assessed at inception or reassessed at each reporting date. The staff clarified that the bargain purchase option should not be reassessed: it should be considered only at inception.

On the other hand, views of Board members were split on whether control of underlying asset was normally transferred when a contract covers the whole of the expected useful life of the underlying asset or when a contract is expected to cover the whole of the expected useful life of the underlying asset because it includes options to renew the lease at a bargain price. Even though some members supported such extension, other Board members remained concerned and proposed alternative criteria that would capture these types of situations. The Board asked the staff to develop those indicators further and, particularly, to clarify how they were articulated.

The Boards agreed that purchase options should be accounted for in the same way as options to expend or terminate the lease. Some of the Board members expressed their concerns about the consistency of the treatment of purchase options (and options to expand or terminate) and contingent rentals, as both of those might capture the same economic substance.

Discussion at the January 2010 Joint IASB-FASB Meeting

Subsequent measurement of leases with options and contingent rentals under amortised cost

At their November 2009 meeting, the Boards tentatively decided that the subsequent measurement of the lessee's obligation and the lessor's receivable should be measured at amortised cost using the effective interest method. The Boards considered at this meeting whether the incremental borrowing rate used to calculate the lessee's obligation, and the interest rate implicit in the lease used to calculate the lessor's receivable, should be revised where there are a subsequent reassessment of:

• the expected lease term, and/or
• contingent rentals.

Lessees

Staff presented the following three approaches with regards to the revising of the incremental borrowing rate for subsequent changes in the expected lease term:

1. No reassessment of the incremental borrowing rate;
2. Reassess by updating for the current incremental borrowing rate for the remainder of the lease term; and
3. Reassess the incremental borrowing rate with the corresponding rate at initial recognition for the revised expected lease term.

The staff explained that they are split between approaches 1 and 2.

When discussing the staff's proposals with regards to changes in the expected lease term, several Board members expressed their surprise at the split views the staff presented. One Board member supported approach 3 as this would take the lessee back to what the answer would have been if all the estimates were known at the inception of the lease. Some Board members felt that this approach will involve hindsight and rather supported approach 2 as the expected lease term applied at inception of the lease is an estimate and all changes in estimates are accounted for prospective from the date of the change. These Board members also noted that the option to extend the lease term already existed at inception and that the exercise of the option does not result in a new lease being entered into. As a result they would not allow approach 3.

One Board member remarked that amortised cost and the effective interest rate method are defined in IAS 39 and IFRS 9. If the Boards decided to have separate accounting requirements for lessees, the methodology for measuring the lessee's obligation should not be labelled 'amortised cost' as amortised cost implies that the incremental borrowing rate is not reassessed for changes in estimates. Several other Board members expressed their sympathy with approach 1 although in their minds approach 2 represents the technically correct answer. It was also noted that approach 2 may result in frustration and additional burden on preparers.

The Boards discussed the issue at great length and were reminded by one Board member that if the requirements for lease accounting are being made too complex and result in overburden on preparers, the progress made to date on the project would be lost. When put to a vote, the Boards tentatively agreed on approach 1.

With regards to revising the incremental borrowing rate for changes in contingent rental payable, the staff identified five possible approaches and proposed that the effective interest rate is not adjusted unless all or part of the rate is contractually reset to current conditions [approach 2 in the agenda papers] as this approach is the most consistent with the strict application of amortised cost under IFRSs. Without much discussion, the Boards tentatively agreed with this approach.

Lessors

For accounting by lessors, the staff recommended the same approach to be followed as for lessees, that is, no revision of implicit interest rate for changes in the estimated lease term. One Board member was curious as to why the staff had split views from the lessee's perspective but not from the lessor's perspective. The staff explained that for lessors, the implicit interest rate already takes into account options to extend the lease term, whereas the incremental borrowing rate of lessees does not. The Boards did not discuss the matter any further and unanimously agreed with the proposal not to adjust the implicit interest rate [approach 1 in the agenda papers].

With any discussion on the matter, the Boards also unanimously agreed that the lessor should not reassess the interest rate implicit in the lease for changes in contingent rentals receivables, unless the rental payments are contingent upon variable reference interest rates.

Scope – Exclusion of short-term leases

At their previous meetings, the Boards discussed whether to provide a scope exclusion for short-term leases. When presenting their analysis to the Boards, the staff explained that a materiality threshold is applied to all accounting requirements and that immaterial lease assets and liabilities are not required to be recognised. The staff then asked the Boards whether there should be an additional exclusion for short-term leases beyond the materiality principle.

The Boards discussed the matter and mixed views were expressed by the Board members. Some Board members are of the opinion that the materiality threshold is the only appropriate measure and that no additional scope exclusion should be applied. They also noted that not recording material lease assets and liabilities would allow opportunities for the structuring of leases. One Board member pointed out that to determine whether a lease asset and lease liability are material, one has to perform all the calculations, and once an entity has done the calculations, they have already performed everything that would be necessary to apply lease accounting. In this Board member's view, an exclusion based on the materiality threshold will not achieve the relief asked for by preparers.

Several other Board members were of the opinion that there should not be a scope exclusion, but rather some form of simplified lease accounting for short-term leases, by not requiring the discounting of the lease obligation. An extended discussion followed on real-life examples from various jurisdictions and how the proposed relief from lease accounting would apply in those circumstances. Various alternatives for simplified lease accounting were also discussed.

One Board member questioned specifically what was meant by materiality and repeated the question as to whether other Board members would be comfortable with material lease transactions not being recognised because they are short-term leases. It was suggested that the Board expose a proposal for allowing relief for a specified period with an explanation to constituents on what they are trying to achieve and ask whether the proposal will provide the relief requested.

A vote was taken, and the Boards tentatively agreed to allow for simplified lease accounting for lessees rather than a scope exclusion for leases with a lease term of 12 months or less.

On the question of how the lease term should be determined, the Boards agreed that it should be the maximum possible lease term achievable under the existing lease agreement, and that any option to renew or extend a lease beyond 12 months would be excluded from the simplified accounting.

The Boards then turned their discussion to accounting by lessors and whether similar relief should be provided. Some Board members noted that for lessors the matter is different than for lessees as the lessor has already recognised an asset and that there should be no difference from what was agreed to in the revenue recognition project. One Board member felt that lessors should be applying accrual accounting rather than lease accounting. The Boards then agreed that for lessors, a scope exclusion will be provided for short-term leases and that the same period, that is, 12 months and restrictions, will apply to lessors.

Lessor accounting – investment properties

The Boards discussed how a lessor should account for leases of investment properties as the proposed lessor accounting requirements does not provide users of financial statements with useful information when applied to investment properties. The Boards were presented with three alternatives:

• A: Lessor accounts for all investment properties using the proposed lessor accounting guidance (recognition of lease receivable and performance obligation with revenue recognised over lease terms as interest income and amortisation of performance obligation);
• B: Lessor accounts investment property using either the cost or fair value model (accounting policy choice). Where fair value is used, a lease receivable and performance obligation are not recognised and lease income in recognised over the lease term.
• C: Same as B, except that lessor is required to measure investment property at fair value. If lessor is unable to determine fair value reliably, the lessor would apply approach A.

Several Board members questioned why there is a difference in the accounting for investment properties carried at fair value and other items of property, plant, and equipment carried at fair value. Those Board members felt that since under the proposed lease accounting requirements, the unit of account is the right of use and not the underlying asset, how the underlying asset is accounted for should not make a difference to the lease accounting. Other Board members also questioned why the concerns from only one industry are addressed, while the Boards are not developing accounting standards for specific industries.

Several Board members expressed strong support for approach C. In their view, the fair value of investment property already takes into account the fact that the investment property is leased out, and if a lease receivable is to be recognised as well, it will result in double accounting. However, in the light of the accounting policy choice currently allowed by IAS 40, it would require an amendment to IAS 40 to remove the choice. Some Board members felt that this project is not the right place to consider amendments to IAS 40 and that approach B is, therefore, the most appropriate approach at the moment.

Other Board members were of the view that by not applying lease accounting the economic reality of the transactions of the entity is not presented in the financial statements. In their opinion lease accounting should always be applied, and the fair value of investment property should be based on the property without the existing lease arrangements in place.

It was noted that the viewpoints of the Boards on this matter are different as there is no equivalent for IAS 40 under US GAAP. After a long deliberation, it was decided that the FASB and the IASB would each consider this matter independently.

When asked to vote, the IASB members expressed a preference for approach B, with a significant majority of the IASB members indicating that they would allow approach B to be applied.

The FASB members requested the staff to prepare an agenda request on the item to analyse the possibilities open to the FASB in addressing the accounting for investment properties and their related leases.

Discussion at the 2 February 2010 Special IASB-FASB Joint Meeting

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.

Discussion at the February 2010 Joint IASB-FASB Meeting

Accounting for Changes in Contingent Rentals

The Boards agreed that changes in amounts payable under contingent rental arrangements arising from current or prior periods should be recognised in profit or loss and all other changes should be recognised as an adjustment to the lessee's right-of-use asset.

One FASB member disagreed with that approach as he believed that contingent rentals are unlike other estimates and, thus, should be allocated between profit or loss and the right of use asset on the same basis as the right-of-use asset is amortised.

One IASB member raised his concerns related to granularity of the reporting period, especially in case of interim reporting. Nonetheless, other Board members believed that the issue is not limited to contingent rentals and, if necessary, should be addressed in a review of the interim reporting standard, that is, outside of scope of this project.

The Boards also agreed that all changes in amounts payable under residual value guarantees should be accounted in the same way as other contingent rental arrangements. One IASB member noted that to he would prefer a formulation that would focus on booking of the changes in the current period unless they stem from the change of usage of the right-of-use asset.

The Boards also agreed that changes in the lessor's receivable should be treated as adjustment to the original transaction price and be allocated to the lessor's performance obligation. Further, if changes are allocated to a satisfied performance obligation, the effect should be recognised in revenues. On the other hand, if changes are allocated to an unsatisfied performance obligation, they will adjust the carrying amount of that performance obligation.

Although the Board agreed with the underlying principle of allocation, wording proved to be contentious. Therefore, the Boards decided to discuss the wording of the guidance offline. Moreover, some Board members were unsure that time would be always appropriate criterion for allocation of satisfaction of performance obligation. The Boards agreed to find a formulation that would reflect the allocation based on the most appropriate factor (time, cost, usage).

Scope – Purchase or sale of the underlying asset

The Boards agreed that the principle that would determine whether a transaction represents a sale or purchase of the underlying asset (rather than a lease contract) should focus on control and, in particular, on transfer of residual benefits. The principle sought would ensure that no gain/loss at the end of the contract is possible.

Subject of drafting of the principle, the Boards agreed that a seller (lessor) shall not apply these requirements to contracts that will transfer all benefits associated with the underlying asset by the end of the contract. Conversely, the Boards agreed that a buyer (lessee) shall not apply these requirements to contracts under which the buyer/lessee will obtain all benefits associated with the underlying asset by the end of the contract.

The Board also agreed that the focus should be on all (but trivial) benefits rather than significant.

Based on these decisions, the Boards decided to include examples of transactions that would generally be considered to be purchases or sales of the underlying asset (including contracts that automatically transfer title, contracts that include bargain purchase option, and contracts where the return the lessor receives is fixed). The Boards discussed additional examples and noted that the decisive condition is existence of any residual benefits.

Finally, the Boards discussed the very long leases of land (for example, 99 years). The Boards were split whether to account for them as sales of underlying land or as leases. The Boards discussed various examples and noted different practices in various jurisdictions (including when the sale of land is legally prohibited). The Boards noted that none of the models is perfect and each has its shortcomings. After a rather lengthy discussion, it was clear that the Boards were split on the issue, with a narrow majority in favour of treatment as sales. Most Board members felt uncomfortable with, for instance, a 200-year revenue deferral, particularly when consideration is transferred at inception.

Initial Direct Cost

The Boards discussed the definition of initial direct cost and agreed that these should be defined as incremental costs directly attributable to negotiating and arranging a lease. Despite agreement on this definition the Boards noted that the decision should be consistent with the treatment of the initial direct costs in other projects (Revenue Recognition, Insurance, and Financial Instruments). Subject to this caveat, the Boards agreed to include additional guidance to illustrate which costs are directly attributable to acquiring a lease.

Some Board members noted that definition of initial direct costs might vary if they are referred to from lessor or lessee perspective. Nonetheless, the main discussion by the Board focus on treatment of the unit of account of those costs and their treatment, for example, within the context of a lease origination department.

Lessee accounting – Transition

The Boards discussed transition requirements for capital/finance leases from lessee's perspective. The Boards noted that for simple finance leases there would be no significant difference between the old model and new model apart from classification. For more complex leases with extension options and contingent rentals, no solution would ensure the benefits of complete comparability as well as simplicity of implementation.

Board members held various views. One Board member was particularly concerned that the implications of the new model would lead to an overall increase in expenses in the first years following transition (as costs allocated to first years under the new model are higher than those allocated to the following years, and after transition all the leases will be in their first year thus increasing the overall expense).

Finally, after a brief discussion, the Boards agreed that for simple leases, assets and liabilities under finance leases remain the same on the transition date with no change to the accounting for those assets and liabilities subsequently. Nonetheless, for leases containing additional features such as contingent rentals, residual value guarantees, or extension options, the proposed general transition requirements would apply to both assets and liabilities (that is, modified retrospective application).

The Boards agreed that the right-of-use asset should be recognised and measured at the present value of the lease payments discounted using the lessee's incremental borrowing rate on the transition date, subject to impairment review and any further adjustments for rentals prepaid or accrued.

Without much discussion the IASB agreed that if an asset acquired under a finance lease is accounted for using the revaluation model, the revalued amount of property, plant, and equipment should be carried forward as carrying amount of a right-of-use asset.

Lessee accounting – Definition of 'interest rate implicit in the lease'

The Boards agreed with the principle that the discount rate that should be used to calculate the present value of the lease payments is the rate that the lessor is charging the lessee. Some Board members felt that such principle would not be operational, and additional guidance would be required.

One Board member suggested that the principle should the objective for determining the discount rate (that is, a finance lease includes a financing element that reflects the uncertainty of the cash payments). He noted that in many circumstances the rates might be marginally different for lessor and lessee, but those differences would not be significant as they relate only to allocation method. The Boards agreed.

Discussion at the March 2010 Joint IASB-FASB Meeting

Disclosure for lessees

The Boards were presented with the proposed package of disclosures to be provided by lessees. The staff explained that the overarching principle on disclosures is to ensure that the information in the notes complements the information presented in the financial statements, so as to provide decision-useful information for users. The Boards were asked to consider the proposed disclosure package in terms of the grouping of disclosures based on the disclosure objective, amounts related to leases, and the assumptions and estimates.

Disclosure objective

The proposed disclosure objective broadly requires the disclosure of quantitative and qualitative information that identifies and explains the amounts recognised in the financial statements and enables users to evaluate the nature and extent of risks to which the leasing activities have exposed the entity. Some Board members were concerned that the term 'risks' is too vague in the context of leasing activities and that they were expecting disclosure around the uncertainty of future cash flows and the flexibility involved in the management of those risks.

Although the Boards agreed in principle with the proposed disclosure objective, it was not considered to be explicit enough and the staff was requested to revise and expand the objective to incorporate Board members' concerns raised during the meeting.

Amounts related to leases

The discussion of proposed disclosures pertaining to the amounts related to leasing activities centred around the general description of leasing activities and the proposed reconciliation between the opening and closing balances for the right-of-use assets and obligations to pay rentals.

One Board member was concerned that the level at which a description of leasing activities are required was too general and will result in boilerplate disclosures. It was suggested that that description should be broken down into certain classes of leases. When questioned how these classes would/should be determined, the Board member responded that it could possibly be linked to the disclosure objective. Another Board member suggested a grouping based on the nature of the underlying assets, for example, real estate, machinery, office equipment. Other Board members agreed that disaggregated information will be more useful to users.

On the requirement to present a reconciliation between the opening and closing balances of the right of use assets and lease obligations, one Board member was opposed to including a roll-forward in the leasing standard when the Financial Statement Presentation (FSP) Standard contain a general principle on when roll-forwards need to be presented. Another Board member remarked that requested the wording of the requirement to be aligned to the wording used in the FSP Standard. The staff commented that they are committed to follow the development of the FSP Standard very closely and ensure that there is alignment in the wording.

Other Board members questioned how leases accounted for using the simplified accounting model will be included in the roll-forward. The Boards concluded that they agree in principle with the proposed disclosures and that comments from individual Board members should be dealt with off-line.

Assumptions and estimates

The Boards mainly discussed whether a lessee should disclose the fair value of lease obligations and a sensitivity analysis to changes in market risks in the notes.

One Board member questioned where else the Boards have required a sensitivity analysis to changes in market risks for liabilities measured on a cost-basis. The Boards entered into a long discussion on whether it would be possible to determine compile a sensitivity analysis for changes in market risks and whether entities would be able to determine the fair value of lease obligations reliably. One Board member asked the staff to clarify that the changes in market risks are only required to assess the impact on future cash flows and not the impact on fair values. Staff confirmed that the intention was to show the sensitivity of future cash flows to changes in market risks. Following this clarification, Board members were more willing to support the proposed disclosure.

Several Board members raised concerns about the practicability to determine the fair value of lease obligations and reminded the Board that the reason why a fair value measurement model was not adopted for lease accounting was the difficulty in determining a reliable measurement. Other Board members responded that the disclosure of the fair values of other financial liabilities is already required in accordance with IFRS 7 and there is no specific reason why lease obligations should be treated differently.

One Board member reminded the Boards that a number of new standards will be published within the next 15 months and that, in each project, new disclosure requirements have been added. This Board member warned that the Boards will be losing their audience if the disclosure burden becomes onerous. Another Board member remarked that the Boards should guard against the perception that a vast volume of disclosures for leases have been added, whereas some of the disclosures are already required under the existing lease accounting models. The chairman responded that it is important to identify which disclosures are already required under existing guidance which requirements are new as a result of the new accounting model.

The Boards concluded the discussion by tentatively agreeing that the fair value of lease obligations should be disclosed and that the sensitivity of market risks should be limited to the impact on future cash flows.

Lessor accounting – Transition

The Boards were presented with the following four alternatives for transitional provisions for lessors:

• A. Full retrospective application as if the new accounting requirements had always been applied;
• B. Modified retrospective application where the new accounting requirements are only applied to arrangements outstanding at the effective date and those entered into after the effective date;
• C. Simplified retrospective application which is applied to all outstanding leases at the effective date, but simplified so that lease receivable is measured using the interest rate implicit in the lease at the effective date; or
• D. Prospective application to new leases entered into after the effective date.

None of the Board members supported alternatives A or D. The FASB supported alternative B as they considered using the interest rate implicit at the effective date may result in the misrepresentation of revenue. The majority of the IASB members initially supported alternative C (which is consistent with the approach proposed for lessees), however after further consideration, some Board members agreed with the FASB view on the implicit interest rate and indicated that they wanted to switch their vote to alternative B. The staff reminded the Boards that alternative B is not consistent with the approached adopted for lessees.

After a short deliberation, the Boards asked the staff whether alternative C could be applied with the implicit interest rate at the date the lease was entered into. Staff confirmed that this could be done. The Boards tentatively agreed to this alternative subject to using the original interest rate implicit in the lease.

The Boards then considered how leased assets capitalised under existing finance leases should be reinstated on the lessor's statement of financial position. It was noted that under US GAAP an option to remeasure at fair value does not exist and therefore the reinstated asset would be recognised at depreciated cost. The IASB agreed with the reinstatement at depreciated cost adjusted for impairment and revaluation in accordance with IAS 16.

Measurement at initial recognition

At the October 2009 meeting, the Board tentatively decided that lease assets and liabilities arise when the lease contract is signed (inception of the lease) and that the net contract position between the signing and delivering should be measured on a cost basis. The Boards were then asked to consider whether initial measurement of the assets and liabilities should be determined at the inception date or at the commencement date.

Without any discussion, the Boards tentatively agreed that an entity should recognise the gross value of assets and liabilities at the commencement of the lease term, and that those assets and liabilities should be measured at the inception of the lease and that the discount rate to be used will be fixed at lease inception.

Lessor accounting – Residual value guarantees

The Boards considered how residual value guarantees (RVG) held by lessors should be accounted for. The majority of Board members were supportive of the staff's proposal to account for amounts to be paid by a lessee under an RVG consistent with the accounting for contingent rentals. As a result any change in the receivable arising from a change in the amounts payable under an RVG would be treated as an adjustment to the lessor's receivable and performance obligation.

One Board member questioned why a lessor needs to recognise an increase in the performance obligation when the amount to be paid by a lessee increases. The Board member was of the opinion that such an adjustment should be recognised as a gain. The staff responded by clarifying that the accounting by the lessee has been mirrored by the lessor's accounting.

It was further pointed out that the definitions of residual value under IFRSs and US GAAP are different, and the impact on the accounting treatment has not yet been explored in the context of lessor accounting. The Boards agreed to explore the differences further and consider aligning the definitions.