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.
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.