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
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.
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.