First-time adoption of IFRSs
Without substantial discussion, the Board agreed that the same proposed transitional requirements should be applied to all leases for first-time adopters of IFRSs. That is, lease assets and liabilities should be recognised and measured at the present value of the leases payments for all leases and relief for simple finance leases should not be applied to a first-time adopter.
The Board considered the consequential amendments resulting from the lease guidance on the business combinations literature. Although the staff was focussing on the issue of the adjustments to the pre-existing intangible asset and/or liability associated with the acquired operating leases, the Board wished to consider the guidance in its entirety. In particular, some Board members were concerned by the requirement to revalue all leases to fair value at the date of acquisition. Those Board members noted that in the deliberations on the leases project the Board concluded that the requirement to use fair value on leases would be onerous and, therefore, questioned the conclusions reached on business combinations guidance.
Finally, the majority of the Board agreed that a specific exception for leases should be developed in the context of business combinations. Some members wanted to discuss the details of the exceptions (for example, related to the question whether the incremental borrowing rate should be reset on acquisition). Nonetheless, as the guidance on business combinations is joint guidance with the FASB, the Board decided to deliberate the issue at a later joint meeting.
The Board considered also the consequential amendments to IAS 40 Investment Property, especially in the context of the intermediate lessor accounting.
The Board agreed that in the context of an intermediate lessor:
- If an entity elects to use the fair value model, its right-of-use asset classified as an investment property is subsequently measured at fair value in accordance with IAS 40. Therefore, the new lessee accounting requirements on subsequent measurement would not be required.
- If an entity elects to use the cost model, the new lessee accounting requirements for right-of-use assets would be required. Therefore, the requirement under IAS 40 to subsequently measure investment property at depreciated cost using the cost model in IAS 16 Property, Plant and Equipment would be replaced with the new lessee accounting requirements.
In addition the Board confirmed that:
- If the right-of-use asset is measured at cost, changes to the obligation to pay rentals should be accounted for under the proposed new leases requirements, and
- If the right-of-use asset is measured at fair value, the adjustments to the obligation to pay rentals arising from changes in the lease term or changes to estimated contingent rentals would be recognised in profit or loss.
Revaluation of the lessee`s right-of-use asset
The Board briefly discussed the issue of the revaluation of the lessee's right-of-use asset and the methodology of the revaluation. The Board was split on whether the appropriate requirements for revaluation of the right-of-use asset are in IAS 38 Intangible Assets (as that is the nature of the right-of-use asset), IAS 16 (as right-of-use asset would be presented within PP&E), or alternatively use the forthcoming fair value measurement guidance. No consensus on methodology was reached. The Board decided to re-discuss the issue at a later meeting.
Nonetheless, the Board agreed in principle to permit revaluation of the lessee's right-of-use asset even if there is not active market in the right-of-use assets. The Board decided to permit a lessee to revalue its right-of-use assets only if the lessee chooses to revalue its owned assets in a class of property, plant and equipment; and to require a lessee to revalue the entire class (as defined in IAS 16) of property, plant and equipment (all owned and leased assets) to which that leased asset belongs if the lessee chooses to revalue its leased assets.