Lessor accounting - Transition under a derecognition approach
The Boards discussed possible transition requirements for lessors under the derecognition approach to lessor accounting. The staff noted that the following possible approaches had been rejected as candidates because the boards have previously rejected them when considering transitional provisions for lessee and lessors:
- retrospective application
- prospective application
- retrospective application for outstanding leases only
The staff were unable to decide which of the following should be recommended to the Boards, so both were presented as possible approaches:
- Option A: Apply to all leases outstanding at the date of initial application, but
- (i) the residual asset is initially measured at a cost allocation based on historical information; and
- (ii) receivables are measured at the present value of the remaining lease payments discounted using the rate the lessor is charging the lessee in the lease (as of the date the lease arrangement was entered into).
- Option B: Apply to all leases outstanding at the date of initial application, however;
- (i) the residual asset is initially measured at fair value as deemed cost (a surrogate for cost at the application date); and
- (ii) receivables are measured at the present value of the remaining lease payments, discounted using the rate the lessor is charging the lessee in the lease (as of the date the lease arrangement was entered into).
The staff stressed that the only real difference was how the entity should measure the residual asset.
A FASB member proposed and other IASB and FASB members refined a third possibility, which would simplify the accounting on transition to a more 'rough and ready' approach based on the remaining useful life of the leased asset. The Board members who supported this approach criticised the 'horrendous' transition provisions proposed by the staff, which was seen as unduly harsh on entities that had not unreasonable accounting now-the asset and related financing liability were in the financial statements.
After a protracted debate, there was not sufficient support for the 'rough and ready' approach and in a subsequent vote, both Boards agreed to adopt Option B, above (IASB: 9 in favour; FASB: 4 in favour).
Lessor accounting - Accounting for arrangements with service and lease components under the derecognition approach
The Boards discussed lessor accounting for a lease with service components under a derecognition approach. The staff explained that if the lessor is unable to identify service components in an arrangement, a concern exists that under the derecognition approach there would be an overstatement of revenue at lease commencement. This is because the lessor would recognise revenue for services before those services have been provided.
The staff considered four possible approaches that could be adopted for the lessor to separate payments between lease and service components when the services are not distinct:
- treating all payments as lease payments;
- treating all payments as payments for services;
- requiring an estimate of future service costs for the allocation of the consideration between service and lease elements; and
- recognising a liability for the costs of future services.
A vigorous and heated debate followed. An IASB member used the example of an office building lease for which the lease payments included heat, light, water, etc. The board member wanted to know whether the obligation to provide these services would be recognised as a liability. (This IASB member would characterise the final bullet above as 'recognising a liability for the obligation to provide future services'.)
Board members disagreed about whether the Leases standard or Revenue Recognition standard would capture the obligation to provide future services - some saw the 'bucket' in revenue recognition as quite large; others thought the 'bucket' in leases would be the large one.
A call for 'first preference' votes was called: the approach requiring an estimate of future service costs for the allocation of the consideration between service and lease elements had the support of a majority of the IASB (9 in favour) but not the FASB (3 opposed).
The chairman closed the debate, promising to revisit the issue, if necessary, after the Boards' discussions of the Performance Obligation Model vs. Partial Derecognition approach on 17 June.