The IASB and FASB continued their discussions from the 17 February meeting on onerous performance obligations. At that meeting, the Boards had tentatively decided that the onerous performance test should be performed at the contract level (considering the remaining performance obligations in the contract) rather than at the individual performance obligation level as proposed in ED/2010/6 Revenue from Contracts with Customers.

During this meeting, the Boards discussed:

• whether to exclude contracts entered into as a "loss leader" (a contact entered into at a loss with the intention of profitable margins on future contracts with the customer)
• what costs should be included in the onerous test and in measuring an onerous performance liability.

Exception for "loss-leader" contracts

In considering whether to exclude contracts entered into as a "loss leader", the staffs raised two alternatives. The first alternative would apply the onerous test only after contract inception such that only adverse changes in circumstances since execution of the contract are identified. The second alternative would exclude contracts identified as loss leaders from the onerous test at inception of the contract.

However, the Boards had little interest in providing an exception for "loss leader" contracts (only one IASB member and no FASB members expressed support). One IASB Board member raised an alternative model of recognising an intangible asset for loss leading arrangements, but that also received little support. Several Board members raised the issue that the Boards had tentatively allowed for contracts that meet specific criteria to be combined but could not support allowing linkage between an existing contract and a potential future contract.

Costs included in the onerous contract test

ED/2010/6 proposed that the onerous contract test consider 'the costs that relate directly to satisfying the performance obligation'. The exposure draft provided that those costs would include direct labour, direct materials, allocations of costs that relate to the contract, costs explicitly chargeable to the customer under the contract, and other costs incurred because of entering into the contract.

However, some comment letter respondents expressed concern with the proposals and felt that only incremental costs to fulfil performance obligations should be included in the onerous contract test. Additionally, some comment letter respondents had concerns over application of the test to individual contracts not designed to recover all the directly attributable costs of fulfilling the performance obligation (e.g. the purchase of a single airline ticket and the entire cost of operating the flight being considered 'the costs that relate directly to satisfying the performance obligation').

The staffs proposed that the costs to be included in the onerous contract test would be the lower of 1) the costs that relate directly to the contracts (the exposure draft proposal) and 2) the amount that would be incurred to pay as compensation for cancelling the contract.

The Boards generally supported the portion of the staff proposal not to consider only incremental costs as part of the onerous test contract but to allow for contract breakage. However, the Boards were less supportive of approaching the recognition and measurement of onerous contracts as a lower of test. Several members of both Boards felt management's intent should drive the determination and that the loss to be incurred is what should be recognised, whether that is the onerous costs for the remaining performance obligation or the costs involved to terminate the contract if that decision is made. The Boards also felt that once a contract is terminated, the contract would move outside of revenue recognition and into accounting for contingencies (IAS 37 or FAS 5).

The Boards tentatively agreed that for purposes of (a) determining if a contract is onerous and (b) the amount of the onerous liability, an entity should consider the costs that "directly" relate to satisfying the contract. However, an entity would use the amount that would be incurred to cancel the contract if all of the following conditions are met:

1. the entity has the right to cancel the contract with the customer
2. the settlement terms are explicit in the contract
3. he entity makes a decision to cancel the contract, and
4. the entity communicates that decision to the customer.

The Boards tentatively decided that the cancellation of the contract would be within the scope of IAS 37 rather than the revenue recognition standard when the settlement terms are not explicit in the contract.

Papers 2A and 2B were originally planned for discussion in February, but were deferred to this month due to time constraints.

Locking in the discount rate (Paper 2A)

The staff presented a paper for the Boards' consideration on the use of locked in discount rates. The Exposure Draft / Discussion Paper ("ED/DP") originally proposed an unlocked discount rate and many preparers commented that, among other things, an unlocked rate did not faithfully represent the economics of many insurance contracts, would result in greater volatility and parallels were drawn between the treatment of other financial assets and liabilities and insurance contracts.

The staff considered these comments, but did not find merit in the arguments put forward and so they concluded and recommended to the Boards that the discount rate should remain unlocked.

With little discussion, the Boards unanimously agreed support for the staff recommendations.

Discounting non-life contract liabilities (Paper 2B)

The staff presented a paper to the Boards focusing on whether certain (i.e. short-duration) non-life insurance contracts should be exempted from discounting. This paper originates from concerns raised by respondents, primarily property / casualty insurers in the United States, that the application of discounting to short-term non-life insurance contracts would not faithfully represent those contracts.

Having assessed these concerns, the staff recommended that the Boards:

• exempt from discounting short-duration, short-tail claims where the settlement period is less than one year from the claim event;
• apply discounting to long-tail claims with a reasonably determinable payout pattern; and
• apply discounting to long-tail claims where the amount and timing of the cash flows may be uncertain.

The Boards spent a significant amount of time discussing the first staff proposal. Concerns were raised that this proposal would allow claims settled up to two years from contract inception to avoid discounting. It was noted that although the paper is only addressing non-life claims the current wording could also be read to include certain types of life insurance claims (for example short duration term insurance). Some Board members proposed reliance on the materiality concept used throughout IFRS, but this was opposed by other Board members who were concerned that the Boards had never actually defined the application of materiality, and that it would vary from jurisdiction to jurisdiction.

Overall, despite the significant debate, the Boards were unable to reach consensus on this issue and instructed the staff to investigate further and to bring this issue back as part of the consideration of the modified approach for short-duration contracts.

No disagreements were identified with the second staff proposal, but some Board members raised concerns that they couldn't see a difference between proposal two and proposal three. The staff advised the Boards that this separation arose from current practice for discounting of claims set out in proposal two and many concerns by respondents to the ED/DP on the discounting of uncertain claims. The staff concluded that they could not see any real circumstances in which proposal two and three would be different in practice. Overall, both Boards supported the staff recommendation for proposals two and three, but noted that some work may need to be done during the drafting phase.

Scope (Paper 2D)

The staff introduced a paper for the Boards to consider focused on resolving an issue identified from the ED/DP which affects the proposed scope of the insurance contracts standard. The paper did not consider financial guarantee contracts or financial instruments containing a discretionary participating feature. These two issues will be considered by the Boards later.

The main concern arising from the ED/DP was the treatment of fixed fee service contracts. Some respondents were concerned that the wording proposed by the ED/DP would result in the contracts that are clearly not insurance-related (e.g. fixed fee contracts for the provision of legal services) being included within the scope of the insurance contracts standard.

The staff proposed that the scope exclusion for fixed fee service contracts should be narrowed to apply only to those contracts that have the primary purpose of the provision of services and that would qualify for the modified approach for short-duration contracts.

The Boards engaged in a significant debate on this topic. Concerns were raised that the current wording proposed by the staff would result in non-insurers having to assess their contracts against the insurance contracts definition and to determine whether contracts (including those clearly not intended to provide insurance services) would fall within the scope of the modified approach for short duration contracts. A number of improvements were proposed (e.g. basing the decision on the substance of the product only and using unbundling to separate out the insurance components) but no universally acceptable solution could be agreed.

The Boards tentatively agreed with the idea of a scope exclusion for fixed fee service contracts that were primarily aimed at the provision of non-insurance services and instructed the staff to delete the reference to the modified approach to short duration contracts and consider the issue further. The Boards suggested that this issue should properly be considered as part of their consideration of the definition of an insurance contract.

The staff also asked the Boards to comment on the scope exclusions that were not tabled for specific discussion:

• Product warranties issued by a manufacturer, dealer or retailer;
• Employers' assets and liabilities under employee benefit plans and retirement benefit obligations reported by defined benefit retirement plans;
• Contractual rights or contractual obligations that are contingent on the future use of, or right to use, a nonfinancial item;
• Residual value guarantees provided by a manufacturer, dealer or retailer, as well as a lessee's residual value guarantee embedded in a finance lease;
• Contingent consideration payable or receivable in a business combination; and
• Direct insurance contracts that the entity holds (i.e. direct insurance contracts in which the entity is the policyholder).

Subject to the above discussion on the definition of an insurance contract, the boards agreed unanimously that these scope exclusions should remain as proposed in the ED/DP.

Report on the results of outreach activities

The staffs presented to the Boards the results of the additional outreach activities performed related to the proposals in the Staff Draft on financial statement presentation. The outreach activities included 1) preparer field visits; 2) meetings with financial statement users; 3) field testing; and 4) other outreach with preparers, auditors, the FSP working group, national standard setters and regulators, representative groups and users.

The staffs met with ten separate companies, six in the US and four in Europe. The discussions with these companies primarily focused on direct-method cash-flow information, disaggregation of expenses by nature and the analyses of changes in the statement of financial position. The companies provided the staffs with an understanding of some of the financial reporting complexities and estimates of costs involved in implementing the proposals.

The staffs also met with 42 investors or other financial statement users. The user outreach meetings focused on the proposed structure and cohesiveness of the financial statements, cash flow information, by-function and by-nature segment information (FASB only), and the analyses of changes and remeasurement disclosures. Additionally, the staffs posted on their respective websites a PowerPoint deck explaining the main aspects of the Staff Draft and a user questionnaire seeking input on the Staff Draft proposals.

The staffs also conducted field testing procedures with 15 companies, ten non-public US companies and five financial services companies who recast their financial statements and provided feedback regarding operationality of the proposed models.

The Boards made no tentative decisions during this meeting.

The objective of the Effective dates and transition methods project was to gather information from stakeholders about the time and effort that will be involved in adopting several new accounting standards and when those standards should be effective, including:

• for the IASB, standards surrounding financial instruments, revenue recognition, leases, insurance contracts, comprehensive income, fair value measurement and post-employment benefits
• for the FASB, financial instruments, including netting of financial instruments, revenue recognition, leases, financial statement presentation, financial instruments with characteristics of equity and insurance contracts.

This project followed a 19 October 2010 FASB published Discussion Paper, Effective Dates and Transition Methods, and IASB published Request for Views on Effective Dates and Transition Methods, which was open for public comment with a comment period ended 31 January 2011, and included a scope surrounding preparation and transition to the new requirements, implementation approach and timetable.

Summary of comments

The Boards received similar feedback on the following issues, with the following key summarised feedback:

• Preparing for and transitioning to the new requirements. Both FASB and IASB stakeholders said that implementation of some of the new standards as proposed could be a time-consuming, costly process
• Effects on the broader financial reporting systems. Constituents of both Boards noted the possible effects of the new standards on a variety of regulatory and tax reporting requirements that would need consideration in determining effective dates
• Early application. A majority of the FASB and IASB stakeholders preferred an early application option.

Stakeholders of the Boards expressed different views on other issues, such as:

• The implementation approach. IASB stakeholders had a strong preference toward the single-date approach (e.g., all standards have a consistent implementation date). The reason cited most frequently in support of this view was that it would achieve economies of scale and minimise disruption on the impact upon financial statements only once. Approximately one-half of FASB stakeholders, however, supported the sequential approach (e.g., standards have different implementation dates), with concerns about the effect on the cost of implementation
• Transition methods. Many of the FASB respondents expressed support for applying the new requirements prospectively given consideration to cost and faster implementation, while the majority of IASB respondents tended to agree with the proposed transition methods of the major projects. Constituents of both Boards expressed concerns over the transition method on the leasing project, however, with a preference for applying a full retrospective rather than a limited retrospective approach to transition.

Another point of commonality was the relatively limited feedback received from investors or representatives of investors, and likewise, relatively little feedback was provided from private companies.

Applying the above, the staff proposed the following plan going forward:

• The FASB and IASB staffs are planning to conduct additional investor outreach to gain more feedback on the issues raised in this project
• The staffs' plan to perform further analysis of disclosures during the period of implementation and adoption, while also realising that such assessment is highly contingent on the Boards conclusions surrounding transition requirements
• The staffs intend to present staff analysis and recommendations on a proposed effective date and a holistic discussion on transitional provisions in the second quarter for the projects that are jointly developed by the Boards, while the IASB staff intends to present staff analysis and staff recommendations on the IASB-only projects at a future meeting.

In light of the above, the Boards, using information provided by the staffs, generally considered the following:

• Assessment of the effective date and transition methods for projects on a standard-by-standard basis. It was noted that certain projects, such as financial instruments and insurance contracts, are inter-related, whereby a failure to consider both jointly would lead to distinction of asset and liability modelling in individual transactions.
• Assessment of the various stages of projects currently underway, whereby certain projects have progressed to a stage closer to finalisation than other projects.
• Assessment over the number of jurisdictions required to implement such guidance, including the need for time to translate guidance into local languages.
• Historic implementation timing post-effective date on other standard issuances, which has historically approximated eighteen (18) months for the IASB.

In deliberations, the IASB generally supported distinction of a specific date for implementation of the projects, with a view of 1 January 2015 outlined by multiple members of the IASB as a single-date implementation approach, although multiple Board members of the IASB felt that a determination of an appropriate implementation date should be based on transition requirements associated with the project (e.g., retrospective or prospective application, for example), and other Board members of the IASB noted that an effective date of 1 January 2015 extended beyond the typical implementation timing period for much bigger projects such as adoption of International Financial Reporting Standards for many countries in the European Union and South America.

Multiple Board members of the FASB felt the most appropriate approach at this stage was to highlight to users and other respective parties a 'no earlier than' date, in which they would provide users and other parties with an expectation as to future implementation timing.

Collectively, both Boards agreed that at the current stage of the projects, when considering that transition requirements have not yet been specified, determination of an effective date was not yet determinable. The Boards highlighted that they would consider a reasonable timeline for transition considering the above impediments subsequent to a more formalised determination of transition requirements.

Other considerations surrounding transition requirements and related matters will be considered at a future meeting.

No decisions were reached at this meeting.

Financial guarantee contracts (Paper 2E)

The Staff presented its views on the redeliberation of financial guarantee contracts based on previous discussions with the Boards. The Staff of both IASB and FASB have recommended that the Boards carry forward the existing approach on the scope allocation for financial guarantee contracts that is currently in place under IFRS 4 and IAS 39 within IFRS and several different pronouncements under US GAAP:

IASB recommendations

The Staff recommendation for IFRS was that:

• Financial guarantee contracts are scoped out of the IFRS for insurance contracts into the IFRS for financial instruments. However IFRS would:
  • permit an issuer of a financial guarantee contract (as defined in IFRSs) to account for the contract as an insurance contract if it had previously asserted that it regards the contract as an insurance contract; and
  • require an issuer to account for a financial guarantee contract (as defined in IFRSs) in accordance with the financial instruments standards in all other cases. Such contracts would be measured initially at fair value (typically equal to the consideration received), with subsequent amortisation of that amount, coupled with a test for credit losses under IAS 37.
• IFRS retains the current decision that does not provide an exception in the preparation of standalone financial statements for the treatment of intergroup guarantees from the accounting required for financial guarantee contracts.

FASB recommendations

The Staff recommends that the FASB should:

• Exclude from the scope of the insurance contracts project the accounting for financial guarantees. This would mean that the insurance contracts standard would carry forward the existing guidance such that:
  • Financial guarantees currently within the scope of Topic 944 (formerly FAS 60) should be within the scope of the insurance contracts guidance
  • Financial guarantees within the scope of Topic 815 (formerly FAS 133) and Topic 460 (formerly FIN 45) as well as financial guarantee insurance contracts within the scope of Topic 944 (formerly FAS 163) should not be within the scope of the insurance contracts guidance and should retain current accounting under those standards.
• Continue current practice under existing U.S. GAAP that provides an exception from recognition requirements for intergroup guarantees.

The Staff asked the Boards to ratify these assumptions. In general, there was full support from the IASB to each of the Staff recommendations.

FASB noted that they agreed with the IASB recommendation for the insurance project but suggested that the Boards should complete the insurance contracts project as planned, complete their deliberations on the impairment of financial assets project and then start a joint FASB/IASB project to develop a convergent treatment of financial guarantee contracts including those issued by members of the same group.

The Boards approved this approach and instructed their Staff to continue their work accordingly.

FASB intends to incorporate the outcomes of this exposure draft in the finalisation of the new US GAAP for insurance contracts. For the IASB this would likely result in possible amendments to both the new IFRS for insurance contract (the IASB aims at issuing it by 30 June 2011) and IFRS 9.

Field testing results (Paper 2F)

The Staff provided a paper to the Boards that highlighted the objectives of the field testing that started in September 2010 and was recently completed.

The Staff clarified that this was an extensive but still targeted field test that did not require a full restatement of participants' financial statements. It was developed with the expectation that participants did not need to invest significantly to adjust their systems, but rather give the best estimate of levels of effort.

Fifteen companies participated, 2 of which were unable to complete the testing in the time frame. The Staff will complete the full analysis of the field testing results during the course of March. However the paper asked the Boards what further information they would like to see as they complete the final discussions on the field testing results later this month. Staff indicated that they had not seen anything that has shown any of preliminary decisions reached so far need to be reopened and that Staff has already reflected the field testing results in each of the Board papers prepared so far. One FASB member requested a mechanism be developed such that all issues identified in the field testing reports are aggregated so that the Boards can be assured they have addressed each concern. The Staff indicated they would work within the parameters of the confidentiality of the field testing to produce this. The Staff were also asked to obtain information about the non-GAAP disclosures that would be presented pre- and post- implementation of the new IFRS with the objective of identifying where the insurance project may not be meeting the requirements of preparers and users.

Information session on uncertainty in the measurement of insurance liabilities (Paper 2I)

The Staff presented their paper on Uncertainty in the Measurement of Insurance Liabilities to the Boards which addressed issues arisen during the discussions in the February meetings. The purpose was to address the Boards' concerns about the potential for double-counting of risk and other measurement items within the building block approach. The paper did not set out to prove the merits of the risk adjustment model, but rather to highlight the relationship between the building blocks. The Staff does not believe there is additional risk compared to other IFRSs of double-counting of these risks.

A few minor questions were asked, but overall the Boards were impressed with the Staff paper and noted that it addressed the concerns previously raised and identified the issues that would need to be discussed at the main March meetings.

Acquisition costs (Paper 2G)

In the 2 February meeting, the Boards made a decision to include acquisition costs at the portfolio level departing from the contract level criterion included in the Exposure Draft. The Staff had divergent views on a recommendation regarding acquisition costs, and provided the Boards with a recommendation and an alternative view.

The Staff's recommendation was that acquisition costs to be included in cash flows are 1) related only to successful contract acquisitions; 2) limited to direct costs; 3) require application guidance.

The Staff's rationale for limiting acquisition costs to those related to successful contract acquisitions included the following arguments:

• Unsuccessful efforts do not have a future benefit
• Consistency with the Boards view in the Exposure Draft basis for conclusions that these costs can be clearly identified with contracts issued
• Consistency with other standards that these costs are determined at the contract level only for successful sales.

The other foundation of the Staff's recommendation is that these costs shall be direct costs only. The Staff developed a table in paragraph 30 of this paper that attempted to separate typical costs into incremental, direct and both direct and indirect costs.

The Alternative view, which was included in Appendix D, recommended that acquisition costs to be included in the expected cash flows should not be limited to costs for successful contract acquisitions and their identification should be the same as the criterion to identify fulfilment cash flows. Therefore, the alternative view introduced the concept of "directly attributable" costs which would include certain indirect costs (for example rent and other overheads for office accommodation used by acquisition activities) to be consistent with the previous tentative decision on the costs to fulfil an obligation on a portfolio of contracts.

There was significant discussion on this topic from both Boards, primarily focused on the successful effort recommendation and the meaning of "direct" or "directly attributable" costs.

The Boards were split on the question of whether to restrict acquisition costs to those related to successful efforts, with the FASB voted unanimously in favour of the Staff's recommendation of a successful efforts approach whilst the IASB voted 10:2 in favour of the Staff's Alternative view inclusive of costs arising from both successful and unsuccessful efforts.

Many IASB members indicated that the definition of acquisition costs should be consistent with that applicable for fulfilment cash flows as acquisition costs are a sub-set of those cash flows. The debate suggested that many IASB and FASB members consider that acquisition costs should include certain costs other than direct costs but no agreement on how such costs should be defined.

The Boards asked that the Staff draft language that better defines "directly attributable" for acquisition costs considering both the definition of fulfilment cash flows as tentatively agreed at the February meeting of the Boards and as well as "direct" costs as used in other IFRSs.

The Boards were in agreement that mandatory application guidance is necessary in the final standard to assist in defining these costs to be included in the expected cash flows and acquisition costs.

Information session on presentation (paper 2H)

This was carried forward to the main March meeting.

As part of continual deliberations surrounding the Exposure Draft Leases published 17 August 2010, the Boards considered the right of use model in application of lessee accounting, as well as the scope of the leases standard.

Right-of-use model

The purpose of this discussion served to confirm the Boards' tentative decisions to apply a right-of-use ("ROU") model to all lease arrangements, whereby, in accordance with the Exposure Draft, a lessee in a lease arrangement would recognise a ROU asset representing its right to use an underlying asset during the lease term and a liability to make lease payments. Although the Boards are considering all issues from both a lessee and a lessor perspective during redeliberations, the scope of this discussion was limited to lessee accounting under a ROU model, as lessor accounting will be considered in a future meeting.

In outlining feedback including comment letters and other outreach, the staff noted:

• Users generally support applying the ROU model in principle to lessees, noting that most respondents support the recognition of lease obligations and related assets on the lessee's statement of financial position
• Certain users noted that in application of a ROU model, they support a whole asset approach where the lessee would recognise the entire underlying asset during the lease term
• Certain respondents noted that improvements could be made to existence guidance under ASC Topic 840 and IAS 17 as opposed to fundamental reform suggested within the Exposure Draft, as those who do not support a ROU model think that the model leads to the recognition of assets and liabilities for all executory contracts, which they perceived as inappropriately grossing up the statement of financial position.

In assessing feedback received, the staff thinks the principles underlying the proposed ROU model would address many of the problems in existing U.S. GAAP and IFRSs, and in particular, the models to lessees would:

• Reflect the assets and liabilities arising in all leases in the statement of financial position
• Result in the same accounting for the majority of leases on the statement of financial position for purposes of comparability
• Be possible to apply to a wide range of leasing arrangements
• Be consistent with the Boards' conceptual framework (e.g., definition of an asset and a liability).

Based on this information, the Boards tentatively confirmed the staff's recommendation that the ROU model be used for lessees in lease arrangements. The Boards acknowledged that this decision may be modified based on future decisions on the leases project.

Scope of the leases standard

The purpose of this discussion served to discuss the scope of the proposed lease accounting model. This scope of this discussion included possible exclusion for intangible assets, certain items classified as inventory by a lessee, as well other scoping areas including leases to explore for or use natural resources, leases for biological assets, leases of non-core assets, long-term leases of land and service concession arrangements within the scope of IFRIC 12 Service Concession Arrangements. Scoping considerations outside this particular discussion, which will be discussed in a future meeting, include investment properties, the definition of a lease and short-term leases.

The Exposure Draft proposed that an entity shall apply the guidance to all leases, including leases of right-of-use assets in a sublease, except (a) leases of intangible assets, (b) leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources and (c) leases of biological assets.

In application of outreach activity feedback, the staff communicated that the majority of respondents agreed with the proposed scope exclusions in the Exposure Draft, but certain respondents suggested that the Boards clarify whether standard should apply when the underlying asset in the contract is an item classified as inventory (e.g., spare parts), a service concession arrangement and timber (for US GAAP constituents).

As part of this assessment, the following tentative decisions and follow-up activities were noted:

• The Boards tentatively decided that the lease accounting model is not required to be applied to all leases of intangible assets except for the right-of-use assets in a sublease. The FASB requested the staff to bring back the question of whether intangible assets under ASC Topic 350-40, Internal-Use Software, should be in the scope of the leases standard

• The IASB tentatively confirmed that leases of inventory should be in the scope of the lease accounting model, consistent with IAS 17, while the FASB requested the staff do more research to better understand the implications of such a decision given that ASC Topic 840 currently scopes out leases of inventory

• The Boards tentatively decided that an asset is not required to apply the leases standard to leases:
  • for rights to explore for or use minerals, natural gas and similar non-regenerative resources
  • for biological assets, including timber (US GAAP-only)
  • for service concession arrangements within the scope of IFRIC 12 (IFRS-only).

Regarding intangible assets, the staff and the Boards acknowledged that outreach feedback on excluding intangible assets from the scope of the leases standard were mixed, with the majority of respondents agreeing that there was no conceptual basis for excluding intangible assets as stated in paragraph BC36 of the Exposure Draft, and other citing (a) difficulties encountered with bundled arrangements with both tangible and intangible assets, (b) concerns surrounding the implications for lessors and alignment of lessor and lessee accounting models and (c) the lack of guidance available for IFRS preparers if the standard excludes intangible assets within the scope of IAS 17.

The Boards tentatively decided that the leases standard is not required to be applied to all leases of intangible assets, except for right-of-use assets in a sublease, absent implications of ASC Topic 350-40, as outlined above, for the following primary reasons:

• Any consideration of leases of intangible assets should be done separately and comprehensively
• It provides a converged answer as opposed to certain scoping differences currently present in IFRSs and US GAAP
• There is no conceptual basis for excluding leases
• Implications of including intangible assets in the scope of the leases standard are not currently known.

Regarding scope exceptions surrounding inventory, the staff and the Boards acknowledged that certain respondents pointed out that based on the definition and exclusions proposed in the Exposure Draft, certain items classified as inventory by a lessee would be in the scope of the guidance. This fact led many respondents to specifically exclude leases of certain items classified as inventory from the scope, or clarify whether a lease of inventory is within the scope of the Exposure Draft.

The staff further acknowledged that the scope of this feedback appeared to be narrow, focusing on outreach feedback received from arrangements in the airline industry and other heavy manufacturing industries where leases of inventory are present, taking the primary form of spare parts or other operating supplies. With that said, it was not always clear that such items are indicative of the conceptual framework of inventory.

The Boards deliberated surrounding any application of a scope exception in considering the conceptual model of inventory and outreach activity received to date. Ultimately, the IASB tentatively decided that leases of inventory should be in the scope of the leases standard for the following reasons:

• From feedback received, in practice, it appeared that relatively few leases of inventory exist and few arrangements may be accounted for under the leases standards
• Either the definition of a lease or the short-term lease election would appropriately address many arrangements that contain leases of inventory
• It creates a potential inconsistency between the scope of the standard for lessees and lessors.

The FASB requested that the staff perform more research to better understand the implications of such a decision, which will be discussed at a future meeting.

With respect to other scope exclusions, including rights to explore for or use minerals, natural gas and similar non-regenerative resources, biological assets, including timber (US GAAP-only), and service concession arrangements within the scope of IFRIC 12 (IFRS-only), the Boards tentatively decided that an entity would not be required to apply the leases standard.

Such a tentative decision was reached based on the fact that:

• These industries are specialised, whereby accounting practices are diverse and often differ from accounting for other types of assets
• It provides for certain levels of consistency through application of more specific accounting guidance
• There is no conceptual basis for differentiating the above areas from other assets
• It follows feedback received during outreach activities.