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.
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(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.