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Leases

Date recorded:

The chairman of the UK's ASB, Ian Mackintosh, accompanied by ASB staff members Andrew Lennard and Hans Nailor presented a paper to the Board examining issues relating to possible methods of accounting for leases within the constraints of existing IFRS.

The Board considered whether assets that represent lessee's contractual rights to use property, plant and equipment should be treated as tangible assets or intangible assets. They agreed that this is a matter which needs to be further explored, and given the constraints (particularly in relation to revaluation) of existing GAAP, it would be better to consider this without regard to the subsequent accounting treatment to come to the 'ideal' answer.

The Board considered whether assets that represent renewal or purchase options should be measured at a revalued amount. One Board member noted that in any event, the fair value of the option must be recognised at the date of exercise for incorporation into the cost of the asset. A number of Board members expressed concern that common practice is to recognise the cost of the renewal at the option premium plus the strike price, when in fact it should be recognised at the fair value of the option at the date of exercise plus the strike price.

Board members agreed that they would be troubled by a model which permitted an option to be revalued where the underlying asset could not.

The Board considered whether liabilities that represent lessee's obligations to make lease payments that are variable or contingent during the lease should be accounted for in accordance with IAS 37 or IAS 39. The Board also considered whether in the lessor's books these should be considered as a financial asset, an intangible asset or part of an asset that could be represented as an interest in property. The Board noted a difference between its own view and that of the ASB as to the timing of recognition of such contingencies - that is the ASB would only recognise amounts contingent on lessee turnover when the lessee makes the sale, while the IASB would incorporate a measure of this asset/liability at an earlier point.

The Board noted a need for exploration of a treatment proposed by some such that leases are treated as a net investment. The Board indicated that this should be explored only sufficiently to explain why the Board had decided it was an inappropriate methodology.

The Board requested the ASB staff to develop a paper on accounting for leases without being constrained by the requirements of existing GAAP as the analysis considered at the meeting showed that existing GAAP was of marginal use in developing an appropriate comprehensive lease accounting regime.

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