In this education session, The Board discussed an analysis of a lease contract in which the lessee has either an option to extend the term of the lease for an additional period, or an option to terminate the lease early.
The staff analysis aimed to assess the terms and conditions of a standard lease and attempted to re-characterise a long-term lease with an option to cancel early as a short-term leased with an option to extend; and to identify the assets and liabilities that arose. At a conceptual level, several Board members noted that the manner in which a lease is described should not affect the assets and liabilities recognised.
Although no decisions were requested or made at this session, Board members indicated that they favoured the staff undertaking further exploration of two possible approaches:
- Approach 1 - The lessee obtains the right to use the asset up until the option exercise date and an option to extend the lease; and
- Approach 2 - The lessee obtains a right to use for the full lease period and an option to terminate the lease.
Many Board members thought Approach 1 was the most conceptually pure and preferred it, but were willing to explore Approach 2 further. It was noted that some participants in the Leases Working Group were concerned that Approach 1 was potentially open to abuse and structuring. However, Approach 2 also had problems associated with it-particularly in the measurement of options. However, measurement difficulties should not, at this stage, preclude further examination of the Approach.
The Board indicated that it was highly unlikely to support either an approach under which the lessee obtains a right to use either for the full lease period or for the period to the option exercise date; or one under which the lessee obtains a right of use whose measurement is based upon the expected value of the payments under the lease. Both of these were criticised for being too intent-based, lacking a clearly-articulated measurement attribute and for departing from the previous assessment of the assets and liabilities identified in the lease.