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Leases

Date recorded:

The Boards discussed a staff paper on preliminary views on lessor accounting. At the May meeting the Boards tentatively decided that a lessor would recognise an asset representing its right to receive rental payments from the lessee (a lease receivable) and a liability representing its performance obligation under the lease.

The initial and subsequent measurement of the lessor's receivable

The Board agreed with the staff's proposal to measure lessor's receivable in line with the applicable requirements of IFRSs and US GAAP.

For initial measurement, the Boards agreed that little divergence is to be expected between the respective definitions as fair value is used under both systems (calculated as present value of future cash flows). Nonetheless, several members of the Boards raised the issue whether the lease receivable was a financial instrument or was to be scoped out from the financial instruments standard. The Boards were unable to agree on the answer. Several members were concerned about possible inconsistency between lessee and lessor accounting.

The Boards agreed that using the interest rate implicit in the lease for discounting the expected lease payments is appropriate.

Some Board members were concerned about the divergence between the proposed financial instruments standards by FASB and IASB and its impact on initial and subsequent measurement. On subsequent measurement, many of the Boards' members though that scoping out leasing from the financial instruments project would be necessary (as it is uncertain whether it would fulfil the basic loan feature and whether it can be assessed to be managed on a contractual yield basis) and its fair value could not be ascertained.

One Board member was concerned about the fluctuations of fair value of the receivable that can arise not only from the interest rate changes but also from the changes of the value of the underlying. As the Boards were unable to agree at this point if it would represent a receivable (as a financial instrument) or a right (within the meaning of revenue recognition project), the staff was directed to provide additional analysis. The Boards seemed to like the notion that in simple leases the receivable could be a financial instrument, whereas in more complex issues (contingent rent, options) the conclusions seemed to be the opposite.

The initial and subsequent measurement of the lessor's performance obligation

The Boards agreed that performance obligation should be measured at transaction price. Some Board members seemed to be concerned that this approach could instigate a Day 1 gain.

The Board also agreed with the subsequent measurement as reflecting decreasing in the entity's obligation to permit the lessee to use the leased item over the lease term. Some of the Boards' members noted that different principles for goods and services shall be developed in line with the principles within revenue recognition.

The presentation of a lessor's receivable and performance obligation

The Boards had divided opinions of how to present leases in lessor's accounting. The Boards were split between gross presentation of all three items (leased asset, lease receivable and performance obligation), lease receivable net of performance obligation, leased items net of performance obligation and a bifurcation between the present value and the estimate of residual amount. Several Board members noted that it is the old finance and operating lease issue. Other Board members noted that perhaps three distinct models of presentation would be required in order to capture the underlying economic reality (financing, provision of goods and provision of services). No decision was reached.

The Boards discussed various issues related to specific industries, requirements to Banks as lessors, real estate sector. The Boards were stuck in the debate of the recognition of the whole asset, rights previously not recognised being recognised, inconsistency between treatment of purchase finance and leases even though they represent the same economic reality.

The Boards concluded that significant issues of definition, scope and measurement would have to be revisited. The staff noted that the Board will be presented additional analysis (revenue recognition model versus financial instruments) in October, after taking into account the feedback from the constituents to the preliminary views discussion paper as well as input from the discussions at working group on leases in September.

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