Preliminary comment letter analysis and redeliberation plan
The staff presented a summary of respondents' comment letters to the Boards' exposure draft published in August 2010 as well as feedback received from the various outreach activities undertaken by the Boards during the exposure period.
Overall, most respondents supported the Boards' efforts to jointly develop a single, comprehensive and converged lease accounting model for US GAAP and IFRSs. There was general support for the efforts to address the 'bright-lines' that exist in current lease accounting literature and most respondents supported the recognition of lease obligations and related assets on the lessee's statement of financial statements. However, significant concerns were expressed with regards to the following matters:
- Complexity and cost of implementing the proposals, specifically the initial and subsequent measurement of lease assets and liabilities
- Reduced comparability arising from the level of estimation and judgement required by the proposals
- Definition of a lease and whether all arrangements meeting the proposed definition should be accounted for in accordance with the proposals
- Direction and objectives of the proposals on lessor accounting.
The staff also reported that a number of respondents recommended that further field-testing should be performed on matters such as the differentiation between a lease and a service, which elements of a lease contract should be disclosed rather than recognised and revisions to the current lessor account model.
Some Board members were surprised and also concerned about the lack of responses from users and that it appears that the users could not reach consensus on the need to change the current lease accounting model.
The Boards acknowledged that pressure is being put on the definition of lease and how it is distinguished from a service contract because the ED requires all leases to be recognised in the statement of financial position. Under the current literature, the distinction was not important as the accounting for operating leases and service contracts were basically the same. The Boards were in agreement that the definition of a lease should reflect the position from both the lessee and lessor's perspective.
Many respondents observed that the proposals with regards to the lessor model were less developed than for the lessee model and recommended that the Boards perform significant additional work as part of the due process, including field-testing, before finalising any changes to lessor accounting.
With regards to the lease term, the staff reported that almost all respondents disagreed with the definition as the longest possible term that is more likely than not to occur, with many respondents either supporting the Alternative view in the ED or increasing the threshold for taking into account options to renew to 'reasonable assured' or 'reasonably certain'.
In summary, the main issues for the Boards to redeliberate, are:
- Definition of a lease
- Lessor accounting model
- Lease term
- Variable lease payments
- Profit or loss recognition pattern.
As the definition of a lease is such a pervasive issue that has implications on a number of other mains issues, the Boards would start their redeliberations by focussing on this.
The Boards did not make any decisions during this session.
How to define a lease and how to distinguish it from a service
The Boards had a preliminary discussion during an education session on how to differentiate between a contract that is within scope of the leases standard and one that is accounted for as an executory contract (service).
In order to formulate the underlying principles for the definition of a lease, the Boards were asked to consider the following questions:
- What is a lease?
- Are all leases:
- A form of financing?
- Different from executory contracts?
- Should be uniquely accounted for?
- What is the asset acquired by a lessee? Is it the right-of-use asset or the underlying asset that is subject to the lease?
- Should the development of the definition of a lease reflect both lessee and lessor perspectives?
Board members were in agreement that the definition of a lease should reflect both the lessee and lessor's perspective and that the definition of a service should be consistent with the Revenue Recognition project. Board members also agreed that the asset acquired by the lessee, is a right-of-use asset and not the underlying asset. A physical asset can be unbundled into its various components and all a lease does is to unbundle the benefits embodied in the physical asset into a right-of-use and a residual value.
With regards to the question on executory contracts, most Board members were in agreement that leases are a subset of executory contracts and that although the Boards are not trying to account for all executory contracts in this project, they are addressing leases. Several Board members were of the opinion that once a lessor has delivered the asset to the lessee, the performance obligation has been satisfied if the lessor is not required to perform any other activities/services.
When discussing whether all leases are a form of financing, several Board members were uncomfortable with the implications of concluding either way. Some Board members acknowledged that in certain cases, the primary objective of a lease is to finance the acquisition of the right-of use asset, whereas in other cases that may not be the case. When asked why the question was put to the Board, the staff explained that respondents have identified certain situations where the profit or loss recognition pattern as proposed in the ED, would not reflect that substance of the lease arrangement. Respondents felt that in some situations the substance would be better reflected by presenting a straight-line rental payment rather than the amortisation of the right-of-use asset and unwinding of the lease obligation.
One Board member suggested an alternative view whereby all leases are recognised in the statement of financial position, but the profit or loss recognition pattern should be different depending on certain factors. The Boards requested the staff to develop criteria and guidance to consider at a future meeting.
No decisions were taken during this session.