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Leases

Date recorded:

Contracts that contain a lease

The purpose of this discussion was to discuss how to separate a lease, service, and other components within contracts that contain a lease.

The staff recommended that entities should be required to separate lease components from all non-lease components. This approach would account for only the right-of-use of the underlying asset as a lease with all other components (services, executory costs, etc.) accounted for in accordance with the applicable guidance.

The boards agreed with this recommendation.

The boards also discussed how to allocate payments between the lease components and the non-lease components of a contract that contains a lease for lessors.

The staff noted that the comment letters received indicated the importance of the FASB and the IASB to reach the same conclusion for the final standard.

The staff recommended that separate guidance for allocation of payments between the lease and non-lease components not be developed. Rather, the staff recommended that the lease standard refer to the guidance within the revenue recognition standard for allocation between separate performance obligations. This is consistent with what was included in the ED.

The boards agreed with this recommendation.

The boards discussed how lessees should allocate payments between the lease components and the non-lease components of a contract.

The staff recommended that lessees should be required to allocate between lease components and non-lease components based on their relative standalone purchase prices.

The boards agreed with this recommendation.

The staff also recommended that if the purchase price of one component in a contract that contains a lease is observable, a lessee can use the residual method to allocate the price to the component for which there are no observable purchase prices.

The boards agreed with this recommendation.

The staff also recommended that lessees should treat the entire contract as a lease when there are no observable prices for any of the components.

The boards agreed with this recommendation.

Sale and leaseback transactions

The purpose of the discussion was to determine when a sale and leaseback transaction should occur.

The staff recommended that when the sale has occurred, the arrangement would be accounted for as a sale and a leaseback. If a sale has not occurred, then the arrangement would be accounted for as a financing.

The majority of the staff also recommended that an entity should apply only the control criteria in revenue recognition to determine whether a sale has occurred in a sale and leaseback transaction.

The boards agreed with the recommendations.

This decision would remove paragraph B32 from the ED which proposed conditions that normally preclude the seller/ lessee from transferring more than a trivial amount of the risks and benefits associated with the transferred asset at the end of a contract that therefore do not result in a purchase or sale.

The boards also discussed:

  • How a seller/ lessee should recognise a gain or loss arising on a transaction that is accounted for as a sale and leaseback
  • How a seller/ lessee should determine a gain or loss arising on a sale and leaseback transaction when it is not at fair value.

The staff recommended that in a sale and leaseback transaction when consideration is at fair value, gains or losses arising from the transaction should not be deferred. When consideration is not at fair value, the assets, liabilities, gains and losses should be adjusted to reflect current market rentals.

The boards agreed with the recommendations.

The boards also discussed whether to apply the partial asset or whole asset approach in a sale and leaseback transaction.

The staff recommended that the seller/ lessee should apply the whole asset approach which is consistent with what was in the ED.

The boards agreed with the recommendations.

The staff recommended that the boards do not prescribe a particular type of lessee accounting model for entities that are participating in a sale leaseback transaction.

The boards agreed with the recommendations.

Related Topics

Correction list for hyphenation

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