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Leases

Date recorded:

As part of its continuing deliberations surrounding the Exposure Draft Leases (Leases ED), the Boards deliberated on the following topics:

  • Lessee accounting: subsequent measurement
  • Lessee accounting: residual value guarantees (RVGs)

Summary

The Boards made a number of tentative decisions during these deliberations, as follows:

Lessee accounting: subsequent measurement

  • Confirm changes in the liability to make lease payments as a result of foreign exchange differences would be recognised in profit or loss
  • Confirm the right-of-use asset would be evaluated for impairment in accordance with IAS 36 Impairment of Assets (IFRSs only) or Topic 350 Intangibles — Goodwill and Other (US GAAP only)
  • Permit revaluation of the right-of-use asset in accordance with the principles of IAS 38 Intangible Assets if a revaluation policy is applied to owned assets of the same class consistent with the proposed guidance in the ED (IFRSs only). For preparers following US GAAP, revaluation of the right-of-use asset is not permitted.

Residual value guarantees (RVGs)

  • Amounts expected to be payable under RVGs included in the measurement of the lessee's right-of-use asset would be amortised on a systematic basis (i.e., to reflect the pattern in which the economic benefits of the right-of-use asset are consumed or otherwise used up) from the date of commencement of the lease to the end of the lease term or over the useful life of the underlying asset, if shorter. If a pattern cannot be readily determined, a straight-line amortisation method would be used
  • Lessees should reassess amounts expected to be payable under RVGs when events or circumstances indicate that there is a significant change in the amounts expected to be payable under RVGs. Changes to the lessee's liability to make lease payments arising from current or prior periods would be recognised in profit or loss, while changes relating to future periods would be recognised as an adjustment to the right-of-use asset. The allocation for changes in estimates of RVGs would reflect the pattern in which the economic benefits of the right-of-use asset will be consumed or was consumed; however, if the pattern cannot be reliably determined, an entity would allocate changes in estimates of RVGs to future periods.
  • The Boards directed the staffs to research distinguishing characteristics between RVGs and variable lease payments (e.g., contingent rent) for discussion at a future meeting.

 

 

Lessee accounting: Subsequent measurement of foreign exchange differences

As the Leases ED did not provide specific guidance on how a lessee should account for the effects of foreign exchange relating to the measurement of a liability to make lease payments and a right-of-use asset, and following respondent feedback to the Leases ED which requested clarity as to whether the effects of subsequent changes in the exchange rate would require recognition in profit or loss, consistent with the principles of IAS 21 The Effects of Changes in Foreign Exchange Rates and Topic 830 Foreign Currency Matters, or as a change in the carrying amount of the right-of-use asset, the Boards tentatively decided, with little deliberation, to confirm that changes in the liability to make lease payments as a result of foreign exchange differences would be recognised in profit or loss.

One IASB member expressed concern with reflection of foreign exchange differences relating to future periods in the current period profit and loss, as he preferred bifurcation of foreign exchange differences between those derived from current or prior periods and those relating to future periods (for reflection as a change in the carrying amount of the right-of-use asset). Other Board members, while not disputing the tentative decision, expressed concern with reflection of foreign exchange guidance within the leases standard. Specifically, certain Board members preferred that relevant guidance on foreign exchange activity be applied in the foreign exchange rate standards, which the staffs will consider in future standard drafting.

Lessee accounting: Impairment of a lessee's right-of-use asset

Considering that the impairment models in IFRSs and US GAAP are not currently converged, the Boards deliberated on the proposal in the Leases ED to follow the existing impairment models in IFRSs and US GAAP when assessing impairment of the right-of-use asset. The staffs presented outreach feedback which noted that many supporting impairing the right-of-use asset as proposed in the Leases ED, while others requested a converged solution. With little deliberation, the Boards acknowledged that retention of the proposals in the Leases ED would not result in a converged solution, but they noted that the consistency and comparability that would result in using the same impairment model for leased and owned assets would outweigh the disadvantage of divergence. Thus, the Boards confirmed the right-of-use asset would be evaluated for impairment in accordance with IAS 36 Impairment of Assets (IFRSs only) or Topic 350 Intangibles — Goodwill and Other (US GAAP only).

Lessee accounting: Revaluation of a lessee's right-of-use asset (IASB-only)

As an IASB-only issue, given that for preparers following US GAAP, the Leases ED did not allow revaluation of the right-of-use asset, the Boards deliberated on the proposals in the Leases ED that:

  • revaluation of a lessee's right-of-use asset would be permitted if a lessee revalued all owned assets in the underlying asset's class of property, plant and equipment, but would not be required, even if the rest of the asset class was revalued
  • if a lessee revalues its right-of-use assets, it would be required to revalue the entire class of assets to which the underlying asset belongs
  • revaluation would be required to be performed in accordance with IAS 38 Intangible Assets; however, an active market would not be required to revalue right-of-use assets.

The IASB staff noted that a minority of respondents to outreach expressed concern with the Board's proposals in the Leases ED, with some respondents expressing a desire for a converged solution to that of US GAAP and others requesting that right-of-use assets be treated as their own class for purposes of revaluation.

With little debate, the IASB tentatively decided to permit revaluation of the right-of-use asset in accordance with the principles of IAS 38 Intangible Assets if a revaluation policy is applied to owned assets of the same class consistent with the proposed guidance in the ED. While this will not result in a converged solution, the Board previously decided that the consistency and comparability that would result in using the same revaluation model for leased and owned assets in IFRSs would outweigh the disadvantage of divergence with US GAAP. Likewise, the prohibition would be difficult to justify as the right-of-use asset is subject to existing guidance for amortisation and impairment, and existing IFRS guidance currently allows revaluation for non-financial assets.

Lessee accounting: Residual value guarantees

The Boards deliberated on subsequent measurement and reassessment of RVGs for lessees. With little debate, the Boards tentatively decided that amounts expected to be payable under RVGs included in the measurement of the lessee's right-of-use asset would be amortised on a systematic basis from the date of commencement of the lease to the end of the lease term or over the useful life of the underlying asset, if shorter. If a pattern cannot be readily determined, a straight-line amortisation method would be used.

Many Board members, however, expressed concern over how to distinguish RVGs and variable lease payments (e.g., contingent rent) in light of the Boards' previous tentative decision that variable lease payments should not be included in the measurement of a lessee's liability to make lease payments and a lessor's lease receivable unless the variable lease payments are 'disguised minimum lease payments'. While this question speaks more to the measurement of RVGs than to the amortisation, one Board member highlighted that RVGs may be derived from underlying asset usage (such as an automobile lease in which the RVG varies according to kilometres driven), and it was not clear whether this would be considered a RVG or a variable lease payment. Thus, the Boards directed the staffs to research distinguishing characteristics between RVGs and variable lease payments for discussion at a future meeting.

The Boards then considered the reassessment of RVGs following Leases ED proposals which noted that lessees should reassess the carrying amount of the liability to make lease payments arising from each lease if facts or circumstances indicate that there would be a significant change in the liability since the previous reporting period. The staffs, citing little respondent feedback on this issue other than practical application challenges from a cost-benefit perspective, proposed to retain the reassessment requirement in order to provide relevant and timely information to users of financial statements on expectations of the lessee's liability in conjunction with providing consistency with previous tentative decisions requiring reassessment of options.

The Boards tentatively decided that lessees should reassess amounts expected to be payable under RVGs when events or circumstances indicate that there is a significant change in the amounts expected to be payable under RVGs. The Boards tentatively decided not to include indicators, such as contract-based, asset-based or entity-based factors, in the final standard for purposes of defining whether reassessment should occur, but rather, proposed application of a general significant change threshold for application by preparers.

Finally, the Boards deliberated on accounting for changes in the expected amounts payable under a RVG as a result of reassessment, including retention of proposals in the Leases ED or requiring all changes be recognised in profit or loss. With little debate, the Boards decided that changes to the lessee's liability to make lease payments arising from current or prior periods would be recognised in profit or loss, while changes relating to future periods would be recognised as an adjustment to the right-of-use asset (consistent with Leases ED). The allocation for changes in estimates of RVGs would reflect the pattern in which the economic benefits of the right-of-use asset will be consumed or was consumed; however, if the pattern cannot be reliably determined, an entity would allocate changes in estimates of RVGs to future periods. Such a conclusion is based on assessment that the above decision better reflects the economics of many leases. One Board member, however, noted that the above decision was inconsistent with earlier tentative decisions on subsequent measurement of foreign exchange differences. Another Board member highlighted that the proposal for RVGs is consistent with decommissioning guidance, however.

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