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Leases

Date recorded:

As part of its continuing deliberations surrounding the Leases ED, the Boards deliberated on the topics of subleases and short-term leases.

Summary

Tentative decisions reached as part of this meeting included the following:

Subleases:

  • Head leases and corresponding subleases would be accounted for as separate transactions
  • Subleases would be accounted for in accordance with the lessee and lessor accounting models
  • Assuming two lessor accounting models, intermediate lessors would evaluate the right-of-use asset recognised under the head lease, instead of the underlying asset, to distinguish lease classification.

Short-term leases:

  • Short-term leases, unless material (which will be defined in a future meeting), would not be recognised on a lessee's statement of financial position (i.e., consistent with the current requirements for operating leases), but additional disclosure would be required surrounding non-capitalised leases. The Boards will reconsider disclosure requirements at a future meeting
  • An entity would apply the short-term lease guidance as an accounting policy election by asset class.

Subleases

The staff sought the Boards' affirmation of their views in the Leases ED that a head lease should be accounted for as a separate transaction. However, the staff recommended that the Boards clarify that an intermediate lessor does the following:

  • As a lessee in a head lease arrangement, it would account for its lease with the head lessor, including the measurement of the right-of-use asset, in accordance with the decisions to date for all leases
  • As a lessor in a sublease arrangement, it would account for its lease with the sublessee in accordance with the decisions to date for all lessors.

Likewise, while the Boards continue to deliberate the lessor accounting model, if the Boards decide that there should be two approaches to lessor accounting, to determine the lease classification, the staff recommended that the principles and indicators used to define other leases (i.e., non-subleases) would be applied by the intermediate lessor as a lessor in the sublease arrangement to the right-of-use asset (instead of the underlying asset) it recognises from the head lease.

With little debate, the Boards tentatively decided to confirm the recommendations set forth by the staff.

Short-term leases

At the 15 March joint Board meeting, the Boards tentatively decided to allow operating lease treatment for short-term leases by lessors; reaffirming the proposals in the Leases ED with some differences in the definition of short-term leases and how the accounting may be elected. Based on subsequent deliberations on the lessee and lessor accounting models, the staff sought the Boards confirmation of a short-term lease exception.

Citing respondent feedback around this practical expedient, in which the majority of respondents requested cost relief for short-term leases, the majority of the Boards expressed a preference for a short-term exception from reporting leases within the statement of financial position.

The Chairman of the IASB noted that the short-term exception is currently defined as a lease that, at the date of commencement of the lease, has a maximum possible lease term, including any options to renew or extend, of 12 months or less. He noted that the decision to apply a 12 month model was based on an assessment of materiality (i.e., leases which have a maximum possible lease term of 12 months or less are not material). However, given different business models, the Chairman of the IASB expressed concern that defining short-term leases exclusively on lease term length might lead to material transactions being held off-balance sheet. Thus, he requested that a time component be considered in conjunction with a materiality assessment (whereby material leases of a maximum duration of 12 months or less would require capitalisation under the right-of-use approach). Many Board members agreed with this view, while others expressed concern that a materiality assessment would yield divergent practice in application, and likewise, audit requirements in assessing materiality would dictate preparers performing a detailed assessment of all leases applying the practical expedient, which would dilute the cost benefit the short-term exception served to provide.

Additionally, multiple Board members expressed a desire to have specific disclosure surrounding those leases applying the short-term exception (such as disclosure of the annual rent expense with discussion as to whether the annual rent expense is representative of what is expected to be recurring), although the Boards noted that such disclosure requirements would be considered as part of the overarching assessment of presentation and disclosures at a future date. In a vote, the majority of both Boards tentatively decided that short-term leases, unless material (which will be defined in a subsequent meeting), would not be recognised on a lessee's statement of financial position (i.e., consistent with the current requirements for operating leases), but additional disclosure (to be determined at a later date) would be required surrounding non-capitalised leases. A specific assessment as to whether short-term leases would be defined as a maximum possible lease term of 12 months or less (or a longer or shorter period) was not specifically discussed in the conduct of these deliberations.

The Boards also deliberated on whether the short-term exception should be an election. While a significant majority of the IASB voted to make the exception a policy election, the majority of the FASB preferred to require presentation to avoid comparability differences. When questioned as to whether FASB Board members would object to the exception being an election, the majority of the FASB did not object.

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