As part of its continuing deliberations surrounding Leases ED, the Boards deliberated on the topics of the lessee presentation and disclosure.
The Boards made a number of tentative decisions during these deliberations, as follows:
Statement of Cash Flows:
Statement of Financial Position:
The Boards discussed certain disclosure requirements from the Leases ED and tentatively decided on the following:
Statement of Cash Flows
The staff discussed the presentation for lessees of cash paid for leases in the statement of cash flows and other supplemental cash flow disclosures. Leases ED proposed that a lessee shall classify cash payments for leases as financing activities in the statement of cash flows and present them separately from other financing cash flows. However, the staff identified four issues with cash flow requirements for lessees based on constituent feedback and past Board tentative decisions. These issues included:
- Interest – Should the cash paid for leases that is classified as a financing activity include amounts for interest?
- Variable lease payments – Should amounts for variable lease payments be classified as financing activities in the statement of cash flows?
- Supplement information – Should there be an explicit statement that a right-of-use asset capitalised during the period should be reported in supplementary cash flow information as a non-cash transaction?
- Short-term leases – Should the accounting treatment of short-term leases determine the classification of the associated cash flows?
Many Board members expressed concern with mandating the classification of interest paid for leases since this decision is outside of the scope of the leases project. However, specifying the classification of the principal portion of the liability to make lease payments would be appropriate because similar liabilities are classified in this manner in current practice.
Other Board members focused on the need to provide clarity to users as to all cash components of leases by way of an aggregated disclosure. Given that staff recommendations included bifurcation of principal and cash payments in the statement of cash flows, these Board members expressed the need for one disclosure specifying all cash components of a lease, including fixed principal, variable lease payments and interest.
The Board was asked to consider whether the principal and interest should be bifurcated in the statement of cash flows. While the FASB tentatively decided that the principal and interest should be bifurcated, the IASB tentatively decided not to bifurcate payments. The FASB Chair then asked if the IASB would be opposed to allocation of principal and interest of cash paid for lease payments in accordance with current applicable IFRS or US GAAP requirements. The IASB did not oppose this view.
Variable lease payments:
The staff noted, as a result of previous tentative Board decisions, the value of the right-of-use asset and the liability to make lease payments should only include amounts for variable lease payments that are index based (in addition to disguised fixed payments). Since the liability to make lease payments does not include other variable lease payments, the staff outlined that there is no settlement of a financing liability by the lessee when those variable lease payments are made, and therefore, it would be inappropriate to include those cash flows in the financing section of the statement of cash flows. However, given that users would like information about variable lease payments, based on outreach performed, the staff recommended that cash paid for variable lease payments excluded from the measurement of the right-of-use asset and the lease liability to make lease payments be classified as an operating activity. Period expenses arising from variable lease payments that were not included in the measurement of the right-of-use asset and liability to make lease payments should be presented separately in profit or loss or disclosed in the notes to the financial statements.
Many Board members were concerned with presenting fixed payments in one section of the statement of cash flows (i.e., financing), while presenting variable lease payments in another section (i.e., operating). Another Board member saw it as 'penalising' to include variable lease payments in operating cash flows since operating cash flows are a focal point for investors. However, other Board members saw variable lease payments as unique from fixed payments, as such variable payments (which were not included in the right-of-use asset) are often based on performance results, such as variable rent payments based on sales during the quarter. These Board members saw variable payments as more akin to period costs and an operating cash flow.
The Boards tentatively agreed that cash paid for variable lease payments excluded from the measurement of the right-of-use asset and the liability to make lease payments would be classified as an operating cash flow. However, the Boards also tentatively decided that period expenses for variable lease payments not included in the right-of-use asset and corresponding liability, along with fixed principal payments, would be disclosed in the notes to the financial statements under a comprehensive disclosure.
With little debate, the Boards tentatively agreed that the acquisition of a right-of-use asset in exchange for a lease liability would be disclosed in an additional non-cash disclosure in the statement of cash flows.
With little debate, the Boards tentatively agreed that cash outflows for short-term leases not included in the liability to make lease payments would be included in the operating section of the statement of cash flows, as there is not a settlement of the liability to make lease payments. The Boards confirmed that this decision was limited to lessees who took the Board's practical expedient from reporting short-term leases within the statement of financial position.
In making all of the above decisions, the FASB Chair expressed a desire to have user feedback on these decisions to ensure coherency. Likewise, another Board member asked that the staff bring back a separate paper to provide a comprehensive disclosure which would highlight both expenses and cash flows for lessees and where recognised in the financial statements.
Statement of Financial Position
The staff discussed the presentation for lessees' right-of-use assets and liabilities to make lease payments in the statement of financial position. Based on comment letter feedback, the staff identified the following issues for discussion by the Boards:
- Disaggregation of right-of-use assets and liabilities to make lease payments
- Presentation of the right-of-use asset
- Characterisation of the right-of-use asset
The Boards considered whether the final lease standard should require that lease assets and lease liabilities be separately presented in the statement of financial position or notes to the financial statements. All Board members agreed that these assets and liabilities have unique measurement attributes and are viewed differently than other assets in certain circumstances (e.g., bankruptcy), and consequently, preferred separate presentation.
Thus, the Boards tentatively agreed that the leases standard would require that lease assets and lease liabilities be separately presented in the statement of financial position or notes to the financial statements. If not presented on the face of the statement of financial position, the amounts disclosed in the notes should indicate in which line item in the statement of financial position the relevant assets and liabilities are presented in. The Boards noted that preparers should follow applicable guidance prescribed in other standards in determining if presentation on the face of the statement of financial position is required.
In considering the presentation of the right-of-use asset, the staff asked the Boards to consider whether the right-of-use asset should be presented in its own asset class and not as part of property, plant and equipment in the statement of financial position. The Boards noted that the right-of-use asset should be presented such that the economic benefits arising from both leased and owned assets are shown similarly (i.e., the nature of the future economic benefit the entity will receive from the lease of an asset during the lease term and the function the asset serves is similar to that of owned assets, and therefore should be presented consistently).
In order to show how the asset is being used by the entity, the Boards tentatively agreed that the presentation of the right-of-use asset would be classified in a consistent manner to classification had the entity owned the asset (if a building if owned, then it would be classified as a building when leased).
Finally, the Boards discussed whether the right-of-use asset should be considered a tangible or intangible asset. This was considered to be a crucial issue in regulated industries, such as financial institutions, given consideration to regulatory capital and taxation. In deliberations, the Boards considered the relevant presentation to be indicative of a regulatory issue and it was not the position of the Boards to dictate presentation for regulatory capital purposes. One Board member noted that the Boards should define exactly what the right-of-use asset is and leave it to regulators to determine presentation for regulatory assessment. Thus, consistent with current guidance in IAS 17 and ASC Topic 840, the Boards decided it was not necessary to clarify whether the right-of-use asset recognised by the lessee represents a tangible or an intangible asset.
The Boards discussed a number of lessee disclosure requirements, including that of disclosure requirements for short-term leases. As part of these deliberations, the staff presented the following recommendations to the Boards based on analysis performed:
- Retain the requirements in the Leases ED to reconcile the beginning and ending balances of right-of-use assets by underlying asset type and the liability to make lease payments, absent a requirement to disaggregate the reconciliation of the lease liability by underlying asset type
- Include a requirement to disclose a maturity analysis of undiscounted amounts to be paid that are included in the liability to make lease payments
- Retain the time bands for the maturity analysis of liabilities to make lease payments proposed in the Leases ED (i.e., annually, for the first five years and the total of the amounts for the remaining years)
- Disclose separately in the maturity analysis undiscounted contractually obligated fixed amounts related to leases that have not yet commenced
- Consistent with the Leases ED, not require disclosure of discount rates used to calculate the liability to make lease payments
- Retain the disclosure requirements in paragraphs 73(a)(ii) – 73(a)(iii) of the Leases ED (i.e., disclosing the basis and terms on which contingent rentals are determined and the existence and terms of options, including renewal and termination). The staff intend to provide aggregation guidance and / or illustrations of the proposed disclosures
- Remove the requirements in the Leases ED to disclose (a) the existence and principal terms of any options for the lessee to purchase the underlying asset and (b) initial direct costs incurred on a lease
- Include a requirement to separately present or disclose interest expense and interest paid related to leases
- Consistent with the Leases ED, include a requirement to separately present interest and amortisation (i.e., not combined and presented as lease expense)
- Include a requirement to disclose rental expense incurred under short-term leases during the reporting period, with a qualification note that indicates if there are circumstances or expectations present that would indicate that the entity's short-term practices would result in a material change in the next reporting period
- Disclosures relating to some arrangements that are no longer determined to contain a lease (as a result of consequential amendments to non-lease guidance) would be outside the scope of the leases standard
In deliberation of all of the above recommendations, the Boards expressed the following primary concerns:
- One Board member noted the importance of requiring disclosure of the range of discount rates used to calculate the liability to make lease payments, as it provides information about the cost of leased capital.
- One Board member preferred requiring disclosure of purchase options on leased assets as it provides information about lessee flexibility in future commitment obligations.
- One Board member preferred requiring disclosure of the fair value related to provisions of arrangements that are accounted for as a lease, similar to that required for debt, but other Board members noted that the removal of the disclosure of optionality limits the usefulness of a fair value disclosure.
- Multiple Board members expressed a desire to have the time band disclosure for the maturity analysis of liabilities to make lease payments provide for a minimum five-year time band. Specifically, preparers should consider whether an extended time band disclosure is necessary for users to its financial statements.
- Many Board members expressed concern regarding inclusion of a time band disclosure which would exclude variable lease payments, short-term leases and non-lease (executory) costs. Significant Board debate occurred on this topic, as certain Board members wanted all future cash commitments included, while others felt the inclusion of all future cash commitments, including executed contracts in which the lease term has not yet commenced, would result in significant estimates on the part of management (comparability issue) and enhance the burden which the Board was attempting to alleviate with previous tentative decisions (e.g., short-term lease exemption and variable lease payment recognition).
- Many Board members were concerned that disclosures would be disaggregated throughout the financial statements. Thus, they preferred the existence of one aggregated disclosure that highlights all expenses incurred and cash paid in relation to lease arrangements.
In consideration of all of the above deliberations, the Boards tentatively agreed with all of the staff recommendations, absent the following:
- Instead of specifying retention of a five-year time band for the maturity analysis of liabilities to make lease payments proposed in the Leases ED, the Boards decided to require a minimum time band of five-years and thereafter, but preparers would consider if an elongated time band is required to assist users in understanding future commitments (if significant commitments are more than five-years out).
- The Boards were split on requiring disclosure of committed cash flows related to services of the lessee (i.e., a maturity analysis of the undiscounted contractually obligated fixed amounts related to leases that have not yet commenced), with the FASB supportive of this disclosure and the IASB not supportive of this disclosure. The FASB noted that this is a required disclosure of the US Securities and Exchange Commission, and thus, is included in the front-half of the financial statements (unaudited). However, FASB members voted to include this disclosure in the back half of the financial statements as an audited disclosure.