The Board discussed the transitional requirements for a first-time adopter of IFRSs regarding leases; considering whether some of the transitional requirements and relief provided for existing IFRS preparers should also be provided to a first-time adopter of IFRSs.
Considering proposals provided in the August 2010 exposure draft Leases, the staff noted that when first applying the new leases standard, they believed that a first-time adopter of IFRSs would face similar issues to those faced by existing IFRS preparers. To that end, and considering existing requirements set out in IFRS 1 First-time Adoption of International Financial Reporting Standards and IAS 17 Leases, the staff recommended that a first-time adopter of IFRSs (regarding leases) should be permitted to:
- apply the general transitional provisions (available to existing preparers) in the leases standard.
- use the fair value of a right-of-use asset as its deemed cost, if that first-time adopter uses the revaluation model to measure right-of-use assets after adoption.
- apply the following reliefs:
- do not require evaluation of initial direct costs for contracts that began before the opening IFRS statement of financial position.
- permit the use of hindsight in periods before the first IFRS reporting period, including when determining whether or not a contract is, or contains, a lease.
A first-time adopter that elected any of those reliefs would disclose the reliefs elected in its first IFRS financial statements.
One Board member suggested that the fair value option should not be limited to those circumstances in which the first-time adopter uses the revaluation model to measure the right-of-use asset after adoption (i.e., a fair value option should be permitted regardless of future revaluation intentions). Other Board members agreed with this view and noted that IFRS 1 permits a one-off fair valuation regardless of any intention to depreciate the asset in the future (as opposed to revalue). Consequently, the Board tentatively decided to amend the staff's recommendation regarding use of the fair value option such that such an option is not limited to circumstances in which the first-time adopter uses the revaluation model to measure right-of-use assets after adoption.
Another Board member requested that the relief provided by paragraph 9A of IFRS 1 (in reference to IFRIC 4 Determining whether an Arrangement Contains a Lease) be extended for first time adopters of IFRSs under this project. However, when put to a vote, Board members did not elect to amend proposed first-time adopter transition provisions for this request given that paragraph 9A of IFRS 1 was seen as a very targeted exemption that should not be carried forward more broadly.