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Leases (IASB only)

Date recorded:

At this IASB only meeting, the Board discussed whether, as a consequence of the lessee accounting proposals, right-of-use assets that meet the definition of investment property should be within the scope of IAS 40 Investment Property.

Presently, a lessee is required to account for an asset that it holds under a finance lease in accordance with IAS 40 if the asset meets the definition of investment property. A lessee is permitted to account for assets that the lessee holds under an operating lease using the fair value model in IAS 40 if that property meets the definition of investment property. The purpose of this meeting was to seek Board views as to whether the current scope of IAS 40 should be retained with respect to right-of-use assets.

The staff presented two approaches. The first approach was to retain the current scope of IAS 40 (i.e., an election would be available to apply IAS 40 for a lease for which the lessee recognises a straight-line single lease expense, but required for a leases where the lessee recognises interest on the lease liability separately from amortisation of the right-of-use asset). The second approach was that investment property held under any lease should be within the scope of IAS 40 (i.e., a lessee would account for all right-of-use assets in accordance with IAS 40 if the leased property meets the definition of investment property in IAS 40). The staff recommended the second approach because it is consistent with the Board’s proposals on lessee accounting and promotes consistency in accounting for investment property. However, the staff acknowledged practical issues with this recommendation. For example, requiring a lessee to provide fair value disclosures for right-of-use assets (meeting the definition of investment property) may be costly/burdensome in some circumstances.

A few Board members questioned the recommendation from a cost-benefit perspective and recommended the revised exposure draft include a specific question on this issue to consider whether the proposed change was practical to implement and useful to financial statement users. The staff confirmed it would raise a specific question on this issue. With little additional debate, the Board tentatively agreed with the staff recommendation.

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