Subleases

An entity may enter into an arrangement to lease an asset from another entity (i.e., the entity is a lessee) and then subsequently lease all or part of the asset to a third party (i.e., the entity acts as an intermediate lessor). While there is U.S. GAAP guidance on an intermediate lessor’s accounting for subleases, IFRSs do not contain such guidance. 

Accounting for Head Lease and Sublease

The boards agreed that in a manner consistent with their May 2013 exposure draft (ED), an intermediate lessor should generally account for the head lease and sublease as two separate contracts.¹ However, the FASB and IASB had differing views on the approach for determining the intermediate lessor’s accounting for the sublease. The FASB tentatively decided that the sublease classification (i.e., whether the intermediate lessor should treat the sublease as a capital or an operating lease) is determined by reference to the underlying asset, whereas the IASB tentatively decided that the sublease classification should be determined by reference to the remaining right-of-use (ROU) asset resulting from the head lease.

Offsetting Lease Assets With Lease Liabilities

The boards also tentatively decided that an intermediate lessor would generally be prohibited from offsetting lease assets resulting from a sublease with lease liabilities related to the head lease arrangement, unless the transactions meet the U.S. GAAP or IFRS offsetting requirements.

Offsetting Lease Income With Lease Expenses

Similarly, the boards tentatively decided that an intermediate lessor would be prohibited from offsetting the lease income from a sublease with the lease expense from the head lease, unless the entity is acting as an agent for the sublessee. This evaluation would be determined in accordance with the “principal-agent guidance” in the recently issued revenue standard.

Lessee balance sheet presentation

Type A ROU Assets and Lease Liabilities

The boards tentatively decided that a lessee should present its Type A ROU assets and lease liabilities as separate line items on the balance sheet or in the notes to its financial statements. A lessee that elects not to present its Type A ROU assets or lease liabilities as a separate line item on the balance sheet would be required to disclose in the notes the respective amounts and balance sheet line items that include these balances. 

Regarding Type A ROU assets, the IASB tentatively decided that if the lessee elects not to present such assets separately on the balance sheet, an entity would be required to present them in the same line item as similar purchased assets; the FASB decided not to provide prescriptive guidance on this topic. Further, the boards tentatively agreed not to specify which balance sheet line item should include the Type A lease liability if the lessee elects not to present the liability separately on the balance sheet.

Type B ROU Assets and Lease Liabilities (FASB Only)

In addition, the FASB tentatively decided that the lessee should present its Type B ROU assets and lease liabilities separately from its other assets and liabilities. Alternatively, a lessee can separately disclose its Type B ROU assets and liabilities in the notes to its financial statements. Further, the FASB decided against specifying where a lessee should present its Type B ROU assets and lease liabilities on the balance sheet; however, a lessee is prohibited from presenting Type B ROU assets and lease liabilities in the same line item as Type A amounts.

Cash flow presentation

Lessor Cash Flow Presentation

Under current U.S. GAAP and IFRS accounting, a lessor is required to classify cash receipts from leases in cash inflows from operating activities in its statement of cash flows. The May 2013 ED carried forward this approach in the proposed new accounting model. At the meeting, the boards tentatively decided to retain this approach in the final leases standard.

Lessee Cash Flow Presentation

The boards also discussed the cash flow statement presentation from the lessee standpoint but had differing views on the appropriate classification. The FASB tentatively decided that cash payments related to a Type A lease should be presented as cash flows from financing activities (for principal) and cash flows from operating activities (for interest), whereas cash payments related to a Type B lease would be reflected as cash flows from operating activities.

The IASB tentatively decided that a lessee would present repayments of the principal portion of the liability in financing activities but could classify, as an accounting policy election, the interest portion of the payment in cash outflows from operating or financing activities. Such classification would be consistent with the existing “interest paid” guidance in IAS 7.² 

The IASB also tentatively decided to require a lessee to disclose the aggregate lease payments in the financial statements, although no particular location was specified (i.e., could be on the face of the cash flow statement or in the notes).