Date recorded:

Scope - Purchases and Sales of the Underlying Asset

The Boards started their discussion with identification of a principle that could be used to determine when a transaction was a purchase or sale of the underlying asset and thus should be excluded from the leases guidance.

Most Board members agreed with the staff proposal to base that principle on control: when a contract transfers control of the underlying asset, it is in fact a purchase or sale and should therefore be excluded from the scope of the leases standard.

Despite the unanimous support for that principle, several Board members expressed their concerns whether that principle would be operational and whether additional guidance that would encompass also risk and rewards type of guidance would not be required. Other Board members were concerned that control was to be defined in the same way as control in the revenue recognition project due to the specific nature of the leasing relationship with continuing involvement (which can be interpreted as a kind of a protective right). These members were concerned that without a more detailed specification (for exampple, identification of the control at the end of the lease term) the control principle would not be operational, as control is effectively shared for the lease term.

The Boards spent a considerable amount of time discussing the issue of the definition of control. Some Board members proposed to adapt the revenue recognition definition of control to include also a future ability to direct the use and receive benefits from the underlying asset or to include residual risk and rewards in the test. The Boards finally agreed with the concept of control but instructed the staff to try to find words that would better articulate that concept for the specific environment of leases. Following that decision the Boards decided to wait with the discussion on the perspective from which to assess the transfer of control for the next Board meeting, when the principle of control would be refined.

Some Board members were concerned that in case the definition of control differed in the revenue recognition and leases projects, some contracts might fall out of scope of both standards (and thus no guidance would apply to them).

The Boards agreed to include in the leases guidance indicators to help reporting entities determine whether control had transferred to the lessee. There was little disagreement among the Board members that control of the underlying asset was normally transferred in leases where title to the underlying asset transfers to the lessees automatically at the end of the lease or in leases that include a bargain purchase option. Nonetheless, some Board members were concerned how the bargain purchase option was defined and whether it should be assessed at inception or reassessed at each reporting date. The staff clarified that the bargain purchase option should not be reassessed: it should be considered only at inception.

On the other hand, views of Board members were split on whether control of underlying asset was normally transferred when a contract covers the whole of the expected useful life of the underlying asset or when a contract is expected to cover the whole of the expected useful life of the underlying asset because it includes options to renew the lease at a bargain price. Even though some members supported such extension, other Board members remained concerned and proposed alternative criteria that would capture these types of situations. The Board asked the staff to develop those indicators further and, particularly, to clarify how they were articulated.

The Boards agreed that purchase options should be accounted for in the same way as options to expend or terminate the lease. Some of the Board members expressed their concerns about the consistency of the treatment of purchase options (and options to expand or terminate) and contingent rentals, as both of those might capture the same economic substance.

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