Date recorded:

Accounting for Changes in Contingent Rentals

The Boards agreed that changes in amounts payable under contingent rental arrangements arising from current or prior periods should be recognised in profit or loss and all other changes should be recognised as an adjustment to the lessee's right-of-use asset.

One FASB member disagreed with that approach as he believed that contingent rentals are unlike other estimates and, thus, should be allocated between profit or loss and the right of use asset on the same basis as the right-of-use asset is amortised.

One IASB member raised his concerns related to granularity of the reporting period, especially in case of interim reporting. Nonetheless, other Board members believed that the issue is not limited to contingent rentals and, if necessary, should be addressed in a review of the interim reporting standard, that is, outside of scope of this project.

The Boards also agreed that all changes in amounts payable under residual value guarantees should be accounted in the same way as other contingent rental arrangements. One IASB member noted that to he would prefer a formulation that would focus on booking of the changes in the current period unless they stem from the change of usage of the right-of-use asset.

The Boards also agreed that changes in the lessor's receivable should be treated as adjustment to the original transaction price and be allocated to the lessor's performance obligation. Further, if changes are allocated to a satisfied performance obligation, the effect should be recognised in revenues. On the other hand, if changes are allocated to an unsatisfied performance obligation, they will adjust the carrying amount of that performance obligation.

Although the Board agreed with the underlying principle of allocation, wording proved to be contentious. Therefore, the Boards decided to discuss the wording of the guidance offline. Moreover, some Board members were unsure that time would be always appropriate criterion for allocation of satisfaction of performance obligation. The Boards agreed to find a formulation that would reflect the allocation based on the most appropriate factor (time, cost, usage).

Scope - Purchase or sale of the underlying asset

The Boards agreed that the principle that would determine whether a transaction represents a sale or purchase of the underlying asset (rather than a lease contract) should focus on control and, in particular, on transfer of residual benefits. The principle sought would ensure that no gain/loss at the end of the contract is possible.

Subject of drafting of the principle, the Boards agreed that a seller (lessor) shall not apply these requirements to contracts that will transfer all benefits associated with the underlying asset by the end of the contract. Conversely, the Boards agreed that a buyer (lessee) shall not apply these requirements to contracts under which the buyer/lessee will obtain all benefits associated with the underlying asset by the end of the contract.

The Board also agreed that the focus should be on all (but trivial) benefits rather than significant.

Based on these decisions, the Boards decided to include examples of transactions that would generally be considered to be purchases or sales of the underlying asset (including contracts that automatically transfer title, contracts that include bargain purchase option, and contracts where the return the lessor receives is fixed). The Boards discussed additional examples and noted that the decisive condition is existence of any residual benefits.

Finally, the Boards discussed the very long leases of land (for example, 99 years). The Boards were split whether to account for them as sales of underlying land or as leases. The Boards discussed various examples and noted different practices in various jurisdictions (including when the sale of land is legally prohibited). The Boards noted that none of the models is perfect and each has its shortcomings. After a rather lengthy discussion, it was clear that the Boards were split on the issue, with a narrow majority in favour of treatment as sales. Most Board members felt uncomfortable with, for instance, a 200-year revenue deferral, particularly when consideration is transferred at inception.

Initial Direct Cost

The Boards discussed the definition of initial direct cost and agreed that these should be defined as incremental costs directly attributable to negotiating and arranging a lease. Despite agreement on this definition the Boards noted that the decision should be consistent with the treatment of the initial direct costs in other projects (Revenue Recognition, Insurance, and Financial Instruments). Subject to this caveat, the Boards agreed to include additional guidance to illustrate which costs are directly attributable to acquiring a lease.

Some Board members noted that definition of initial direct costs might vary if they are referred to from lessor or lessee perspective. Nonetheless, the main discussion by the Board focus on treatment of the unit of account of those costs and their treatment, for example, within the context of a lease origination department.

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