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Date recorded:

Definition of a lease

The Boards started their discussion with components of the definition of a lease.

The Boards discussed how broad the definition of a lease should be and, more generally, how would the proposed definition interact with the scope of the leases Standard, given the tentative decision made in December 2009 that the proposed new leases requirements should exclude intangible and biological assets.

Some of the Board members were concerned that a broad definition of a lease could lead to reconsideration of the scope. Other Board members were concerned that such decision would send mixed signals to constituents how to apply the guidance, especially in the context of possible application of the guidance by analogy in line with IAS 8. One FASB member urged the Board to develop a comprehensive leases package including intangibles and biological assets. The FASB Chairman noted that such guidance would be part of a future project.

Eventually, the Boards agreed that the overall definition of leases should be broad, with a narrow scope of the Standard. The Boards also agreed to include a question regarding possible application of the guidance by analogy in the invitation for comments.

The Boards agreed to define a lease as a type of 'contract'. Both Boards preferred the term 'contract' instead of 'agreement' as they believed that it was consistent with other projects.

The Boards agreed that definition of a lease state that a lease is for a period of time. One Board member noted that some leases might be based on different criteria (for example, miles). Nonetheless, other Board members thought that even if a different base was agreed, the time factor would be still present and thus time should be used in the definition.

The Board agreed that a consideration is a necessary element in the definition of a lease.

After a significant discussion the Boards agreed that for a lease to exist, the lessor must convey the right to use a specified asset. The Boards agreed that additional guidance was necessary to describe the meaning of specified asset (in the context of a pool of assets or class of assets) in order to distinguish between supply of products/services and the right to use. Some Board members were also concerned with the relation between the leases project and the revenue recognition project.

Finally, the Boards considered when a lease conveys the right to use the underlying asset. The Board agreed that such condition is fulfilled when the purchase has the ability to control physically the use of the underlying asset either through operations or physical access. The Boards also agreed that such condition would be fulfilled in case of 'de-facto control' of an asset (not based on contractual terms). The Boards also noted that pricing mechanism can be an indicator of such control (payment for something different than products/services provided).

Some Board members were concerned that such a definition of a lease would blur the differences between leases and in-substance purchases. The staff will present a paper on such distinction for one of the following meetings.

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