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Leases

Date recorded:

Lessee accounting - Presentation

The Boards considered how a lessee's assets, liabilities, expenses and cash flows arising should be presented in the financial statements, first in accordance with the existing presentation requirements and then in accordance with the proposals of the Financial Statement Presentation (FSP) project.

Considering the existing financial statement presentation requirements, the Boards agreed in principle with the staff proposal to present the right-of-use asset and lease obligation on the face of the statement of financial position but to ask a specific question in the exposure draft on whether separate presentation in the notes would be appropriate in certain circumstances.

One Board member questioned why the classification of the right-of-use asset should be based on the use of the underlying asset as opposed to the nature of the asset. This classification will determine whether the revaluation of the right-of-use asset is allowed. The IASB members seemed a little confused as to what was previously decided on whether the right-of-use asset should be accounted for in accordance with IAS 16 or IAS 38. A lively discussion followed, where after the staff was instructed to bring the matter back for discussion at a later stage.

The Boards then considered whether to require the separate presentation of amortisation and interest expense from other amortisation and interest expenses either on the face of the statement of comprehensive income or in the notes. After a short discussion, the Boards agreed that judgement should be applied to determine whether the amortisation and interest expense are presented separately on the face or in the notes.

The Boards also considered whether the cash repayments of the capital amount and interest payments should be classified as financing activities in the statement of cash flows. One Board member questioned which cash amount the Boards want to present - the total cash payment or separate payments of interest and capital amounts, as that will determine the classification in the statement of cash flows. By a narrow majority the Boards tentatively decided that the cash repayment of leases should be separately identified in the statement of cash flows.

For information purposes, the Boards considered how the proposed presentation principles of the FSP project would apply to lessee accounting. In general, the Boards agreed with the proposal that the right-of-use asset should be presented as an operating asset in the business section with the amortisation as an operating expense. The interest expense should be presented as financing costs from operating obligations and cash rental payments in the operating category of the business section in the statement of cash flows. On the proposal to present the lease obligation as a liability in the financing arising from operating activities sub-category, one Board member noted that the definition of that category will need to be amended to achieve that. The staff acknowledged the point and undertook to liaise with the FSP project staff on the definition. The Boards asked the staff to provide feedback at a later stage.

 

Lessor accounting - Presentation

The Boards considered how a lessor's assets, liabilities, expenses and cash flows should be presented in the financial statements. The Boards were presented with the following four alternatives:

  • Alternative A. Gross presentation of the leased asset, lease receivable and performance obligation;
  • Alternative B. Present the lease receivable net of the performance obligation;
  • Alternative C. Present the leased asset net of the performance obligation;
  • Alternative D. Net presentation of all three items as a distinct item in the SFP.

Some Board members indicated strong support for alternative A as this is the only alternative that is consistent with the proposed lease accounting model and that captures the economics of the lease arrangement. Another Board member questioned how lessors would present leases for investment property in accordance with IAS 40, since the Boards have scoped out these leases from the proposed leasing standard. This Board member is not comfortable with a difference in presentation between leases for investment property and other leases. The staff pointed out that since the accounting basis for investment property is different from other leases there will inevitably be a difference in presentation.

Other Board members indicated that they prefer some form of net presentation, although they were evenly split between alternatives B, C and D. When initially put to a vote, the FASB strongly supported alternative D, whereas a very narrow majority of IASB members indicated that they can accept alternative D.

One Board member made the remark that alternatives B, C and D appear to be consistent with the derecognition approach. Another Board member felt that the Boards have not deliberated the derecognition approach sufficiently to disregard it as the most appropriate approach for lessor accounting. The Boards entered into a very lively and extended discussion on the merits of the derecognition approach. Several Board members asked for the debate on the derecognition vs. performance obligation approach to be re-opened. The chairman put it to vote and the majority of Board members indicated their support to develop the derecognition approach further.

The Boards were asked how this decision would impact the expected timing of the publication of the exposure draft and how the derecognition approach will be presented to constituents. The Boards agreed to think the matter over for a while and discuss the various alternatives on taking the project forward on the following day.

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