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Leases

Date recorded:

Lessor accounting: Impairment of assets

The Boards were requested how impairment by lessors should be addressed under the performance obligation model where the lessor has two assets - the underlying leased asset as well as the lease receivable. In their deliberations, the Boards considered two approaches suggested by the staff:

  • Approach A: group the underlying asset and performance obligation as a single unit of account to assess for impairment in accordance with IAS 36, while the receivable is assessed for impairment in accordance with IAS 39.
  • Approach B: consider the underlying asset, lease receivable and performance obligation as a single unit of account in accordance with the requirements of IAS 36.

The Board members expressed mixed support for approaches A and B, with a few Board members indicating that they don't have a strong preference for either of them. Those Board members that supported approach A were of the opinion that the underlying asset and lease receivable are distinct assets with significantly different characteristics and need to be assessed separately.

The Board members supporting approach B were of the view that by entering into the lease contract, the underlying asset has been modified through the performance obligation and some of the economic benefits of the underlying are included in the measurement of the lease receivable. According to these Board members this is the purest form of a cash generating unit as defined in IAS 36 and should be assessed for impairment at that level.

Some Board members questioned why the performance obligation is netted against the underlying asset in approach A. In terms of the performance obligation model, the performance obligation arises as a result of the lease receivable and if the lease receivable no longer exists as a result from, for example, default by the lessee, the lessor no longer has a performance obligation and as such has recourse to the underlying asset. Some Board members regard this as economically similar to a secured loan and don't see enough reason to treat impairment on this differently to secured loans.

One Board member remarked that the proposed approaches highlight the weaknesses and problems with the performance obligation model and regarded the approaches as being overly simplistic. This Board member favoured an approach whereby the lease receivable is assessed for impairment first and if it is, to look at the rights and obligations of the lessor in terms of either recovering the outstanding receivable or repossessing the underlying asset. As several other Board members also favoured this approach above the other two presented, the staff was instructed to further articulate the alternative approach and develop a flowchart with the assistance of some FASB members to explore the interrelationship between the various components for discussion at a future meeting.

 

Long-term leases of land

At the February 2010 joint meeting, the staff was instructed to develop criteria for excluding very long leases of land from the scope of the proposed new leases requirements. The staff explained that they have requested input from constituents and do not think that an exemption should be provided from very long leases of land as criteria has already been developed to distinguish the outright sale or purchase of an asset from a lease. If the criteria for the recognition of an outright sale or purchase have not been met, then there would be no conceptual basis to differentiate these leases from other leases.

The Boards were supportive of the staff's proposal not to exempt very long leases of land from the requirements of lease accounting. One Board member did question whether a lessor would recognise a performance obligation at inception if it has undertaken to pay property taxes (for example) for a certain period of time. The Boards entered into a discussion on whether it will qualify as a performance obligation or as a period cost to the recognised in accordance with IAS 37. It was agreed to further discuss this question offline, however, the staff was requested to link this matter to the previous discussion on what the performance obligation of the lessor is and whether it is possible to have more than one performance obligation.

 

Lessor accounting for Purchase options

In the light of the Boards' tentative decision for lessee accounting that purchase options should be accounted for in the same way as options to extend or terminate the lease, the Boards deliberated how lessors should account for purchase options. The staff explained that although the Boards tentatively decided that there should be symmetry in the accounting by lessees and lessors, there may be a difference in measurement. However, the staff recommended that lessors should also account for purchase options in the same way as for renewal or termination options.

Some Board members questioned how gains or losses on purchase options will be treated as it is possible under the performance obligation model to recognise a gain on the purchase option prior to the option being exercised. These Board members wanted a part of the performance obligation to be allocated to the purchase option until the option is exercised.

After a short discussion on whether there is a difference between what was tentatively agreed on lessee accounting and what is proposed for lessor accounting, the majority of Board members supported the staff proposal but qualified their support on the basis that there need to be linkage with how the performance obligation is run-off.

 

Leases - information about total cash rentals paid

At the March 2010 joint meeting, the Boards tentatively agreed that cash payments of interest and principal amounts relating to leases should be presented separately as financing activities in the statement of cash flows. Some Board members noted that information on cash rentals paid are important, especially for users that used to have an operating lease payment included in the calculation of EBITDA. As the lease payments under the new requirements would be split between interest and prinicpal amounts, and would be grouped with interest and principal repayments on other borrowings, it may be difficult to reconstruct the total cash rentals paid.

The staff recommended that the cash rentals paid be disclosed in the roll-forward presented in the notes. The Boards agreed with this proposal.

The Boards were also asked whether they want the interest and principal cash payments on leases to be presented separately from other borrowings. After some confusion as to what was tentatively agreed to at the previous meeting, the Boards confirmed that such separate presented should not be required.

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