Date recorded:

Hybrid approach to lessor accounting (Educational session)

The IASB explored a possible hybrid lessor accounting model. No decisions were taken. These issues will be discussed at a joint session with the FASB later in the week. The FASB preliminarily decided to apply the performance obligation approach to all leases, with a possible exception for manufacturers' and dealers' leases.

The staff discussed disadvantages and criticisms of both major models (performance obligation model and partial derecognition model). The staff also presented a variety of approaches with different emphasis placed on those models.

Most of the Board members agreed to scope out short term leases (that is, leases with maximum possible lease term of 12 months) from the leases requirements that would be accounted for by a simplified accrual accounting.

A few Board members expressed support for the staff recommendation to use the partial derecognition approach for all leases except short-term leases and leases of investment property (that might be expanded to some additional leases of real estate). Those Board members agreed that this approach would be consistent with the approach for lessees and would avoid double counting of assets. On the other hand, some Board members disagreed as they believed that this model does not overcome their concerns over the partial derecognition model that were expressed at the May Joint Board meeting. Those Board members continued to express their concerns over the application of the partial derecognition model.

One Board member noted that the presentation of partial derecognition approach would be complex as net gain presentation or presentation of gross revenue and costs of sales would be driven by a business model.

Several other Board members expressed their preference to use the performance obligation approach for leases where the lessor's exposure to the risks associated with the underlying asset is significant. They believed that such approach was conceptually-based and did not need any further exceptions. On the other hand, several other Board members expressed their concerns over this approach as it might be prone to structuring and would draw the line that the leases project should have removed. One Board member questioned whether it would not be preferable to retain the current guidance in IAS 17 Leases.

In the subsequent debate the Board members tried to reconcile the two accounting models. One Board member summarised that there are three items that cause the two model to appear differently in the financial statements - the net presentation of fixed asset, performance obligation and lease receivable under the performance obligation model, non-accretion of interest on the residual asset under the derecognition approach and recognition of gain on lease recognition under the partial derecognition approach when the carrying amount of the underlying asset is less than its fair value.

The Board also discussed the difference between the residual value of an asset under IAS 16 Property, Plant and Equipment and the proposed treatment of the residual asset under the partial derecognition approach. The staff noted that the residual asset reflect the allocation of the initial fair value of the asset and is not re-measured.

The Board will discuss these issues at a joint session with the FASB later in the week.

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