Leases – Preferred default approach to lessor accounting

Date recorded:

Preferred default approach to lessor accounting

The IASB discussed the derecognition model as its preferred default approach to lessor accounting. The Board agreed that there exist some leases for which derecognition approach would not be suitable and discussed possible criteria for the exceptions (i.e. criteria for accounting for the lease contracts under the performance obligation approach). Some Board members expressed their concerns focused on application of the performance obligation model to investment property and real estate industry.

After a lengthy discussion, the Board tentatively agreed (subject to further discussion with the FASB and subject to drafting) that the lessor should use the performance obligation approach if the lease term is insignificant (short term) in relation to the useful life of the underlying asset, with the lease term being defined as the minimum contractual term of the lease, and the lessor is exposed to the significant risk of obligation resulting from the non-integral services that could lead to non-performance (with non-performance possibly leading cancellation of the entire lease contract).

The Board discussed other possible criteria for the exception including removal of the asset risk for the lease period, residual value guarantee as well as business model of the lessor. Nonetheless, these criteria did not attracted widespread support among Board members.

The IASB will discuss the criteria for the performance obligation approach at a separate meeting on Thursday. Subsequently, it would discuss possible solutions to the divergent views on lessor accounting jointly with the FASB.

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