Leases – Education session

Date recorded:

The IASB and FASB staff provided the Board with a one-day education session on the leases project in relation to topics which will be discussed in greater detail during the joint IASB and FASB meetings the week commencing 11 April 2011.

No deliberations were performed as part of this education session, and likewise, no tentative or definitive decisions were reached.

During this meeting, the Boards discussed:


Definition of a lease

Following discussion at a joint meeting of the Boards on 17 February 2011 in which the definition of a lease and the application guidance in the Leases Exposure Draft (ED) relating to that definition were discussed, the staff presented feedback received from targeted outreach in relation to previous decisions of the Boards. Specific discussion points of this targeted outreach considered (1) whether the definition of a lease should refer to a specific or specified asset, or to an asset of a particular specification, (2) whether both a physically distinct portion (e.g., a floor of a building) and a non-physically distinct portion (e.g., capacity portion of a pipeline) of a larger asset can be the subject of a lease and (3) when does a customer have the right to control the use of a specified asset, among other areas.

Specified asset:

Receiving feedback from outreach activities that participants generally did not support the widening of the definition of 'specified asset' (beyond that of a uniquely identified asset), several Board members raised concerns that application of the term, 'specified asset,' as used in the ED to defined leases, to one particular asset, without consideration of substitutability to an asset of consistent specification, would be too specific and would ignore the broad principle of including assets of a particular specification in the definition of a lease given the financing nature of underlying arrangements. Likewise, several Board members expressed concern that limiting the definition to one particular asset would lead to prospective contracts providing verbiage on substitutability in order to receive the preferred accounting consequence, and therefore, it was noted that the concept of control should be considered in future meeting agenda discussions, as discussed in further detail below.

Portions of a larger asset:

Regarding contracts which represent a portion of a larger asset, the staff provided a recommendation that a physically-distinct portion of a larger asset can be a specified asset, but a capacity portion of a larger asset that is not physically-distinct cannot. Similar to the specified asset discussion, above, several Board members noted the significance of the control (e.g., access control) concept in the determination of whether a portion of a larger asset is representative of a lease, which will be discussed in a future meeting.

Right to control:

The staff noted that the majority of staff support an approach that aligns more closely the application of control as applied to leases in the ED, to how it is applied in the forthcoming revenue recognition standard and the consolidation standards, for purposes of consistency in application, while other staff support retaining the proposals regarding the right to control the use of an asset in the ED, with minimal changes to address practice concerns identified in the comment letters and through outreach.

Several Board members commented that the definition of a lease, as applied in the finalisation of the standard, should more directly describe the specific concept of control, and it was noted that this concept would be discussed in further detail in joint meetings of the Boards to be held the week commencing 11 April 2011. Likewise, Board members will deliberate at such time both views receiving support from the staff, as outlined above.

Types of leases

In a February 2011 joint meeting of the Boards, the Boards introduced two different types of leases, which were referred to as finance and other-than-finance leases (although the labelling of such lease types will be considered further in a future meeting). Targeted outreach on this distinction revealed that most respondents were supportive of having two types of leases, but noted certain disadvantages of a two-type model, including added complexity and creation of bright-lines that may allow structuring between types of leases.

Considering this feedback, the staff presented a draft definition to be used in distinguishing finance and other-than-finance leases, as well as supporting indicators in distinguishing between the two; noting, generally, that the assessment should be based on the business purpose of the contract and a review of indicators including the lessor business model, residual asset, potential ownership transfer, length of lease term, underlying asset, variable rent, rent characteristics (e.g., benchmarking of rent payments) and embedded or integral services.

One Board member expressed concern that the assessment for the lessee adds too much complexity to an environment in which the underlying purpose of leasing is generally financing, and therefore, proposed that only one type of lease be recognised for lessee modelling. This same Board member supported two types of leases in lessor accounting given the need to account for different income statement recognition patterns. This concept will be discussed further in a future meeting, in conjunction with assessment as to how the underlying leases would be accounted for both in the income statement and the balance sheet.

Accounting for variable lease payments

The Boards were presented with staff recommendations and outreach feedback regarding the identification of lease payments that are in-substance fixed lease payments but are structured as variable payments in form (e.g., disguised minimum lease payments), following the Boards' tentative decision in February 2011 to require that the lessee's liability and the lessor's receivable include an estimate of disguised minimum lease payments.

The majority of targeted feedback supported the Boards' tentative decision, and as a consequence, the staff presented potential indicators for determining when the lease arrangement contains disguised minimum lease payments.

Several Board member expressed concern that indicators presented by the staff did not address uncertainties; for example, if a lease payment is contingent on a future event (e.g., underlying sales), how would the minimum lease payment be determined for purposes of assessment as to whether the lease is indicative of a disguised minimum lease payment. Other Board members expressed concern of recognising contingent balances on the balance sheet, and noted this as an area to discuss more fully in next week's joint meeting of the Boards.

Considering, specifically, the accounting for variable lease payments, the Board was presented with outreach feedback surrounding the Boards' February 2011 tentative decision that a high threshold ("reasonably assured") would be applied to variable lease payments, whereby variable lease payments should be included in the lessee's liability to make lease payments and the lessor's right to receive lease payments only if they are "reasonably assured." It was noted that the majority of feedback did not support inclusion of such payments in the lease liability or asset, as applicable, even if considered to be reasonably assured. Considering feedback received, the majority of the staff did not recommend retention of the Boards' tentative decision from February 2011. While this topic will be discussed in a future meeting, one Board member questioned whether the Boards were adding unnecessary structure in the accounting for variable lease payments; highlighting that a focus should be directed on disguised minimum lease payments only.

All of the above topics will be subject to deliberation during the joint meeting of the Boards scheduled the week commencing 11 April 2011.

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