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Leases

Date recorded:

As part of its continuing deliberations surrounding the Leases ED, the Boards discussed the presentation of a lessor's lease receivable and residual assets (collectively, lease assets) in the statement of financial position, classification of cash received for lease payments by a lessor in the statement of cash flows, as well as lessee transition requirements.

Summary

The Boards made a number of tentative decisions during these discussions, as follows:

Presentation: Lessor statement of financial position

  • Lease assets would be presented under a single caption as 'investment in leased assets'
  • The final leases standard would require that the residual assets and the lease receivable be separately presented either in the statement of financial position or disclosed in the notes to the financial statements. Lessors would be required to apply the guidance provided in IAS 1 Presentation of Financial Statements (IFRSs only) and Securities and Exchange Commission (SEC) regulations (US GAAP only), as well as management judgements, in determining whether disaggregation of the residual asset and lease receivable is required in the statement of financial position.

 Classification: Lessor statement of cash flows

  • All cash receipts from lease payments would be classified as operating activities in the statement of cash flows, except those cash flows relating to securitised receivables (in which existing guidance should be applied).

Presentation: Lessor statement of financial position

The Boards discussed the presentation of a lessor's lease receivable and residual assets in the statement of financial position. The Boards discussed three alternatives for presentation: (1) presenting lease assets under a single caption in the statement of financial position, (2) requiring presentation of the residual asset as it would be presented at expiry of the lease or (3) not specifying the line items for presentation of the residual assets and the lease receivable.

Many Board members expressed a belief that presenting the lease receivable and residual assets together is a more meaningful presentation, given that it provides users with an aggregated view of contractual cash flows to be generated from the lease asset and the value of the leased asset at the end of the lease term. Likewise, it summarises the lessor's total interest in an asset to which it has legal title.

Other Board members expressed a preference for a 'business model' presentation of the residual asset (i.e., requiring presentation of the residual asset as it would be presented at expiry of the lease). These Board members noted that allowing entities to present the residual asset consistent with the way the entity would present the residual asset at expiry of the lease would be consistent with the Boards' tentative decision that a lessee would present the right of use asset as if it owned the underlying asset and would allow for different industries and entities to present information in a meaningful way to relevant financial statement users. Similarly, a few Board members expressed a preference to not prescriptively require presentation of the residual assets and the lease receivable given that application in certain industries may result in misleading results.

However, many Board members expressed concern with requiring presentation of the residual asset as it would be presented at expiry of the lease or not specifying the line items for presentation of the lease assets given that it would negatively impact comparability. Thus, when put to a vote, the Boards tentatively decided lease assets should be presented under a single caption in the statement of financial position (to improve comparability), absent potential disaggregation in the statement of financial position.

The Boards then discussed disaggregation of amounts related to leases either in the statement of financial position or within the notes to the financial statements. Board members generally agreed that lease receivables and the residual asset should be disaggregated at some level in the financial statements given that residual assets and lease receivables have different risks (asset versus credit risk) and the nature of the assets are dissimilar.

With little debate, the Boards tentatively decided that disaggregation of the lease receivable and residual assets in the statement of financial position should not be required unless aggregated presentation distorts the view of users of the financial statements. Thus, the final leases standard would require that the residual assets and the lease receivable be separately presented either in the statement of financial position or disclosed in the notes to the financial statements. However, lessors would be required to apply the guidance provided in IAS 1 Presentation of Financial Statements (IFRSs only) and SEC regulations (US GAAP only), as well as management judgements in determining whether disaggregation is required in the statement of financial position.

Classification: Lessor statement of cash flows

The Boards discussed the classification of cash received for lease payments by a lessor in the statement of cash flows. The Leases ED, which proposed that the lessor should classify the cash receipts from lease payments as operating activities in the statement of cash flows, resulted in feedback from many constituents as to inconsistency with presentation of cash inflows for loans receivable as investing activities. Thus, based on this feedback, the Boards considered:

  • presenting all cash received for lease payments as operating activities, or
  • presenting all cash received for lease payments as operating activities unless certain conditions are met (if the entity makes an up-front cash payment for legal title to an asset, the purchase of title to the asset is directly linked to that entity becoming the lessor of the asset and that payment to purchase the asset is an investing activity, then inflows should be classified as investing activities).

Board members generally supported presentation of all cash received for lease payments as operating activities as they saw this presentation to be a simplification of the accounting model which would eliminate diversity in practice.

However, the FASB Chair expressed concern with classifying all cash received for lease payments as an operating activity given potentially contradicting guidance for securitised receivables. Many Board members agreed with this concern. Thus, the Boards tentatively agreed that all cash received for lease payments should be classified as an operating activity, except those cash flows relating to securitised receivables (in which existing guidance would apply).

Lessee transition issues

The Boards discussed transition requirements and disclosures for lessees upon adoption of the proposed leases' requirements. However, no decisions were made during these discussions as Board members requested that comprehensive transition proposals be provided covering both lessees and lessors before any vote is taken on the topic.

The staffs presented three proposals to the Boards for general transition requirements:

  • Modified full retrospective approach: The modified full retrospective approach was considered to be generally consistent with the requirements of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors and Topic 250 Accounting Changes and Error Corrections, where entities would be required to calculate the carrying amount of all outstanding leases as if those leases had always been accounted for in accordance with the proposed requirements. However, certain transitional reliefs were proposed by the staffs
  • Modified retrospective approach: The modified retrospective approach uses key inputs at the date of initial application to approximate the transitional impact as opposed to applying inputs as if those leases had always been accounted for in accordance with the proposed requirements. Furthermore, certain transitional reliefs were proposed by the staffs
  • Optional full retrospective approach: Entity option to apply either of the above alternatives.

Many Board members expressed concern that the modified full retrospective approach may be too onerous for financial statement preparers, which was consistently communicated by constituents during project outreach. However, other Board members noted that a number of the tentative decisions reached during redeliberations would be expected to make 'full retrospective application' less onerous. Other Board members questioned the value of full retrospective application to users of the financials. These Board members believed that the modified retrospective approach provided sufficient information to users of the financials.

Finally, a number of Board members questioned whether the transition guidance for lessees should be consistent with transition guidance in the revenue recognition project as well as the lessor accounting model. With this, many Board members expressed a desire to defer voting on lessee transitional requirements until a comprehensive transition proposal is provided which includes both the lessee and lessor accounting models, including considerations to subleases. As such, voting was deferred on this topic.

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