Date recorded:

The IASB and the FASB (the Boards) discussed the following topics:

  • The feedback received from the outreach on the subsequent measurement of right-of-use (ROU) assets
  • Next steps


In response to continuing concerns raised by constituents regarding the lease expense recognition pattern resulting from the proposed lease accounting model in the Boards’ exposure drafts (i.e. front-end loaded expense pattern), at the February 2012 joint board meeting the Boards discussed alternative approaches for lessees to measure their right of use assets subsequent to their initial recognition.  At that meeting, the Boards asked the staff to conduct outreach with various constituents to assess the usefulness and potential cost and benefits of the alternative approaches discussed.   The staff conducted outreach with approximately 100 users, preparers, and auditors in April and May 2012.   The staff also met with lessors to discuss concerns and possible implication issues for lessors if they were to apply the accounting under one of these approaches.

At the 24 May 2012 joint board meeting, the staff presented a summary of the feedback on the four approaches for how lessees should subsequently measure their right of-use assets. Under all four approaches, the initial measurement of right of use assets and lease liability would be identical. In addition, the subsequent measurement of the lease liability would also be identical. The four approaches presented are as follows:

  • Approach A: approach proposed in the exposure drafts
  • Approach B: the interest based amortisation approach
  • Approach C: the underlying asset approach
  • Approach D: the whole contract approach

Details of the four approaches and feedback summary can be found in the May 24, 2012 Board Paper IASB memo 3 and FASB memo 232.

Boards’ discussions

At the joint board meeting on 24 May 2012, the Boards did not vote for which approach for the subsequent measurement of the right of use asset they believe is appropriate.  However, they narrowed down the alternatives based on the feedback received from the outreach process and instructed the staff on how to proceed.  The Boards showed support for three approaches, namely, approach A, approach D, and a combination of approach A and D.

Some Board members continue to support approach A as they believe this approach is conceptually the best answer.  In addition, they believe that from a users’ perspective approach A would provide users with the most useful information. One Board member expressed concerns that they believe approach D would be problematic as it would effectively treat all leases as executory contracts and would eliminate the concept of finance leases (in substance purchase).  Consistent with the feedback received, the Board members agreed not to explore approach B or C further. During the outreach constituents indicated that they believe approach B and C would be too complex to implement.

The Boards also discussed whether there should be a single lease model that applies to all leases (i.e. one type of lease) or two types of leases (i.e. a combination of two approaches). The majority of the Board members expressed support for a model with two types of leases, while others believe that there should be a single lease model. Those who supported a single lease model believe that this would reduce complexity. They also noted that no matter how the Boards try to distinguish between the two types of leases, there will always be some industries that will be dissatisfied on how their leases are classified.

The Boards discussed how to distinguish between the two types of leases if they were to proceed in that direction. Some Board members suggested using the IAS 17 criteria as they believe this approach is simple and easily understood as constituents currently apply IAS 17 today. Others suggested providing an outright exemption for certain types of leases e.g. real estate leases (based on the feedback received that real estate lessees generally prefer approach D while equipment lessees, including airlines, generally prefer approach A).

Other suggestions include distinguishing leases for assets with multi-tenants or distinguishing leases for assets based on the asset consumption rates (e.g. low consumption of the underlying asset would justify straight-line expense). One Board member suggested an approach that would distinguish leases for properties that are managed on a fair value basis.  A few of the Board members also suggested exploring whether there are leases without a significant financing component.  If so, they suggested the lessee could record the lease asset and liability at the gross undiscounted cash flow amounts which would result in a straight line expense in the income statement.

The Board members also discussed whether there should be symmetry in the accounting between lessors and lessees.  Many indicated that there should be symmetry, although a few of the Board members believe that the lessors and lessees enter into the arrangement for different economics reasons and therefore symmetry would not be necessary.  Some Board members also brought up the feedback from constituents on the ED that indicated that current lessor accounting is not broken and suggested not to complicate the lessor accounting.

Next steps

The Boards plan to discuss the various approaches on the subsequent measurement of right-of-use assets in their upcoming meetings. They suggested the staff propose three approaches at the next meeting namely, approach A, approach D, and a combination of approach A and D.

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