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Leases I

Date recorded:

Leases – Lessee accounting model

The staffs introduced the lessee accounting model discussion by summarising the four alternative approaches that were detailed within the staff agenda paper 3A:

  • Approach 1 – propose a single model approach in which lessee would account for a lease as financing the purchase of a ROU asset.
  • Approach 1A – propose a dual model approach that would permit, rather than require, lessees to account for substantially all property leases similar to Type B leases in the 2013 Exposure Draft (2013 ED).
  • Approach 2 – propose a dual model approach similar to the model in the 2013 ED, but introduce the concept of 'integral equipment' for potential Type B classification; all non-property leases would be classified as Type A.
  • Approach 3 – propose a dual model approach with the lease classification based primarily on the current IAS 17 classification criteria (i.e., as Type A or Type B based on whether the transaction was effectively the purchase of the underlying asset). The staff paper highlights the specific criteria that would be considered in determining whether the lessee has obtained control of the asset, thereby resulting in a Type A or Type B classification.

Prior to turning the discussion over to the Boards, the staff highlighted the fact that they were divided in their views. Accordingly, no staff recommendation was provided. The Boards' discussion focused primarily on Approach 1 and Approach 3. None of the Board members supported Approach 2.


General Considerations

Income statement impact

In the discussion of applying Approach 1 versus Approach 3, one FASB members questioned if the staff had compared the expected income statement impact for each of these approaches. The staff responded that the overall difference was expected to be minimal (the difference between these two approaches was, at most, 2 percent and, in most cases, less than 1 percent.)

Ease of application

The FASB chair asked the staff/other Board members their views on which approach would be easier to apply.

  • U.S. view – Approach 3 would be easier to apply as preparers would be able to retain current systems and there would be a simpler transition.
  • European view – mixed views on which approach would be easier to apply. Approach 3 was consistent with current accounting but Approach 1 would be less complex.
  • Japanese view – while the initial reaction of preparers might seem to indicate support for Approach 3, once preparers understood the complexity and discounting implications around Type B accounting, Approach 1 would be more favourable.

Consideration of costs

One Board member highlighted that, in his view, the costs of applying Approach 1 versus Approach 3 would not sway the overall decision on which approach was more appropriate. What was important to consider was:

  • Addressing concerns with current accounting (bringing substantially all leases on-balance sheet versus off balance sheet treatment).
  • Neither Approach 1 nor Approach 3 introduced significant accounting complexities – Approach 1 required less judgement whereas the requirements under Approach 3 were similar to the accounting requirements already in place.
  • Neither Approach 1 nor Approach 3 introduced significant costs resulting from system-related issues – Approach 1 introduced a simple model that would require a simple system (i.e., minimal costs to implement) whereas Approach 3 would require no incremental costs as the systems were already in place under current accounting.
  • Overall fundamental difference was not linked to cost but rather views of appropriate accounting.

User views

The IASB chair questioned the staff on user costs. In response to his questions, the staff indicated that global users preferred Approach 1, while the views of users in the U.S. depended upon the nature of the user (e.g., credit analysts seemed to prefer Approach 1 and equity analysts did not have a preference for either Approach 1 or Approach 3). The staff did clarify that users unanimously supported all leases being captured on the balance sheet.

Conceptual basis of Approach 1 versus Approach 3

The Board members offered mixed views about the conceptual basis for the alternative methods of accounting for the ROU asset. Certain Board members felt that the ROU asset resulting from the lease transaction was similar to other non-financial assets and should be treated accordingly. Others felt that the non-financial asset resulting from the lease was not similar to other non-financial assets because of the link between the asset and the lease liability (i.e. similar treatment to a single unit of account).

An IASB member questioned whether there was a way to bridge the gap between Approach 1 and Approach 3 through presentation requirements. The staff responded by highlighting that there were variations to Approach 1 and Approach 3 that might serve as this bridge (outlined in paragraphs 128 through 137 of Agenda Paper 3A).


Approach 1 – Consideration points

In support of Approach 1, one IASB member indicated that all leases should be accounted for consistently. He was concerned about the varying information that would result from different leases.

Reflecting the economics of a lease

An IASB member offered the view that the accounting should reflect the economics of the lease. He did not agree with the unit of account argument (i.e., Type A lease being two units of account versus Type B being one unit of account.) Similarly, he did not agree with the degradation of the asset argument. In response to his concerns that Type B approach would result in an accounting anomaly, a FASB member highlighted that there were other areas in accounting that resulted in similar anomalies (e.g., executory contract accounting).

One IASB member identified an alternative where a lessee would apply an approach similar to Approach 1, but would present the amortisation and interests as a single lease expense amount (Approach 1 Prime).


Approach 1A – Consideration points

One IASB member questioned whether Approach 1A would require the use of a classification test in determining whether, if elected, a lessee could apply 'Type B' accounting for property leases. Further, this Board member also asked the staff if they had any sense as to whether the 'Type B' election would be widely used.

In response, the staff did confirm that a classification test would need to be applied in determining if a Type B classification could be elected for property. Further, the staff offered its views on whether companies would take advantage of the Type B classification election, citing that companies with a significant real estate portfolio might be more likely to take advantage of this election whereas companies that had a significant mix of property and other than property might not (note, the staff clarified that this was sheer speculation and there were no facts supporting this.)

As a follow-up to this questioning, the same IASB member expressed his concern that a wide use of the companies electing to apply Type B accounting to property might turn this option from the exception to the rule, potentially skewing the comparability between companies.


Approach 3 – Consideration points

General discussion

Various IASB and FASB members discussed the merits of Approach 3. In the context of discussing 'ownership' versus 'leasing', one IASB member highlighted the fact that ownership introduced infinite benefits, risks, and rewards to the one who controls the asset whereas leasing presented finite benefits, risks, and rewards. This, in of itself supported the need for a dual classification approach.

Linking of the asset to the liability

Various Board members discussed the linkage of the ROU asset to the lease liability. From the standpoint of a Type A lease, it was noted that since the transaction was the financing of a sale, the ROU asset and liability were not directly linked. In contrast, in a Type B lease the ROU asset would be directly linked to the corresponding lease liability.

This expanded to a discussion on how this approach was consistent with the impairment evaluation. One FASB Board member clarified his view that while the ROU asset and liability were linked for Type B leases, the ROU asset would still need to be considered for impairment. This was what made leases unique.

Core objective of the project

One of the FASB members noted that the core objective of the leases project was to record the lease liability on balance sheet. In his view, the easiest, cost-effective way to accomplish this objective was by applying Approach 3. He indicated that Approach 3 was based on current accounting requirements and would result in minimal disruption and no change in P&L pattern. He called out that, in his view, Approach 1 did not allow for easy transition as it offered a level of complexity to reconcile current operating leases to being financing arrangement.

Operational considerations

One FASB Board member acknowledged that both Approach 1 and Approach 3 could be, to some extent, conceptually supported. The primary focus, then, should be cost differential, which leaned more towards Approach 3 being more supportable and operational.

  • New systems would not be required as the information is currently being captured
  • Transition would be relatively easy

Decision reached

After much discussion about the lessee accounting model, the IASB and FASB chair requested the Boards to indicate which approach they support. The results were as follows:

  • Approach 1 – received 11 votes in favour (11 IASB)
  • Approach 1 Prime – received 1 vote in favour (1 IASB)
  • Approach 1A – received 3 vote in favour (2 IASB/1 FASB)
  • Approach 3 – received 6 votes (6 FASB)

The IASB/FASB chair indicated that the Boards would revisit the discussion on lessee accounting model during Wednesday’s meeting.


Leases – Lessor accounting model

The staff introduced the lessor accounting model discussion by highlighting that throughout the outreach process, there appeared to be few concerns raised about the current lessor accounting approach under both U.S. GAAP and IFRS. Specifically, the staff called out that there was:

  • No outcry from stakeholders indicating a need for accounting change.
  • Limited feedback received on the need for lessee and lessor accounting symmetry.

While the staff did acknowledge that the Boards needed to consider any potential unintended consequences of not changing lessor accounting, the staff did not believe a fundamental change to current accounting was needed. The staff then summarised the three alternative approaches that were detailed within staff agenda paper 3C:

  • Approach 1 – determine the lessor lease classification on the basis of whether the lease was effectively a financing or a sale rather than an operating lease by considering guidance similar to the current requirements in IAS 17. This evaluation would be focus on whether substantially all of the risks and rewards related to ownership of the underlying asset are transferred to the lessee.
  • Approach 2 – this approach is similar to Approach 1, with the an additional requirement that a lessor would be precluded from recognising the profit for a sales type lease if the lessor does not transfer control of the asset to the lessee (evaluated under the proposed revenue recognition requirements) at lease inception (the profit would be deferred and recognise over the lease term).
  • Approach 3 - lessor lease classification would be determined on the basis of the lessor's business model.

Prior to turning the discussion over to the Boards, the staff recommended that the Boards adopt Approach 2 as they believed there was a benefit to aligning the leases standard with the pending revenue recognition standard. The Boards discussion focused around Approach 1 and Approach 2. None of the Board members supported Approach 3.


General Considerations

Need to overhaul lessor accounting

Various IASB and FASB members agreed that the current lessor accounting did not need to be changed. They indicated that modifications to the lessor requirements were inconsistent with the goal of the underlying project (i.e., getting all lease liabilities on the balance sheet of lessees), and few stakeholders indicated a need to change lessor accounting.

One IASB member was of the view that lessor accounting should be in the scope of the project. His view was that current lessor accounting did not represent the true economics of the lease transaction and removing lessor accounting from the project would result in conceptual inconsistencies and potential pushback from constituents. An alternative approach would be to separate lessor accounting into its own project.


Approach 1– Consideration Points

Support for Approach 1

Certain IASB members expressed their support of Approach 1. In particular, one member indicated that Approach 1 appeared to be consistent with the new revenue recognition guidance if viewed from the perspective of the ROU asset (rather than the underlying leased asset). He expressed concerns with Approach 2, which retained certain risk/reward elements from the leases guidance but would also require the consideration of the revenue recognition model, which was generally founded on a control notion.

Additionally, one IASB Board member offered her opinion that the differences between Approach 1 and Approach 2 would be minimal. That being said, she offered the view that the cost of applying Approach 2 would outweigh the benefits obtained.

Concerns with Approach 1

A FASB Board member indicated that Approach 1 was not consistent with the ROU asset approach as the lessee recorded the ROU asset whereas the lessor maintained interest in the whole asset. Also, not linking the lease evaluation to proposed revenue recognition requirements opened the door for accounting arbitrage.


Approach 2 – Consideration Points

Support for Approach 2

Certain FASB members noted that Approach 2 would lead to a more aligned approach with the upcoming revenue recognition standard, although some FASB members did acknowledge that they would accept Approach 1 as a viable alternative. One of the key reasons for supporting Approach 2, as introduced by various FASB members, was the fact that there needed to be a link between the lessor standard and new revenue recognition standard to avoid accounting arbitrage.

Concerns with Approach 2

One IASB Board member indicated that linking lessor accounting to the final revenue recognition standard was problematic as 'leases' were explicitly scoped out of the proposed revenue standard. He indicated that if a lessor was required to apply the proposed revenue guidance to determine whether they could recognise the profit on the lease, the Boards would need to re-expose the revenue standard as this concept was not explicitly discussed during the outreach process.

A second IASB member felt that aligning the lessor requirements with the proposed revenue recognition standard under Approach 2 would raise too many questions as to whether the leases standard was truly aligned with revenue recognition and to what extent. Concerns were raised that the lessor standard focused on whether a lessor has transferred the risks and rewards of ownership to a lessee, while the revenue proposal focused on whether the lessee has obtained control of the asset. One Board member raised a concern that a lessor might have transferred all of the risks and rewards of an asset (accordingly, the transaction would be a sales-type lease under the leasing guidance); however, if the risks and rewards were split between the lessee and a third party providing a residual value guarantee, the lessor would not be allowed to recognise the profit.

Align with the final Revenue Recognition standard

Certain Board members were in favour of Approach 2 in substance, but contended that the language that linked to the revenue standard should be relaxed so that there was no undue indication that this was fully aligned with the final revenue standard. The staff and certain Board members also discussed including criteria that would be indicators of control and how this might affect lease accounting.

Decisions reached

After much discussion about the lessor accounting model, at the end of the second day, the FASB voted unanimously in favour of Approach 2 while the majority of IASB members voted in favour of Approach 1.


Leases – Lessee: Small-ticket leases

In order to provide lessees relief for leases of small-ticket assets (i.e., those leases that were high-volume, low-value items) the staff presented three potential alternatives for the Boards to consider, including (a) providing an explicit materiality threshold for applying the lease guidance, (b) allowing lessees to apply lease guidance at a portfolio level, and (c) providing separate recognition and measurement requirements for leases of small, non-specialised assets.


Explicit materiality requirement


A staff member provided an overview of this proposed alternative, highlighting the fact that the materiality provisions in IAS 8 and ASC Topic No. 105 could address materiality concerns. The staff provided their recommendation that the leases guidance should not include specific requirements regarding materiality.

Board discussion

There was not a broad discussion on this topic. Only one IASB member disagreed with the staff's view that this alternative should be taken off the table. He cited the following reasons:

  • Other recommended alternatives would add additional complexity and potentially make the standard weaker;
  • Introducing multiple alternatives might set the precedent of other future compromises.

Decisions reached

All IASB and FASB Board members, with the exception of one, voted affirmatively to support the staffs' recommendation. Based on the results of this vote, the Boards would not incorporate any explicit materiality guidance within the final leases standard.


Applying the lease guidance at a portfolio level


The IASB staff introduced the second proposed alternative for lessee to account for small-ticket leases. Specifically, the staff provided an overview of the benefits of permitting lessees to apply the leases guidance at a portfolio level and provided an overview of the relief this alternative would provide. Further, the staff provided its recommendation, which was to include portfolio guidance in the body of the final standard consistent with the pending revenue recognition standard. This could provide companies with significant cost-relief, while maintaining the information relevant to users.

Board discussion

Board members offered two primary points-of-view on accounting for leases at a portfolio level. Although all agreed with this concept, views were mixed on whether this guidance should be included in (1) the final standard or (2) the Basis for Conclusion.

  • Most IASB members indicated their support of the staff’s recommendation. Two IASB members specifically recommended that the portfolio level language similar to that which was included within the pending revenue recognition standard should be included with the final leases standard.
  • Other Board members, while supporting the view that leases could be accounted for at the portfolio level, did not agree with including specific guidance within the body of the standard. Rather, they would support including 'portfolio level' considerations within the Basis for Conclusions. They believed that including guidance within the standard itself might result in a number of issues (e.g., (1) might require that additional guidance be included within the standard on what constitutes a portfolio; (2) might set the precedent that instances where a standard does not explicitly allow for accounting at a portfolio level would infer that that this approach was not permitted).

Additionally, one IASB member who supported accounting for small-ticket leases at the 'portfolio level' did not necessarily believe that this guidance needed to be included in the final standard or Basis for Conclusion; rather this view simply needed to be communicated in some form.

The IASB staff members also indicated that as it related to impairment, clarifying guidance might be needed to specify how impairment would be considered when the portfolio approach was applied. Currently, as proposed in the agenda paper, the 'reasonable expectation' guidance in IFRS would help determine whether the portfolio would need to be broken up for impairment testing. However, they felt that additional clarifying guidance might be needed.

Decisions reached

Fourteen IASB and all seven FASB members supported the recommendation of allowing lessees to account for leases at a portfolio level. The FASB decided to include the portfolio guidance in the Basis for Conclusions. The IASB decided to include the portfolio guidance in the application guidance.


Providing explicit recognition and measurement exemption for small-ticket leases


The IASB staff introduced the third proposed alternative for lessees to account for small-ticket leases. Specifically, the staff provided an overview of the benefits of providing lessees an exemption for leases of non-specialised assets. The staff indicated that their views on this exemption were mixed:

  • Some staff members supported the exemption proposal in its entirety.
  • Some staff members supported the exemption for ‘measurement’ only as it would not result in any incremental efforts.
  • Some did not support the exemption as this could inadvertently result in the exclusion of material significant lease assets and liabilities in the aggregate.

Board discussions

Several Board members expressed their concerns about whether the exemption would be operational:

  • Understanding the delineation between small and non-small leased items.
  • Specialised versus non-specialised assets (many support eliminating 'non-specialised designation').
  • Exemption might exclude material amounts (i.e., as might be the case if there the aggregate value of high-volume, low-value leases reached material level).
  • Exemption would introduce a certain level of judgement.

Two Board members supported the approach where the exemption would be provided for 'measurement' only. This would allow entities to recognise small-ticket leases without considering time value of money.

In the context of better understanding the 'recognition and measurement' exemption, one IASB member questioned the interaction between this alternative and the 'portfolio level' alternative. The staff clarified that the 'recognition and measurement' alternative trumped the 'portfolio level' alternative. The staff elaborated by explaining that applying the exemption was an accounting policy election.

Various Board members from both the IASB and FASB discussed the impact of removing the 'specialised' and 'non-specialised' designation from the exemption. One FASB member questioned how, after removing the designation, this would differ from the current fixed asset 'capitalisation policy' applied by many entities. Another FASB member suggested that the Basis for Conclusion should indicate that it was appropriate for entities to develop a threshold similar to what was applied when determining a capitalisation policy. This approach would address small lease items.

Decisions reached

The IASB and FASB chair called for a vote on this issue with the following result:

  • 11 Board members supported moving forward with a recognition and measurement scope exception (11 IASB/0 FASB)
  • 11 Board members did not support moving forward the recognition and measurement scope exception (4 IASB/7 FASB)

This concluded the joint Board meeting session on Tuesday.

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