Leases II

Date recorded:

Leases – Lease term

The staff introduced the agenda paper and recommended that the Boards retain the term "significant economic incentive" when evaluating whether renewal options should be included in the lease term. The staff also indicated that the Boards should clarify that there would be a high hurdle for including a renewal option in the term of a lease.

A number of Board members agreed that the threshold for including renewal options in the lease term should be a high threshold. They also agreed with retaining the term "significant economic incentive."

However, a few Board members were concerned that the wording in the agenda paper suggested that "significant economic incentive" would entail economic compulsion. Those Board members thought that the concept of economic compulsion was different than their understanding of "significant economic incentive" – i.e., too high a threshold – and that this would be an inappropriate threshold.

Another Board member emphasised the need to make sure that the final standard needed to clearly indicate the Boards' intent. The Board member noted that his understanding was that the analysis was much broader than whether the renewal option was in the money or not. For example, if a lessee leased a highly specialised asset, then they might have significant economic incentive to renew the lease. Several Board members agreed with that comment.

One Board member asked the staff what type of application guidance would be provided to help constituents better understand the term. The staff responded that they wanted to clarify that the term "significant" was effectively the same as the terms used in IAS 17 and ASC 840 today – being "reasonably certain" or "reasonably assured." In addition, the staff indicated that the final standard should emphasise that economic considerations, similar to the factors included in the 2013 ED, should be used to determine whether a significant economic incentive exists. The staff asserted that the analysis under the proposed language would be similar to current practice, but clearer than what was in IFRSs currently.

A FASB member indicated that a renewal option should only be included in the lease term when, in substance, it was more akin to a forward (virtually certain that it would be exercised) rather than just a mere option. The Board member noted that he did not believe it was appropriate to recognise a liability for a renewal option where it wasn’t virtually certain that the lessee was going to exercise the option. Several Board members suggested that they did not think the threshold had to be that high.

Several Board members asked the staff to explain how the term "reasonably certain" was being applied under IFRSs today. The staff responded that their understanding was that "reasonably certain" was being applied essentially the same as how "significant economic incentive" was explained in the 2013 ED. The staff noted, however, that constituents had expressed concern about what was meant by the term "significant." That is the reason the staff suggested adding language to the guidance explaining that significant should be interpreted in the same manner as either "reasonably certain", "reasonably assured", or both.

Decision reached

After several examples were shared to test individual Board members' understanding of "economic incentive", the FASB chair called a vote. The Boards decided that, when determining the lease term, an entity should consider all relevant factors that create an economic incentive to exercise an option to extend, or not to terminate, a lease. An entity should include such an option in the lease term only if it was reasonably certain that the lessee would exercise the option having considered the relevant economic factors.


Lease term – Reassessment

The staff explained their recommendations related to the requirement to reassess the lease term. The staff indicated that they had a split view on the recommendation. Some supported reassessment upon the occurrence of certain triggering events whereas others supported no reassessment of lease term.

One Board member shared his concerns that by not requiring reassessment of lease term, this would create the opportunity to structure around, and abuse, the standard. He expressed his support for reassessment, but disagreed with certain of the triggering events outlined in the agenda paper. Specifically, he did not agree that changes in macroeconomic events should trigger a reassessment. He suggested narrowing the triggering events to those items that are in the control of the lessee (e.g., installing material leasehold improvements). Several Board members agreed. One Board member noted that it would be inappropriate to reassess the lease term merely due to the passage of time (e.g., if the lease term was almost complete and the lessee felt 'compelled' to renew the lease rather than identify a new asset to lease).

The staff remarked that under Approach 1 (required reassessment upon the occurrence of certain triggering events), they were attempting to identify situations where an action had to be taken; that is, the passage of time would not be a sufficient triggering event.

A few Board members noted that they did not think reassessment was necessary (Approach 2) because of the Boards' decisions made related to the lease term. That is, because the hurdle for including a renewal option in the lease term is so high, they did not feel that the cost of requiring ongoing reassessments would justify the benefits (as they did not expect reassessment to frequently result in changes to the lease term). One Board member shared an example of a British telecom company with over 800,000 lease contracts. The Board member suggested that requiring ongoing reassessment would be incredibly onerous and the benefits arising from any reassessment would be very limited. Several Board members agreed that the benefits did not outweigh the costs, and therefore suggested not requiring reassessment. In response, one Board member thought it would be inappropriate to not require reassessment given that one of the primary objectives of the project was to require recognition of the lease liability on the balance sheet.

Two Board members supported reassessment, but did not feel it necessary to identify triggering events. Instead, they would rather have lessees continuously evaluate whether the lease term has changed.

Decisions reached

The FASB chair called a vote. A majority (4) of the FASB Board members voted in favour of requiring reassessment, but based only on triggering events under the control of the lessee. The overwhelming majority of IASB Board members voted similarly.

Lease term – Purchase options

The FASB chair then called a vote to see if both IASB and FASB members agreed that purchase options should be treated similarly as renewal and termination options. Both Boards agreed unanimously with that view.

Lease term – Reassessment by lessors

After that vote, the FASB chair questioned whether lessors should be required to reassess whether there was a change in lease term. The majority of Board members indicated that they would not require reassessment by lessors.


Leases – Lessee accounting: Short-term leases


Following the discussion on lease term, the staff introduced the agenda paper on short-term leases. They highlighted that the feedback they had received regarding the short-term lease exemption was largely positive owing to the fact that the exemption would provide a significant cost saving to preparers implementing the revised lease model. In light of additional feedback received and subsequent decisions taken by the Boards, the staff recommended the following:

  • (a) Confirming a recognition and measurement exemption for lessee’s short-term leases;
  • (b) Confirming that the short-term lease threshold was 12 months or less;
  • (c) Changing the definition of a 'short-term lease' so that it was assessed consistently with the definition of 'lease-term'; and
  • (d) Requiring disclosure of the amount of expense in the current period relating to short-term leases, as well as including short-term leases in whatever qualitative disclosures the Boards would decide upon for leases generally.


Items (a), (b) and (c)

The requirement to evaluate whether a lease qualifies for the 'short-term lease' in the 2013 ED was based on the maximum possible lease term, including options to extend the lease. Under the staff’s proposal, entities would consider whether the lease term (determined in accordance with the discussion outlined under the previous agenda paper on the lease term) was 12 months. The staff stated they believe this change would provide a better answer for leases such as evergreen leases, increase consistency in the leases guidance and result in little incremental information lost in comparison to the 2013 ED.

Board discussion on items (a), (b) and (c)

Certain FASB members raised the concern that if the threshold for including renewal options in a lease term was considered to be a high hurdle to meet, this amendment might provide entities with structuring opportunities to apply the short term lease exemption to more contracts than the Boards might have envisioned. This might consequently inundate the IFRS Interpretations Committee and the EITF with interpretation requests on such guidance. These Board members felt the 12 month rule in the ED was simple to apply, understandable and was necessary for the development of a high-quality accounting standard that was not subject to structuring abuse or a high degree of interpretation.

One IASB Board member raised a question concerning a company that signed several leases for the same asset with different forward starting dates and whether such leases should be considered to be one lease or a number of individual leases. The staff believed this should be considered one lease but indicated that although they had not addressed contract combination in the 2013 ED they would consider including contract combination guidance similar to that which would be included in the proposed revenue recognition guidance in the final leases standard.

One Board member raised a concern that under the 2013 ED a lessee of a lease that had a one year non-cancellable term with an option to renew for additional year, but the lessee did not believe it will exercise the option would be unable to apply the exemption as described under the 2013 ED. However, they would still only record a one year lease obligation under the proposal. The Board member did not believe this was appropriate and therefore was not opposed to aligning the short-term lease scope exception with the definition of lease term.

Some Board members supporting the staff’s proposals indicated that they were focused on consistency and reducing complexity which they believed the alignment in definitions achieves.

Decisions reached

The FASB chair called for a vote on the staff recommendation. The majority of Board members (13 IASB and 4 FASB) supported the staffs proposals outlined in (a), (b) and (c) above.


Item (d) – Disclosures

The staff noted their recommendation to include qualitative disclosures on short-term leases as well as the expense recognised in the current period for such leases. They reiterated their decision to specifically exclude disclosure of a maturity analysis for future payments of short-term leases.

Board discussion on item (d)

Certain IASB members supported the proposal provided renewal options that had not been included in the determination of the lease term were disclosed as part of the qualitative disclosures. Certain IASB members noted that companies generally provided very limited information in their qualitative disclosures related to leases and therefore they had concerns whether qualitative information provided on such renewal options would be robust enough to enable users to fully understand the magnitude of the impact of such options. These Board members requested the staff include additional guidance on what type of disclosures should be made for these options.

Certain Board members noted that removing short-term leases from the lease commitments currently disclosed and replacing it with disclosure of the lease expense recognised in the current period might eliminate commitment disclosures required by securities laws in certain jurisdictions (although other Board members pointed out that the Boards were not responsible for disclosures required by regulators under securities laws). These Board members also noted that if material short-term leases were entered into immediately before a reporting period an entity would disclose an expense that was comparatively smaller to the future commitments, and this information might be relevant to users. The staff responded that they had considered the issue but felt the cost of providing a maturity analysis of future commitments outweighed the benefit. Two Board members stated that they still felt that disclosure of future commitments under these circumstances would be helpful if the leases were considered to be material.

Some Board members indicated that requiring maturity disclosures for short-term leases is counter-intuitive to providing an exemption in the first place as it would require entities to continually track such leases and not provide preparers with much relief. These Board members also indicated that a maturity analysis for short-term leases would not be worthwhile since all payments would be due within one year. In response, other Board members felt companies would likely be tracking information of material short-term leases and would probably be in a position to provide such information.

Decisions reached

The FASB chair called for a vote on the following disclosure options:

  • (a) Disclose the expense recognised in the current period only
  • (b) Disclose the expense recognised in the current period as well a qualitative information if the expense was not reflective of the lease commitment at the balance sheet date
  • (c) Disclose the expense recognised in the current period as well any remaining commitment

The majority of Board members (5 FASB and 10 IASB) voted for option (b). The FASB chair noted that the Boards would reconsider the qualitative disclosures required for short-term leases when the staff brought back the disclosure package.


Concluding remarks

At the end of their discussions on lease term and short-term leases, the FASB chair suggested that the Boards return to their decisions on lease classification for both lessees and lessors. The FASB chair asked FASB Board members whether FASB members would be willing to change to Approach 1 for lessor account to achieve convergence. Only two FASB Board members indicated they could support Approach 1.

With respect to lessee accounting, the FASB chair directed the staff to perform additional outreach regarding small-ticket leases to better inform the FASB members what the implications would be of adopting such an approach.

The FASB chair suggested to all Board members (both IASB and FASB) that they continue to work together on the leases project, for example, on the definition of a lease, etc. He then closed the meeting by thanking the IASB members and IASB staff for coming to Norwalk.

Related Meeting Notes

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