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Leases

Date recorded:

The IASB tentatively decided about the transition requirements for (i) leases previously classified as operating leases; (ii) sale and leaseback transactions; (iii) subleases; and (iv) definition of a lease. In addition, the IASB tentatively decided on additional guidance for (i) the exception of leases of small assets; and (ii) the discount rate for intermediate lessors in a sublease.

The Project manager introduced the agenda papers. She said that the discussion to be held would complete the technical deliberations and, if necessary, only sweep issues would be brought to the Board at future meetings. She clarified that the discussions would be held separately from the FASB since the Boards’ respective lessee models were different so there were different consideration requirements.

Agenda Paper 3A Transition – Leases Previously Classified as Operating Leases

The staff analyst presented the agenda paper and provided a brief summary of the staff recommendation, as summarised below:

(a) a lessee could choose either a fully retrospective approach or a modified retrospective approach on transition. A lessee should apply the approach chosen consistently across its entire operating lease portfolio.

(b) under the modified retrospective approach:

(i) a lessee should not restate comparative figures;

(ii) a lessee should recognise the cumulative effect of initially applying the new standard as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at the date of initial application.;

(iii) a lessee should measure the lease liability at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate at the date of initial application;

(iv) a lessee would be permitted a choice of two measurement approaches for the ROU asset at the date of initial application, chosen on a lease-by-lease basis:

  • measure the ROU asset as if the new leases standard had always been applied, but using a discount rate based on the lessee’s incremental borrowing rate as at the date of initial application; or
  • measure the ROU asset at an amount equal to the lease liability, adjusted by the amount of any previously recognised prepaid or accrued lease payments;

(v) a lessee could apply a single discount rate to a portfolio of leases with reasonably similar characteristics;

(vi) a lessee should adjust the ROU asset by the amount of any previously recognised onerous lease provisions;

(vii) a lessee could apply an explicit recognition and measurement exemption for leases for which the term ends within 12 months or less of the date of initial application (determined consistently with the short-term lease exemption);

(viii) a lessee could apply the relief proposed in the 2013 ED that a lessee would not need to include initial direct costs in the measurement of the ROU asset;

(ix) a lessee could apply the relief proposed in the 2013 ED that a lessee might use hindsight, such as in determining the lease term if the contract contained options to extend or terminate the lease; and

(x) in the annual reporting period that includes the date of initial application, the following disclosures would replace the disclosure requirements of IAS 8:

  • the operating lease commitments that would have been reported if IAS 17 had been applied in that reporting period;
  • the weighted average incremental borrowing rate at the date of initial application;
  • explanation of any differences between: (a) the result of discounting the operating lease commitments that would have been reported under IAS 17 at the end of the annual reporting period that includes the date of initial application using the incremental borrowing rate at the date of initial application; and (b) lease liabilities recognised on the balance sheet at the end of that reporting period; and
  • the rental expense that would have been recognised if IAS 17 had been applied in that reporting period.

The staff also recommended that the leases standard should require that, with the exception of accounting for subleases, a lessor should continue to apply its current accounting for any leases that were ongoing at the date of initial application.

With respect to first-time adoption of IFRSs, the staff recommended that IFRS 1 should permit a first-time adopter to apply the modified retrospective approach with the exception of (i) the relief that a lessee would not need to restate comparative figures (i.e. a first-time adopter would be required to restate comparatives under the modified retrospective approach); (ii) the relief that a lessee could apply an explicit recognition and measurement exemption for leases for which the term ends within 12 months or less of the date of initial application; and (iii) the special disclosure requirements described in paragraph 6(b)(x) in the agenda paper (see point (x) above).

The Vice-Chairman said that he found it odd that leases entered into in the year of implementation would be treated under the new standard and the old leases would continue under the old standard. The staff responded that there would be disclosures of additions of ROU assets related to new leasing activity which would compensate the lack of comparability.   

One Board member suggested as an alternative doing something similar to the IFRS 9 transition requirements which added additional disclosures to help users understand how an entity moved from one model to the other. The staff responded that the options were considered by the staff based on cost implications and the fact that leases were unique. She said that  in a “normal” transition scenario, an entity would be moving from one set of double entry accounting to another; however  operating lease commitment were off balance sheet and it would be too costly for an entity to change its systems to show an alternative method of double entry accounting. She said that the staff was proposing to allow an entity to continue using its systems that were being used to track operating leases for one year and then require a reconciliation at the end of the year of implementation of the new leases standard. 

One Board member asked, based on the lack of comparability in the P&L under the new leases standard in the year of implementation, if there would be additional disclosures to compensate for that situation and help users to understand the P&L. The staff responded that it was already decided to have enough disclosure requirements for new leasing activities; although, she acknowledged that it would not be a perfect comparison.  The Board member asked if the information should be presented with some warnings (in relation to the lack of comparability in the P&L).  The Vice-Chairman said that doing that could set a bad precedent which other Board members agreed with. The Project manager also indicated that the total cash flow would be disclosed and users could have more information about lease activity.    

One Board member disagreed with not mandating a full retrospective application given the impact of the new standards, he said that the economics would not change but the presentation would change. He said that the situation for revenue was different. Further, he suggested to use the modified approach but with full restatement of comparatives. The staff responded that the feedback received was mostly focused on retrospective application and cost implications.

Another Board member said that he supported the staff recommendation. He said that preparers still would have the obligation to explain their financial statements. He then asked about the impact of the transition requirements on interim financial statements. The project manager said that users should apply IAS 34. The Board member suggested given the importance of the standard to explain in the drafting how the standard was expected to be applied in interim financial statements. 

The Chairman called to vote. The Board members:

  1. Approved the staff recommendation to permit a lessee to choose either a fully retrospective approach or a modified respective approach on transition (13 votes)
  2. Approved the staff recommendations included in the agenda paper for the modified retrospective approach (12 votes in general and 8 votes for the disclosure requirements)
  3. Approved the staff recommendations that would require a lessor to continue to apply its current accounting for any leases that were ongoing at the date of initial application with the exception of accounting for subleases (all members agreed)
  4. Approved the staff recommendations for first-time adopters (13 votes)

Agenda Paper 3B Transition – Sale and Leaseback Transactions

The staff introduced the agenda paper. Below is a summary of the staff recommendations:

  1. the new leases standard would not require reassessment of historic sale and leaseback transactions to determine whether a sale occurred in accordance with IFRS 15;
  2. with respect to sale and leaseback transactions that were classified as finance leases under IAS 17, a seller-lessee should not perform any retrospective accounting specific to the sale and leaseback arrangement.
  3. with respect to sale and leaseback transactions that were classified as operating leases under IAS 17, a seller-lessee should not perform any retrospective accounting specific to the sale and leaseback arrangement. Instead, the staff recommended that a seller-lessee should account for:

    (i) the leaseback in the same manner as any other operating lease that was ongoing at the date of initial application;
    (ii) any deferred losses that relate to off-market terms at the date of initial application as an adjustment to the leaseback ROU asset;
    (iii) any deferred gains that relate to off-market terms at the date of initial application as an adjustment to the lease liability.

  4. that a seller-lessee would be required to apply the partial gain recognition approach only to new sale and leaseback transactions entered into after the date of initial application.

One Board member asked if by not requiring retrospective accounting, the standard would provide a window of opportunity for structuring transactions using the old rules. The staff acknowledged that it was a risk but they decided their recommendation based on cost considerations. Another member suggested introducing a clarification that the grandfathering would only be applicable for sales and leaseback transactions entered into up to the publication of the standard to avoid structuring opportunities. There was support for this suggestion.

One member asked if the requirement for not reassessing was mandatory (meaning the standard would prohibit reassessment) or an option. The staff confirmed that it would be mandatory for all entities. Then, the Board member suggested that users should not be allowed to adopt the new lease standard before IFRS 15. She said that there could be conflicts for early adopters that could early adopt one standard but not early adopt the other one. The Project manager said that depending on decisions of effective date or earlier application, that conflict would be possible, not only for sale and leaseback transactions but there could be other applicable cases.

One Board member disagreed with the requirement in paragraph 29b) which stated that any deferred gain that related to off-market terms should be recorded as an adjustment to the liability. He said that the adjustment should be recorded against the ROU asset as an adjustment because the liability should only represent the present value of the minimum lease payments (any off-market terms would be captured in the minimum lease payments); he also said that otherwise the asset would be overstated.  The project manager and other Board members indicated agreement with his suggestion.

The Chairman called to vote and the Board decided the following:

  1. The standard would indicate that historic sale and leaseback transactions should not be reassessed to determine whether or not a sale occurred in accordance with IFRS 15 [Note: the change in the terms “should not”  instead of “would not require” was suggested during the discussion].
  2. Approved the staff recommendations for sale and leaseback transactions that had been classified as finance leases under IAS 17.
  3. Approved the staff recommendation for sale and leaseback transactions that had been classified as operating leases under IAS 17 (with the amendment suggested by one Board member that any deferred gains arising from off-market terms should be adjusted against the ROU asset instead of the liability)
  4. Approved the staff recommendations for the approach for partial gain recognition.

Agenda Paper 3C Transition – Subleases

The staff introduced the agenda paper.  

With respect to the transition requirements for subleases, the staff recommended that the new leases standard requires an intermediate lessor to: (a) reassess each existing operating sublease at the date of initial application to determine whether it is classified as an operating lease or a finance lease under the requirements of the new leases standard; (b) base this reassessment on the remaining contractual terms of the head lease and the sublease; and c) for those subleases that had been classified as operating leases under IAS 17 and were classified as finance leases under the new leases standard, account for the sublease as a new finance lease entered into on the date of initial application.

No significant comments were made.

The Chairman called to vote and all members agreed with the staff recommendations.

Agenda Paper 3D Transition – Definition of a Lease

The staff introduced the agenda paper.  

The staff recommended that the new leases standard should permit (but not require) an entity to grandfather the definition of a lease for all contracts that were ongoing at the date of initial application (i.e. those contracts that were previously assessed under the existing requirements of IAS 17 Leases and IFRIC 4 Determining whether an Arrangement contains a Lease and that continue to be in place at the date of initial application). Consequently:

(a) an entity could continue to account for contracts that contain a lease under the existing requirements of IAS 17 and IFRIC 4 as containing a lease when applying the new leases standard;

(b) an entity would not need to account for contracts that do not contain a lease under the existing requirements of IAS 17 and IFRIC 4 as a lease when applying the new leases standard.

The staff also recommended that if an entity chose to grandfather the definition of a lease:

(a) this would apply to all contracts that were ongoing at the date of initial application; and

(b) that fact should be disclosed.

No significant comments were made.

The Chairman called to vote and all members agreed with the staff recommendations.

Agenda Paper 3E Leases of Small Assets

The staff introduced the agenda paper.

The staff recommended that, if a recognition and measurement exemption for small assets would be included in the new leases standard, the drafting of this exemption should be based on that discussed in Agenda Paper 3F as presented in the March 2014 joint board meeting. However, in light of the information identified by the outreach activities, the staff also recommended that the IASB consider including the following elements in the small asset exemption:

(a) a requirement that the small asset exemption should apply only to leases of assets that were not dependent on, or highly interrelated with, other leased assets;

(b) in the Basis for Conclusions, a discussion of the quantitative threshold that the IASB had in mind at the time of deliberating the exemption; and

(c) in the Basis for Conclusions, a statement that the small asset lease exemption would be a particular focus of the post implementation review.

One Board member asked whether the meaning of small assets was related to physically small or small in terms of monetary value. He said that it should be clarified in the Basis of Conclusions. The staff responded that the term “small” meant low value.

Several Board members expressed concern about the threshold suggested by the staff. There were concerns in terms of using a particular amount which would not be relevant in many jurisdictions (for example many jurisdictions have particular thresholds for tax purposes), others were concerned about future needs to update the threshold. The staff indicated that the drafting would clarify that the threshold represented the amount considered by the Board at the time of issuing the standard and also that the threshold would be an option. There was further debate about the usefulness of such threshold. The Chairman pointed out that it would be just a practical expedient so that entities would not be require to conduct further analysis.

The Chairman indicated that he disagreed with adding in the Basis of Conclusion a reference to the post implementation review (“PIR”). He said that if the Board were certain about the small assets lease exception there should be no need to add a reference to the PIR. Other Board members agreed with his concern.

The Chairman called to vote and the Board decided the following:

  1. Approved the staff recommendation (11 votes) to include a recognition and measurement exception for leases of small assets
  2. Approved the staff recommendation (13 votes) that the small asset exemption should apply only to leases of assets that were not dependent on, or highly interrelated with, other leased assets;
  3. Approved the staff recommendation (12 votes) to add a discussion of the quantitative threshold that the IASB had in mind at the time of deliberating the exemption
  4. Did not approve the staff recommendation to add in the Basis for Conclusions, a statement that the small asset lease exemption would be a particular focus of the post implementation review.

Agenda Paper 3F Subleases sweep issue—discount rate

The staff introduced the agenda paper. The staff recommended to allow an intermediate lessor to use the discount rate used for the head lease to account for a sublease classified as a finance lease if the rate implicit in the sublease cannot be readily determined.

There were no comments raised by the Board. The Chairman called to vote and all members agreed with the staff recommendation.

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