Leases (education session)

Date recorded:

The Board held an Education Session on Leases. The objective of the session was to allow the Board to ask the staff questions on Agenda Paper 3B – Disclosure: Lessee Disclosure requirements which would be discussed in the Joint session to be held on 21 January 2015. No decisions were made.

The IASB Project Manager introduced the session by explaining that the objective was to prepare for the joint session to be held on 21 January 2015 so that the Board could ask any particular questions on the paper. She indicated that there were two agenda papers for the disclosure requirements for lessees; agenda paper 3A based on the FASB lessee model, and agenda paper 3B based on the IASB lessee model. She said that the education session would be focused on paper 3B. She also reminded the Board that they would not be required to make any decision.

The staff analyst then introduced agenda paper 3B. She said that the staff recommended retaining the overall disclosure objective in the 2013 ED with further changes on detailed disclosure requirements based on feedback received from preparers and users of financial statements. She said that the changes recommended were intended: (i) to respond to concerns from preparers; (ii) to avoid excessive disclosure; and (iii) to focus on information that would be most useful. She said that their recommendations included eliminating some proposals from the 2013 ED which would be replaced with less costly proposals. She said that the final lease standard would include specific mandatory quantitative disclosure requirements summarised in paragraph 52 of the paper. She said that the information would include lease expense and lease cash flows which would be presented in one note in the financial statements. She said that the information would be presented in a concise and comparable way. Then she said that the final lease standard would require a maturity analysis for lease liabilities in accordance with IFRS 7 for all financial liabilities. She said that they were also recommending the final lease standard to include an additional requirement for a lessee to disclose any further information that would enable users to understand the amount, timing and uncertainty of cash flows arising from leases. The staff was also recommending to supplement the list of the requirements with a specific list of disclosure objectives. She said that this would cover for example sale and leaseback transactions, variable lease payments, and termination options. She said it was expected that the disclosures would be different based on the lease portfolio of each entity. She also said that they were proposing to include illustrative examples in the final lease standards; although, she said that the examples would not be comprehensive and preparers would still be required to apply judgement based on their individual circumstances. She then turned the discussion to the Board. 

One Board member asked in relation to the table included in paragraph 51 about the interaction for short term lease expense and small lease expense, whether one would be a subset of the other, and accordingly; what the governing principle would be. He also asked about paragraph 39 which indicated that a reconciliation of lease liabilities would not be required. He said that in order to comply with the standard an entity would need to create or adjust their systems so the information would be expected to be available (although he pointed out that he was not objecting to the proposal). He also asked where the information would appear related to liabilities created due to leases commencing or being extended as mentioned in paragraph 39a). The staff responded on the first question that the order of events would be first short term lease and then small lease asset. On the second question about the reconciliation she said that they tried to balance cost and useful information and found out that preparing the reconciliation would be costly to preparers and users highlighted that they were only interested in particular things instead of a full reconciliation. The Board member pointed out that even though it would not be required, it would not be prohibited to present the information; the staff confirmed his assessment. She also said on his final comment that the disclosures related to new liabilities would be shown in the disclosure of additions of right-of-use assets. 

Another Board member said that he supported the staff recommendation. He said in relation to the table that there could be cases where an entity would have to supplement the information with footnotes, but in other cases the table itself could be useful so he found it difficult to understand the requirement as mandatory. He also mentioned that in cases of entities with significant sublease income that the sublease income would be included within the total lease expense and also that the cash information was only cash outflows. The staff responded on his first concern that they were trying to identify the disclosures that investors wanted to see irrespective of the nature of the lease portfolio, but materiality would also apply. On his second concern on sublease income, she said that she would get back to him, and on his last concern on cash flows she said that they would clarify in the final standard that their intention was to capture cash flows rather than cash outflows only. The Project manager clarified that it would capture cash outflows net of any cash inflows derived from subleases in order to be consistent with the lease expense disclosure. Also, she said that the table was not particularly focused on entities for which the main income was sublease income. The Board member said that he did not find it useful to disclose the weighted average lease term. The staff responded that they found that investors were looking for that information in order to assess how long the business could operate in its current capacity without renewing any of the current leases but she acknowledged that this information would be captured in the maturity analysis. 

Another Board member also expressed concern that offsetting sublease income with lease expense would not be appropriate for certain business models and he said that he had the same concern about duplication of information between the maturity analysis and lease term disclosure. He then asked if the effect of discounting a liability was significant, where that information would be disclosed, particularly information about the discount rate used in material leases and how it was calculated. He said that the requirements should be more specific rather than just relying on IAS 1. The project manager acknowledged that it would be difficult to introduce a specific requirement to capture what exactly should be disclosed.

One Board member said that he agreed with the staff recommendations. He said that the disclosure initiative would indicate that entities needed to focus on material items. He said that that recommendation should also be included in the final standard, for example in the basis for conclusions. He then asked whether the information on the weighted average lease term by class of asset should be divided further. The staff confirmed that if the information was useful, it still could be disclosed. She also pointed out that the forthcoming amendments of IAS 7 would require a reconciliation of debt and lease liabilities would fall into that requirement.

One Board member asked about the requirement to disclose lease expense by class of asset as detailed in paragraph 58. He said that he did not find this information useful and believed that the information would be difficult to prepare. The staff responded that by disclosing expense by class of asset, investors  could estimate “whole asset information”; they noted that, in particular, equity analysts often calculated an estimate of this information when determining the capital employed in an entity, to obtain comparability between entities that lease and own assets. In cases for which a ROU asset did not comprise substantially all of the economic benefits embedded in the underlying asset, investors would not obtain this whole asset information from the amounts recognised on the balance sheet. The Board member still pointed out that he was not convinced of the usefulness of that disclosure requirement.

Another Board member said that he agreed with the staff recommendation. He asked what the interaction would be between small asset lease expenses with materiality. He asked whether only a material number in aggregate should be disclosed or everything about small asset lease expense. He then asked about the requirement on the weighted average lease term, and said that if that information was necessary, why it was not being required for PPE. The staff responded that materiality would apply for small asset lease expense. [Note: the staff did not respond the second concern.]

The Vice Chairman pointed out that he did not find it useful to disclose income from sale and leaseback because he expected that there would only be few sale and leaseback transactions.

Another Board member said that he agreed with the staff recommendations because it was responsive to investor needs. She then asked whether the disaggregation guidance from the 2013 ED included in paragraph 25 would be included in the final standard. The staff confirmed that it would be included. The Board member then asked if the maturity analysis could serve both for information on liquidity and renewal risk. The staff agreed that that information could be obtained from the maturity analysis.

One Board member asked about total cash flows for leases and whether there were problems in collecting this information for leases because there were different cash flow requirements between FASB and IASB. The staff responded that the decision was based on the discussion held in the June meeting and because investors were interested in a single cash flow for leases.

One Board member also asked about the total cash flow for leases and particularly what cash flows would be captured. The staff responded that it would capture cash flows that were not lease liabilities, for example variable lease payments.

Another Board member asked about the table for total lease expense and said that given that under the new standard there would not be a lease expense for leases but right-of-use assets, he found it odd to add together expenses, interests and amortisation. The staff responded that the total information was prescribed in order to get one disclosure comparable between entities. She explained that entities could still disclose this information in other sections. The Board member pointed out that total lease expense would not appear on the P&L. Another Board member pointed out that it should be clarified that the table should say total lease expenses related to lease contracts so that users would not try to tie this information to the P&L.

No additional comments were made.

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