IFRS 10 – Control of a structured entity by an operating lease

Date recorded:

The Senior Technical Manager introduced the agenda paper concerning a structured entity that was created to lease a single asset to a single lessee. The structured entity was the lessor in an operating lease. The submitter had asked whether the lessee’s right of use of the asset and its right to exercise a purchase option gave the lessee power over the structured entity’s relevant activities. The submitter put forward two views:

Under View A, the lessee’s right to use the leased asset affected the residual value of the leased asset and thus the returns of the structured entity. Hence, under View A, the operating lessee directed the relevant activities of the structured entity.

Under View B, the right of use of the leased asset did not give the lessee power over the structured entity. The submitter noted that the lease would contain covenants to ensure that the lessee did not damage the leased asset. The relevant activities were therefore monitoring the default of the receivable and the use of the asset and managing the sale or re-lease of the asset if the purchase option was not exercised by the lessee.

An outreach had resulted that there was no diversity in practice. View A had had little or no support amongst the constituents consulted.

In addition to the questions submitted, the staff analysis considered the effect on the relevant activities of the structured entity of the lease being an operating lease. The analysis also examined whether other requirements of control were met and what the intention of IFRS 10 and IAS 17 was.

As a result of the analysis, the staff concluded that they were in View B. The returns of the structured entity would arise from the residual value of the asset, the credit risk on lease receivables and the financing risks on its interest outflows. In the staff’s view, the lessee did not have power over those relevant activities.

The staff recommended that the Committee should not take the issue onto its agenda as there was no significant diversity in practice and the standard gave sufficient guidance to make the consolidation assessment.

One Committee member agreed with the staff recommendation. He said that there was not enough information in the fact pattern but he tended to think that IFRS 10 would provide the solution if all information was available. He suggested to add the purchase option to the tentative agenda decision as otherwise it would be a very trivial case. He was concerned about the reference in the draft tentative agenda decision that the lessee did not control because the transaction was an operating lease. He said that there could be operating leases that led to control. Another Committee member agreed and suggested to delete the sentence where it was suggested that the classification of the lease influenced the control assessment. An observing Board member agreed as well and said that a lease would not influence the control assessment as it was a right to use a particular asset.  Another Board member replied that a lessee could nonetheless control an entity.

Several Committee members expressed support for issuing a tentative agenda decision with the modification proposed. The Chairman concluded that this should be the next step.

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