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FASB and IASB continue joint lease project redeliberations

  • FASB-IASB Image

Jan 24, 2014

Yesterday, the FASB and IASB continued their redeliberations on their joint lease accounting proposal. The boards discussed (1) lessor accounting, (2) lessee accounting, and (3) a possible scope exception for lessees of “small-ticket” items; however, no formal decisions were made at the meeting.


Lessor accounting

The staff identified three approaches to how lessors should classify leases:

  • Lease classification would be based on whether the lessee transfers substantially all of the risks and rewards of ownership of the underlying asset.
  • Lease classification would depend on whether the transaction results in the lessor recognizing a manufacturer’s/seller’s profit or loss. In those situations where a profit or loss exists, the classification would be determined on the basis of whether control of the asset has been transferred to the lessee. If no profit or loss exists, the lease classification would be consistent with the first alternative (i.e., focus on whether the lease transfers the risks and rewards of ownership of the underlying asset).
  • Leases would be classified on the basis of the lessor’s business model.

In addition, the boards discussed whether the receivable and residual (R&R) approach in the 2013 proposal (with some simplifications) should be retained or whether to develop an approach consistent with current IFRSs lease requirements is appropriate.


Lessee accounting

The boards also discussed three alternatives for lessee accounting.

  • Replace the dual model in the proposal with a single model in which all leases would be accounted for as financing the purchase of a right-of-use asset ("Type A" approach in the proposal).
  • Retain the dual-model approach in the proposal, but make certain targeted simplifications (e.g., amend the definition of property to include “integral equipment”).
  • Retain the dual-model approach in the proposal, but the subsequent accounting for the lease would be determined using the criteria in existing U.S. GAAP (ASC 840) and IFRS (IAS 17).


Small-ticket leases

Finally, the boards discussed potential alternatives to provide relief and alleviate complexities associated with leases of small-ticket items. These alternatives included:

  • Providing materiality thresholds for applying the leases proposal.
  • Expanding the proposed 12-month short-term lease scope exemption.
  • Providing guidance for apply a portfolio approach to lease accounting.
  • Including a scope exclusion for non-core assets.

The staffs will consider the feedback received to enhance their final staff papers to be presented to the boards during a March 2014 joint meeting. At that meeting, the boards will determine how they move forward to finalize the proposal.

For more information on the joint lease accounting project, see the project page on the FASB’s Web site.

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