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FASB and IASB talk leases

  • FASB-IASB Image

May 23, 2014

At their joint videoconference meeting on May 22, 2014, the FASB and IASB continued redeliberating their May 2013 exposure draft on leases. The boards discussed (1) the definition of a lease, (2) separating lease and nonlease components, and (3) initial direct costs.

Definition of a lease

The boards tentatively decided to provide:

  • Additional guidance on when a lessor’s substitution rights are considered substantive in the evaluation of whether an identified asset exists.
  • Additional guidance on evaluating whether a customer has the right to control the use of the underlying asset.
  • A more robust framework and examples related to determining which decisions on directing the use of the asset would have the greatest impact on the economic benefits derived from use of the asset.

Separating lease and nonlease components

The boards tentatively reconfirmed that (1) multiple lease components in a contract should be combined or separated from one another and (2) both lessees and lessors would be required to separate lease components and nonlease components (e.g., any services provided) in an arrangement and allocate the total transaction price to the individual components.

Further, the boards concluded that both lessees and lessors would be required to “reallocate the consideration in a contract when the contract is modified and the modification is not a separate, new contract.”

Initial direct costs

The boards tentatively decided that the definition of initial direct costs for both lessees and lessors should include only those costs that are incremental to the arrangement and that the entity would not have incurred if the lease had been obtained. In addition, the boards tentatively agreed that a lessee would include all initial direct costs in its initial measurement of the right-of-use asset.

Next steps

The boards will discuss the following topics at a future meeting:

  • Subleases.
  • Sale-and-leaseback transactions.
  • Leases of “small” assets.
  • Presentation and disclosure.
  • Cost-benefit concerns, transition, and effective date.
  • Leveraged leases and private-company and not-for-profit issues (FASB only).
  • Other topics (e.g., related-party leases).

For more information, see the related Deloitte Accounting Journal entry and the meeting notes on the FASB's Web site.

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