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The FASB and IASB are in the process of finalizing the amendments to their guidance on the accounting for leases. One of the primary objectives of the leases project is to address the current off-balance-sheet financing concerns related to a lessee’s operating leases. While developing an approach that would require all operating leases to be recorded on the balance sheet may seem like a simple task, the numerous exposure drafts issued by the boards, along with years of redeliberations, have proved otherwise. The boards have had to grapple with questions such as (1) whether an arrangement is a service or a lease, (2) what amounts should be initially recorded on the lessee’s balance sheet for the arrangement, (3) how to subsequently account for the amounts recorded (a point on which the FASB and IASB were unable to converge), and (4) how to perform these assessments in a cost-effective manner.

In addition, the boards have addressed other concerns related to the current almost-40-year-old leases model. For example, the FASB is proposing to eliminate the bright lines currently in U.S. GAAP for determining lease classification, and both boards are proposing that lessors provide additional transparency into their exposure to the changes in value of their residual assets and how they manage that exposure.

Editor’s Note: We expect that a final leasing standard will be issued later this year. While the boards have not discussed the final effective date, the standard is likely to be effective in 2019. While this may seem like a long way away, entities should start considering the extent to which they may need to change processes and controls to apply the revised guidance, including those related to obtaining additional information that may have to be provided under the new disclosure requirements. In addition, entities should consider the effect of the revised guidance as they enter into new transactions.

A Snapshot of the Proposed Provisions

The table below highlights the key proposed amendments to existing lease accounting guidance on the basis of the boards’ tentative decisions to date.1

Key Proposed Amendment FASB IASB
Scope Similar to current scope requirements. Lessees can elect to apply the guidance to leases of intangible assets.
Definition of a lease
  • A leased asset must be specifically identifiable either explicitly (e.g., by a specific serial number) or implicitly (e.g., the only asset available to satisfy the lease contract).
    • Substantive substitution rights will need to be considered.
    • A physically distinct portion of a larger asset could represent a specified asset (e.g., one floor of a building).
  • A lease contract conveys the right to control the use of the specified asset. A customer controls an asset when the customer:
    • Has the ability to direct the use of the identified asset.
    • Obtains substantially all of the economic benefits from directing the use of the asset.
Lessee accounting
  • A lessee recognizes (1) a right-of-use (ROU) asset for its right to use the underlying asset and (2) a liability for the corresponding lease obligation (both initially measured at the present value of the future lease payments over the lease term).
  • Initial direct costs (e.g., commissions paid) directly attributable to negotiating and arranging the lease, as well as any lease payments before or at the commencement of the lease, would be included in the ROU asset.
  • Lessees have an option of not recording leases that have a lease term of 12 months or less on the balance sheet.
  • Two approaches are used for amortizing the ROU asset: (1) Type A (“financing“) and (2) Type B (“straight-line“). See Deloitte’s March 27, 2014, Heads Up for information about the FASB’s dual-model approach.
  • The determination of which amortization approach to apply would be similar to the classification criteria in IAS 17.2
A single approach (like the FASB’s Type A “financing“ approach) is used for amortizing the ROU asset.
Lessor accounting
  • Retain current lessor accounting approach for operating and capital (direct financing type and sales-type) leases.
  • Dealer’s profit for a sales-type lease can only be recognized up front if the arrangement qualifies as a sale under ASC 606.3
  • Eliminates leveraged lease accounting requirements.
  • Retain current lessor accounting approach for operating and capital (direct financing type and sales-type) leases.
  • Dealer’s profit for a sales-type lease can be recognized up front without regard to the revenue guidance in IFRS 15.4
Lease term
  • Noncancelable term that takes into account renewal options and termination options if it is reasonably certain that the lessee would exercise the option.
  • Only lessees would be required to reassess the lease term after lease inception if there is a significant event or change in circumstances that is directly attributable to the actions of the lessee.
Lease payments Lease payments would include:
  • Fixed payments (including in-substance fixed lease payments — e.g., the lease contains disguised fixed lease payments).
  • Variable payments that are based on an index or rate, calculated by using the index or rate that exists at the lease commencement (i.e., the spot rate). Do not include variable lease payments based on usage or performance of the asset (e.g., a percentage of revenues).
  • Amounts expected to be paid under residual value guarantees for lessees and certain residual value guarantees for lessors.
  • Payments related to renewal or termination options in which it is reasonably certain that the lessee would exercise.
Variable payments based on an index or rate would only be reassessed when the lease obligation is reassessed for other reasons (e.g., a change in the lease term). Variable payments based on index or rate would be reassessed when there is a change in contractual cash flows (e.g., the lease payments are adjusted for a change in the consumer price index).
Discount rate
  • Lessee would use the rate, if available, that the lessor charges the lessee. If the rate is not available, the lessee would use its incremental borrowing rate as of the date of lease commencement.
  • Lessor would use the rate it charges the lessee.
Private-company lessees can also use a risk-free rate. No exemptions provided for private-company lessees.
Lease modifications
  • A lease modification would be any change to the contractual terms and conditions of a lease that was not part of the original terms and conditions of the lease.
  • A lessee/lessor would account for a lease modification as a new lease, separately from the original lease, when the modification (1) grants the lessee an additional ROU asset and (2) prices the additional ROU asset commensurately with its stand-alone price.
  • Lessees would account for a lease modification that is not a new lease by using the updated lease payments (and current discount rate) to revise the lease liability and adjust the ROU asset (and in some cases a gain/loss may be recognized).
  • Lessors would account for a lease modification that is not a new lease either effectively as a new lease (modification of a Type B lease) or applying the guidance on accounting for modifications of receivables (Type A lease).
Sublease A lessor in a sublease would determine the lease classification on the basis of the underlying asset. A lessor in a sublease would determine the lease classification on the basis of the ROU asset.
Sale and leaseback arrangements
  • The transaction would not be considered a sale if (1) it does not qualify as a sale under ASC 606 or (2) the leaseback is a type A lease.
  • The full gain would be recognized if the transaction is considered a sale.
  • The transaction would not be considered a sale if it does not qualify as a sale under IFRS 15. (All leasebacks would be considered type A leases).
  • The gain would be limited to only the portion associated with the residual asset sold. The portion of the gain related to the underlying asset leased back would be offset against the ROU asset.

FASB’s Disclosure Requirements

Lessee Disclosure Requirements

The overall objective of the lessee disclosure requirements is to “enable users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases.“ Accordingly, the FASB decided that in addition to this disclosure objective, the final leases standard should include both qualitative and quantitative disclosures about a lessee’s lease arrangements.

Qualitative Disclosures

While the FASB decided not to provide additional guidance on the level of disaggregation required for presenting qualitative information about a lessee’s lease arrangements, the Board agreed that a lessee should disclose (1) the nature of its leases, (2) which leases have not yet commenced but create significant rights and obligations for the lessee, (3) the significant assumptions and judgments it used in applying the lease standard, (4) the main terms and conditions of any sale-and-leaseback transactions, and (5) its accounting policy election for short-term leases.

Quantitative Disclosures

The FASB also decided that to meet this objective, a lessee should disclose additional quantitative information, typically broken down by Type A and Type B leases. For example, a lessee would be required to separately present the lease expense related to Type A and Type B leases separately (a lessee would disclose the amortization expense of ROU assets and interest expense for Type A leases).

For a complete list of the disclosure and presentation requirements for lessees, see the FASB’s Web site.

Lessor Disclosure Requirements

A lessor would be required to provide qualitative and quantitative disclosures about its leasing activities, including:

  • Information about the nature of the entity’s leases, and the significant assumptions and judgments it used when applying the leases guidance.
  • Information about how the entity manages its exposure to the underlying asset.
  • A separate maturity analysis of the undiscounted cash flows for Type A leases and Type B leases. The maturity analysis should show the undiscounted cash flows to be received in each of the first five years after the reporting date, and a total of the amounts for the years thereafter. For Type A leases, the maturity analysis should be reconciled to the lease receivable balance.
  • Lessors should apply the disclosure requirements in ASC 360 for all assets that are subject to a Type B lease. The lessor should also disclose (by major class) assets that are subject to a lease separately from those that are held and used by the lessor.
  • A tabular disclosure of lease-related income, including:
    • Profit recognized at lease commencement for Type A leases.
    • Interest income on the lease receivable for Type A leases.
    • Interest income from the accretion of the residual asset for Type A leases.
    • Lease income from Type B leases.
    • Variable lease income.
    • Short-term lease income.

For a complete list of the lessor disclosure and presentation requirements, see the FASB’s Web site.

FASB’s Transition Requirements

Lessee and Lessor

An entity would be required to apply a modified retrospective transition method for a lessee’s existing capital and operating leases and a lessor’s existing sales-type, direct financing, and operating leases. When applying this method, a lessee and a lessor would be allowed to use hindsight in their evaluation of renewal and purchase options on existing leases.

A lessee or lessor could elect transition relief such that it would not be required to reassess:

  • Whether any expired or existing contracts are leases or contain leases.
  • The lease classification for any expired or existing leases.
  • Initial direct costs for any existing leases.

If transition relief is elected, the entity must adopt all of the relief provisions and would be prohibited from applying the transition relief on a lease-by-lease basis. In addition, the entity would be required to disclose as an accounting policy election the transition relief applied.

Sale and Leaseback

An entity would be required to reassess the sale of a sale-and-leaseback transaction under ASC 606 only if the sale is still considered to be a failed sale as of the effective date of the new lease accounting guidance. In addition, the Board tentatively decided that:

  • An entity would continue to amortize the gain or loss on capital leasebacks as it currently does in accordance with ASC 840.
  • The seller in a sale-and-operating-leaseback transaction would be required to recognize any deferred gain or loss resulting from off-market terms as an adjustment to the leaseback ROU asset (loss) or lease liability (gain) as of the date of initial application. The seller would recognize any deferred gain or loss not resulting from off-market terms as a cumulative-effect adjustment to equity.

Build-to-Suit Lease Arrangements

The Board tentatively decided to eliminate the specific guidance on build-to-suit arrangements. A lessee would apply the modified retrospective transition approach to its build-to-suit lease arrangements.

Leveraged Leases

The FASB tentatively decided to allow entities to continue to apply the current leveraged-lease guidance to leveraged-lease arrangements that exist as of the final standard’s effective date.


Meeting Minutes

Deloitte Observer meeting notes on the leases project are available on the Global IAS Plus Web site.



1 Although the boards have nearly completed their deliberations in this project, the guidance in the final standard may differ from the tentative decisions as a result of changes made during the finalization process.

2 IAS 17, Leases.

3 For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.“

4 IFRS 15, Revenue From Contracts With Customers.

Correction list for hyphenation

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