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Journal entry — Leases — Boards continue to deliberate various issues

Published on: Sep 21, 2012

At their joint meeting yesterday, the FASB and IASB (the “boards”) reached tentative decisions related to sale-and-leaseback transactions, the single-lease-expense (SLE) approach, and lease classification. In addition, one FASB staff member indicated that the boards will most likely issue a revised exposure draft in the first quarter of 2013 for a 120-day comment period.

Sale-and-Leaseback Transactions

The boards clarified their previous tentative decisions on sale-and-leaseback transactions, tentatively deciding that when applying the proposed revenue recognition guidance to determine whether the underlying asset has been sold in a sale-and-leaseback transaction, an entity should evaluate the entire transaction. That is, the entity should consider that it will retain physical possession of the asset under the lease. However, the existence of the lease may not prevent the entity from accounting for the entire transaction as a sale and leaseback. The boards concluded that the lease “does not transfer control of the underlying asset to the lessee; instead, it transfers the right to control the use of the underlying asset for the term of the lease.” Therefore, provided that the seller/lessee does not have “the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset,” the transaction may qualify for sale-and-leaseback accounting rather than as a financing arrangement.1

To address concerns related to sale-and-leaseback transactions that include a call or put option on the underlying asset, the boards tentatively decided that if the seller/lessee can repurchase the asset for an amount that is less than its original selling price, the entity would conclude that a sale has not occurred and the entire transaction would be treated as a financing arrangement.

The boards also asked the staffs to consider whether the proposed sale-and-leaseback guidance would apply to situations in which a lessee is involved in the construction of an asset on behalf of the owner-lessor and the asset will be leased to the lessee when construction is complete. Such situations typically occur in build-to-suit arrangements.

SLE Approach

The boards tentatively decided that if the right-of-use (ROU) asset for a lease accounted for under the SLE approach is impaired, the lessee would adjust the subsequent amortization of the ROU asset to ensure that a straight-line expense is maintained through the remainder of the lease unless, because of the impairment, the total lease expense for any period would be lower than the interest expense on the lease obligation. In such situations, rather than continuing a straight-line expense approach (albeit at a reduced amount), the subsequent amortization of the ROU asset would be consistent with the interest and amortization approach. Accordingly, if the ROU asset is fully impaired under the SLE approach, the lessee would subsequently recognize lease expense in a manner consistent with the unwinding of the liability to make lease payments.

In addition, the boards tentatively decided that the expense recognition pattern for leases accounted for under the SLE approach must be straight-line, regardless of whether this is the pattern of consumption for the underlying asset.

Lease Classification

The boards tentatively decided that an entity would determine the lease classification at lease commencement. The entity would not be required to reassess its classification unless the lease is subsequently modified and accounted for as a new lease. Further, the boards tentatively decided that in a sublease, the lessor and lessee should focus on the underlying leased asset, not the ROU asset, in determining the classification.

Watch for our upcoming Heads Up for more details about the boards’ ongoing decisions on leases.


1 Quoted material from paragraphs 11 and 12 of the boards’ agenda paper (IASB 3A/FASB 247).

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