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Journal entry — Leases — Board redeliberates certain FASB-only issues

Published on: Aug 28, 2014

At yesterday’s FASB-only meeting, the Board continued redeliberating its revisions to lease accounting but only addressed U.S. GAAP issues. Specifically, the Board discussed (1) the discount rate that nonpublic business entity (NBE) lessees should use, (2) the accounting for related-party leases, (3) the accounting for sale-leaseback transactions that involve repurchase options, and (4) whether to eliminate leveraged-lease accounting.

The following table summarizes the tentative decisions reached at the meeting:


NBE lessee discount rate

The May 2013 exposure draft (ED)1 allows NBE lessees to elect, as an accounting policy, to use a risk-free interest rate in lieu of their incremental borrowing rate when measuring their lease liabilities. At yesterday’s meeting, the board tentatively reaffirmed this guidance. 

Related-party leases

The May 2013 ED requires lessees and lessors to account for related-party leasing arrangements on the basis of the legally enforceable terms and conditions of the lease rather than the substance of the arrangement. Further, the May 2013 ED indicates that lessors and lessees must provide the related-party disclosures required by ASC 850.2 At yesterday’s meeting, the FASB tentatively reaffirmed this guidance.

Sale-leaseback accounting 

Consideration of Substantive Repurchase Options

At their July 2014 joint meeting, the FASB and IASB discussed whether a substantive repurchase option held by the seller-lessee in a sale-leaseback transaction would preclude a conclusion that a sale has occurred. The IASB tentatively agreed that a seller-lessee’s substantive repurchase option would preclude sale recognition; however, the FASB did not vote on this issue and directed the staff to perform additional analysis.

At yesterday’s meeting, the FASB tentatively decided that a seller-lessee’s option to repurchase an asset would prevent the seller-lessee from concluding that the underlying asset was sold unless the asset is a nonspecialized asset and the exercise price is at fair value. The Board also tentatively decided that the final standard would include application guidance on how repurchase options should be evaluated.

Accounting for “Failed” Sale-Leaseback Transactions

The boards also discussed the accounting for “failed” sale-leaseback transactions at their July 2014 meeting. In a manner consistent with the guidance in the May 2013 ED, the IASB tentatively decided that a transaction that results in a failed sale should be accounted for as a financing arrangement. The FASB did not vote on this provision at the July 2014 meeting because it first wanted to assess the staff’s additional analysis of repurchase options.

At yesterday’s FASB-only meeting, the Board tentatively reaffirmed the May 2013 ED’s guidance on this topic (i.e., the seller-lessee and buyer-lessor should account for a failed sales transaction as a financing arrangement).

Leveraged leases

The May 2013 ED would have eliminated the current guidance on accounting for leveraged leases and does not include any specific transition guidance related to this topic. At yesterday’s meeting, the FASB reaffirmed its decision to eliminate leveraged-lease accounting for all new arrangements. However, the Board 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.

While the boards have redeliberated many aspects of the proposed leases model, they still need to discuss a number of issues, including the following:

  • Lessee disclosures.
  • Transition.
  • Effective date.

Other items that the boards may revisit include previous decisions on the lessee accounting model and small-ticket lease exceptions.


1 FASB Proposed Accounting Standards Update, Leases

2 FASB Accounting Standards Codification Topic 850, Related Party Disclosures.

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