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Leases

Date recorded:

The staff set out the background to the research project and its purpose, being to examine the rights and obligations arising under lease contracts. In terms of the approach the lessor would recognise assets reflecting the right to receive the lease payments and the residual right in the leased asset, and the lessee would recognise an asset reflecting the right to use the asset for the lease period and a liability reflecting the obligation to pay the lease payments.

In response to a question it was noted that the obligation to return the asset would not be reflected.

It was further stated that if a lease has a minimum lease period created either by an option to extend the lease term or a cancellation clause, the rights and obligations would be reflected for the minimum period. In addition rights created by the option would be initially reflected based on the premium inherently included in the lease payments.

If payments are linked to price changes such as a consumer price index, the rights and obligations reflected would be based on the estimated cash flows taking account of their timing and uncertainty. In response to a question about whether this could be measured reliably, staff replied that this still needed to be considered but could be seen to be representationally faithful in that changes would be recorded when they occur.

If lease payments are conditional on the lessee's usage, the lessor would reflect the additional obligation to stand ready to allow the lessee to purchase the additional usage and the lessee would reflect the option to purchase more usage. It was noted that the potential benefit to the lessor may be akin to an intangible asset reflecting the expectation of more profitable business.

If the lease payments are conditional on the lessee's profits or other performance such as turnover, two alternative approaches were proposed. The first would include the estimated amount of the variable lease payments in the rights and obligations reflected. The second would consider the variable payments as a stake in the business which would be akin to an equity interest in the business and consequently would not be included in the rights and obligations reflected.

There was some discomfort expressed as to the second view, and it was noted that the IASB tentatively supports the first view.

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