Other Lease Obligations

At its meeting in March 2007, the Board tentatively concluded that a lessee's obligation to return the leased item at the end of the lease term does not meet the definition of a liability. However, a number of Board members noted that the terms of the lease contract might give rise to other obligations that meet the definition of a liability. For example, an obligation to return the leased item in a specified condition may meet the definition of a liability.

At the current meeting the Board analysed a number of lessee obligations to determine if they meet the definition of a liability and, if so, what should be the appropriate accounting treatment. In particular, the Board considered:

• Lessee obligations to incur costs to return the leased item.
• Lessee obligations to return the leased item in a specified condition.
• Lessee obligations to maintain the leased item.

The objective of the discussion was to provide feedback to the staff, rather than make formal Board decisions.

Lessee obligations to incur costs to return the leased item

The Board agreed that such obligations meet the definition of a liability. The Board noted that the treatment of the debit arising on recognition of the liability should be same as if the asset was owned.

Lessee obligations to return the leased item in a specified condition.

The Board were presented with three alternative views of when an obligation could arise in these circumstances:

• View A: At the end of the lease term.
• View B: When the leased item falls below the contractually specified condition.
• View C: When the leased item is delivered or made available to the lessee.

The majority of the Board members were inclined toward View B. One Board member noted that this may be at the beginning of the lease.

Lessee obligations to maintain the leased item

The Board were presented with two alternative views of when an obligation could arise in these circumstances:

• View A: When the leased item falls below the specified maintenance standard.
• View B: When the leased item is delivered or made available to the lessee.

The Board noted that these liabilities were similar to lessee obligations to incur costs to return the leased item and therefore the majority of the Board members were inclined toward View A.

Measurement of the liability - Initial measurement

The Board discussed initial measurement of liabilities, specifically whether they should be measured at fair value or at the expenditure required the settle the present obligation. The Board noted that other liabilities within the leases project have been recognised at fair value. Some Board members indicated that they did not believe there would be a difference between fair value and the treatment under IAS 37. No decisions were made.

Measurement of the liability - Subsequent measurement

The issue of subsequent measurement of such liabilities was not discussed.

Do lessee obligations give rise to assets for the lessor?

The Board briefly discussed whether terms in a lease contract that require a lessee to either return the leased item to the lessor in a specified condition or maintain the leased item would appear to create valuable rights for the lessor. The Board agreed that no additional asset would arise.

Variable Lease Payments

The Board briefly discussed agenda paper 12B.

In relation to lease payments with a variable factor based on price changes or an index, the Board agreed that the lessee has a liability that includes both fixed and variable components of the future rentals. No decisions were made in relation to subsequent measurement.

In relation to lease payments with a variable factor based on the lessee's financial or operating performance from the leased item the Board noted that this issue was similar to the 'sale of future revenues'. The Board noted that such sales were unlikely to be an obligation, however no decisions were made.