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Leases

Date recorded:

The purpose of this session was to resolve open issues before publication of a discussion paper (DP).

The issues addressed at this meeting were:

  • Consideration of Lease Term, Purchase Options, Contingent Rentals and Residual Value Guarantees
  • Subsequent Measurement of right-to-use asset and obligation to pay rentals
  • Presentation of Leases
  • Subleases

The staff said that while they hoped the Board would reach preliminary views on these issues before the DP is issued, to avoid significant delay of the DP an alternative approach could be to describe the unresolved issue, discuss alternative treatments, and ask respondents for their views in the DP.

Consideration of Lease Term, Purchase Options, Contingent Rentals and Residual Value Guarantees

Lease Term

The staff asked the Board whether assessment of the lease term is done for purposes of recognition or measurement. The example used was a lease contract over 10 years with a 5 year option to renew. The staff proposed two alternative approaches:

  • Approach 1: Lessee recognises obligation to pay rentals, the uncertainty in the lease term is addressed through measurement.
  • Approach 2: Lessee recognises obligation to pay rentals over a specified lease term. Uncertainty is addressed through recognition.

It was noted that the FASB voted for approach 2. The Board discussed various implications of both approached. Finally, the majority of the Board members voted in favour of approach 2.

Determining Lease Term under Approach 2

The staff highlighted that under approach 2 an entity would be required to establish a lease term for the purpose of recognition. Possible solutions to this issue presented were:

  • Approach 2A: a probability threshold
  • Approach 2B: a best estimate
  • Approach 2C: a best estimate - most likely lease term

Some Board members expressed concern over the term 'best estimate' as it implied a certain degree of subjectivity. Again, the Board discussed certain implications and agreed with the staff recommendation that the most likely lease term (approach 2C) should be used.

Purchase options

The Board agreed with the staff recommendation that the possible exercise of a purchase option was reflected in the obligation to be recognized by the lessee and that it was to be included if exercise of the option was the most likely outcome.

Measurement of contingent rentals

The staff presented three possible approaches to measure contingent rentals:

  • Best estimate
  • Best estimate - most likely amount of contingent rentals
  • Probability-weighted best estimate
The Board decided to propose a probability-weighted measure.

Residual value guarantee

The Board decided to require that the initial assets and liabilities recognised by the lessee should reflect the obligation to make payments under a residual value guarantee.

Subsequent Measurement of right-to-use asset and obligation to pay rentals

The staff presented the Board with their approach to subsequent measurement of the lessee's right-to-use asset and obligation to pay rentals. The proposed accounting would be as follows:

  • Amortise/depreciate right-of-use asset
  • Apportion the lease payments between a finance charge and a reduction of the outstanding obligation
  • Present interest expense and amortization/depreciation in the income statement.

The Board discussed the interaction with the conclusions reached in the financial statement presentation project.

One Board member noted that the proposed accounting would not meet the cohesiveness objective. The Board agreed, however, with the staff recommendation.

The staff continued to address the issue of reassessment of lease term. The staff proposed to continuously reassess the lease term. The Board agreed.

The staff then turned to the reassessment of the obligation to pay rental. The staff proposed to reassess the obligation to pay rentals at every reporting date. The Board agreed.

For the resulting change in the estimated lease payments the staff proposed a cumulative catch up approach by discounting the new cash flow estimates with the original effective interest rate. Some Board members expressed concern over the use of the original effective interest rate. The Board had a lengthy discussion on whether also rate changes should trigger reassessment, or whether remeasurement should only be triggered if cash flows changed. The FASB voted for a cumulative catch up approach. The Board voted in favour of a cumulative catch up approach. The staff continued to ask the Board where the changes in estimated rental payments should be recognised. The staff recommended treating all reasons for changes in rental payments similarly and reflecting the balancing journal entry in an adjustment to the right-of-use asset. The Board agreed.

Presentation of Leases

Presentation of the right-to-use asset

The staff presented the Board with possible alternatives of presenting the right-to-use asset in the statement of financial position:

  • Approach A: presentation in line with the underlying asset
  • Approach B: presentation as an intangible asset
  • Approach C: different presentation for different types of leases

Staff noted that additional disclosures should accompany any of the presentation approaches. The staff recommended approach A. The Board agreed with no support for a concept of an 'in substance purchase'.

Presentation of the obligation to pay rentals

The staff recommended that the obligation to pay rentals should be presented as financial liabilities not being required to be presented separately from other financial liabilities. One Board member was concerned that the staff recommendation would not be in line with the cohesiveness principle. Staff responded that it did not consider the outcomes of the current financial statement project. The Board agreed to the staff recommendation.

The staff informed the Board that the presentation in the statement of financial position will drive income statement presentation, but that this would not be addressed at this meeting.

Subleases

The staff informed the Board that in sublease scenarios, the different accounting treatment for lessee (accounted for under the new model) and lessor (accounted for under the IAS 17 model) accounting would create problems. This resulted from the Board's decision only to address lessee's accounting in the project. The staff recommended deferring this issue until after publication of the discussion paper. The Board agreed and asked the staff to use the comment period to address the issue of subleases. FASB staff informed the Board that the FASB indicated that if this issue would not be resolved, they would not move on with this project.

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