Date recorded:

Impairment of right-of-use asset

The staff opened the discussion by reminding the board that they have previously tentatively decided to requite initial and subsequent measurement of a right-of-use asset on an amortised cost basis. Consistent with other assets measured on an amortised cost basis it needs to be determined how a right-of-use asset will be reviewed for impairment.

The staff noted that they believe there are four options for impairment accounting for right-of-use assets:

  1. require all entities to use IFRS approach
  2. require all entities to use US GAAP approach
  3. develop specific approach for right-of-use assets
  4. require entities to refer to existing applicable standards (IAS 36 for IFRS preparers, SFAS 144 for US GAAP preparers)

The staff recommended the last alternative. The Board agreed with the staff recommendation.


The staff introduced the topic by noting that the discussion was about whether an option for revaluations should be included for right-of-use assets, not a requirement to revalue. The staff recommended that revaluation of right-of-use assets should be permitted. The staff further added that their recommendation did not change regardless of whether the right-of-use asset was considered to be intangible or tangible in nature. The staff believes that permitting revaluation may provide users of financial statements with more relevant information about the revalued assets than amortised cost based measurement. They also believe that revaluation will ensure consistency with other non-financial assets in IFRSs. The FASB staff did not agree with the IASB staff recommendation; the FASB staff recommended that revaluation of right-of-use assets should not be permitted. At their Board meeting the FASB agreed with the FASB staff recommendation.

One Board member asked the staff whether they thought the revaluation criteria would be IAS 16 or IAS 38? The Board member thought that the Board needed to decide this first as revaluation under IAS 38 requirements would be impossible as there is no active market. The Board member would favour no revaluation.

Another Board member supported the IASB staff recommendation. They thought that the appropriate standard to look to would be IAS 16, not IAS 38. The Board member did not see why financing a non-current asset by leasing rather than by an outright purchase should change whether a revaluation should be allowed.

Some other Board members thought that the right-of-use was an intangible.

Another Board member said that they agreed with the IASB staff recommendation. The Board should not revisit the current requirements. Whether IAS 16 or IAS 38 is applied depends on the nature of the asset you are leasing. A number of other Board members agreed with this notion.

In response to a Board member's question, the staff said that the FASB made their decision as it was consistent with current US literature. The FASB staff member added that the FASB think that rights-of-use are intangible. This is a difference.

The Board voted, and all favoured the IASB recommendation.

The staff summarised the discussion by saying that we should look to the nature of the underlying asset and apply that revaluation model. In that case the remainder of the questions in the paper were not required.

One Board member asked whether the staff thought that the revaluation should be applied to classes or assets or individual assets, as in IAS 40. The staff responded by noting that they need to consider the interaction between IAS 40 and the leasing proposals and will bring this back for Board consideration at a future meeting.

Initial direct costs

The staff introduced the discussion by stating that there are three possible ways of addressing how initial direct costs should be accounted for:

  • (a) add initial direct costs to the carrying amount of the right-of-use asset
  • (b) allocate initial direct costs between debt issuance costs and asset acquisition costs
  • (c) recognise such costs as an expense as incurred.

The staff recommended (a), and the FASB at their meeting agreed with (c).

One Board member agreed with the FASB. Another noted that if the asset is revalued the initial direct costs would be expensed anyway. Another Board member said that they would like to get to the FASB answer. Another added that if the initial direct costs are added to the costs to the asset, then the asset would not equal the liability on initial recognition. It would also be inconsistent with the definition of cost in the discussion paper. A number of other Board members supported the IASB staff view.

The Board voted. The vote was split: 7 Board members favoured (a) while 7 favoured (c) - expense. The Chairman used his 'casting vote' (paragraph 35 of the 2009 IASCF Constitution) to make the vote 7 for (a) and 8 for (c).


The staff initially considered four ways of addressing how the new lease standard should be applied:

  • Option A - retrospective application
  • Option B - prospective application to new lease contracts entered into after the effective date
  • Option C - measure all leases at fair value on the transition date
  • Option D - measure all leases at the present value of the lease payments, discounted using the lessee's incremental borrowing rate on the transition date.

The staff recommended Option D. At their meeting, the FASB agreed with the staff recommendation. The Board also generally supported the staff view, subject to some modification.

Sale and leaseback

The final issue to be addressed was to obtain preliminary views from the Board on how a seller/lessee should account for a sale and leaseback transaction under a right of use accounting model. Lessors are also discussed in the staff paper; however, the Board would not be asked to reach a preliminary view on lessor accounting at this stage. The staff noted that they were not attempting to develop a general theory of derecognition for non-financial assets. The staff also noted that they have assumed that the sale proceeds received by the seller/lessee equal the fair value of the property sold and that the leaseback is at a market rate.

The staff said that the FASB preferred an approach where the entire asset was derecognised. They preferred to look at whether a sale had occurred, regardless of the existence of a leaseback. They would look at the existing control based assessment and consider the use of some specific criteria in making this judgement.

The staff then turned to the first question; whether the Board agreed with the staff recommendation that a seller/lessee should consider whether the entire asset qualifies for derecognition. Following some discussion, the Board agreed with the staff recommendation.

The second question posed by the staff was whether the Board would support (a) always derecognising the leased asset or (b) developing criteria to differentiate between transactions that qualify for derecognition and those that do not.

A number of Board members thought that they should use the revenue recognition (control) model. Following discussion the staff summarised by noting that the Board would look to the control model as to whether there is a sale or derecognition and look to revenue recognition for indicators as to whether this has occurred. The Board agreed.

The staff then asked the Board if they would like additional criteria beyond the revenue recognition criteria? The Board indicated that they did not; the revenue recognition criteria should be sufficient.

As a final question, the staff asked the Board if a sale is recognised, would they want to defer any gain associated with this. The Board indicated that they would not want to defer any gain.

Question 4 of the staff paper was not discussed.

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