Lessee accounting - Transition

The Boards discussed transition requirements for capital/finance leases from lessee's perspective. The Boards noted that for simple finance leases there would be no significant difference between the old model and new model apart from classification. For more complex leases with extension options and contingent rentals, no solution would ensure the benefits of complete comparability as well as simplicity of implementation.

Board members held various views. One Board member was particularly concerned that the implications of the new model would lead to an overall increase in expenses in the first years following transition (as costs allocated to first years under the new model are higher than those allocated to the following years, and after transition all the leases will be in their first year thus increasing the overall expense).

Finally, after a brief discussion, the Boards agreed that for simple leases, assets and liabilities under finance leases remain the same on the transition date with no change to the accounting for those assets and liabilities subsequently. Nonetheless, for leases containing additional features such as contingent rentals, residual value guarantees, or extension options, the proposed general transition requirements would apply to both assets and liabilities (that is, modified retrospective application).

The Boards agreed that the right-of-use asset should be recognised and measured at the present value of the lease payments discounted using the lessee's incremental borrowing rate on the transition date, subject to impairment review and any further adjustments for rentals prepaid or accrued.

Without much discussion the IASB agreed that if an asset acquired under a finance lease is accounted for using the revaluation model, the revalued amount of property, plant, and equipment should be carried forward as carrying amount of a right-of-use asset.

Lessee accounting - Definition of 'interest rate implicit in the lease'

The Boards agreed with the principle that the discount rate that should be used to calculate the present value of the lease payments is the rate that the lessor is charging the lessee. Some Board members felt that such principle would not be operational, and additional guidance would be required.

One Board member suggested that the principle should the objective for determining the discount rate (that is, a finance lease includes a financing element that reflects the uncertainty of the cash payments). He noted that in many circumstances the rates might be marginally different for lessor and lessee, but those differences would not be significant as they relate only to allocation method. The Boards agreed.