Application guidance on when to use the performance obligation or derecognition approaches (continued)

The Boards continued their discussion on when to use which approach to lessor accounting. The Boards discussed multiple variants of the model, either separately, or at a joint meeting, before agreeing on a converged solution to lessor accounting.

The Boards agreed that a lessor should account for a lease contract based on whether the lessor retains exposure to significant risks or benefits associated with the underlying asset

The Boards also agreed that counterparty credit risk of the lessee should not be considered for this assessment. The Boards confirmed that this assessment should be made at the inception of the lease and not reassessed subsequently.

The Boards agreed that if the lessor retained exposure to significant risks or benefits associated with the underlying asset, the performance obligation approach should be used, otherwise the lessor should apply the derecognition approach.

The Boards agreed to provide additional factors that would indicate that significant risks or benefits associated with the underlying asset during the lease term have been retained. These would include the risks resulting from:

• Significant contingent rentals that are based on the use or performance of the underlying asset;
• Options to extend or terminate the current lease term; or
• Contractual material non-distinct services provided under the lease contract.

The Boards also decided that a lessor should consider whether the term of the lease is short in relation to the useful life of the underlying asset when determining whether the lessor retains exposure to significant risks or benefits associated with the underlying leased asset subsequent to the term of the current lease contract. The Boards noted that in making this assessment the lessor should consider the present value of the residual cash flows at the end of the lease term as well as effect of residual value guarantees provided at inception by the lessee or third parties.

Finally, the Boards concluded that the residual asset should not be re-measured as the asset risk is considered through the lessor's consideration of exposure to risks or returns through sale of the underlying leased asset.

The Boards also noted that the Basis for Conclusion should refer to the business model as a possible indicator of whether the derecognition or performance obligation model for lessor accounting would be appropriate.

Sale and leaseback

The Boards considered implications of the deletion of the reference of 'all but a trivial amount of the risks or benefits associated with the underlying asset' as well as two of the other criteria in determining whether a contract is a purchase or sale of the underlying asset. (Note: that tentative decision was made earlier on Monday).

The Boards decided to reinstate the reference to 'all but a trivial amount of the risks or benefits associated with the underlying asset' but confirmed deletion of the two criteria.

Some Board members still expressed some concerns with the purchase or sale criteria as they believed that these might be potentially confusing with the criteria for using the derecognition approach to lessor accounting.

In relation with sale and leaseback, the Boards decided not to change any proposed guidance, and acknowledged the possible effect that more transactions being accounted for as financings.

Support for the package of decisions

The Boards formally approved the package of decisions in the leases project. Mr. Finnegan indicated that he might present an alternative view related to derecognition and performance obligation approach to lessor accounting.