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Leases (IASB and FASB)

Date recorded:

The Boards discussed possible clarifications to the guidance within the draft revised Leases Exposure Draft regarding the transition of leases that are currently classified as finance leases under IAS 17 Leases (IFRSs only) and as capital/direct-finance/sales-type (referred to as ‘capital’ leases herein) and leveraged leases under Topic 840, Leases (US GAAP only).

The Boards previously tentatively decided that for capital/finance leases existing at the beginning of the earliest comparative period presented, a lessee would not be required to make any adjustments to the carrying amount of lease assets and lease liabilities and should reclassify those lease assets and lease liabilities as right-of-use assets and liabilities to make lease payments. Similarly, for finance/sales-type and direct finance leases existing at the beginning of the earliest comparative period presented, a lessor would not be required to make adjustments to the carrying amount of the assets associated with those leases.

At this meeting, the staff noted that several external review comments to the draft revised Leases Exposure Draft requested that additional guidance be provided about the tentative decision regarding the transition of leases currently classified as finance/capital, sales-type or direct finance leases. As such, the staff presented three approaches to provide additional clarity about how to transition these type leases:

  • Grandfather current capital/finance leases [Approach A]: Lessees and lessors would continue to apply existing standards to leases classified as capital/finance leases. A key advantage of this approach is that it provides transitional relief to lessees and lessors in an area where, in the staff’s estimation, similarity in recognition and measurement requirements exist between existing guidance and the proposed guidance. However, this approach would result in a lack of comparability across entities (and a prolonged transition period).
  • Reclassify current carrying amounts and then apply the new leases guidance to those amounts [Approach B]: For leases classified as capital/finance leases under existing standards, lessees and lessors would carry forward the balances at the date of transition. Subsequent to transition, the new proposals would be applied. The staff noted that key advantages of this approach include the lack of a need to carry forward existing lease guidance and the comparability offered to users. However, the transitional relief provided to preparers is limited.
  • Modified retrospective approach [Approach C]: A lessee and lessor would be required to apply the same transition guidance to current capital/finance leases as is applied to other leases. On the date of initial application, lessees and lessors would derecognise any lease assets and lease liabilities measured under existing lease requirements and recognise lease assets and lease liabilities on a modified retrospective basis. The staff noted a key advantage of this approach is that it provides comparability in the accounting for all leases. However, this approach is more complex to apply and provides little relief to preparers.

While the staff provided no specific recommendation regarding its preferred approach in the staff paper, when asked, the FASB staff noted a preference for Approach C while the IASB staff noted a preference for Approach A considering the advantages and disadvantages noted above. However, the staff were quick to point out that preferences are influenced by credence placed on competing priorities – providing transitional relief (Approach A) versus comparability (Approach C).

Considering the options presented in the staff paper, two IASB members believed the staff paper failed to capture the approach previously agreed by the Boards. Specifically, they believed the Boards previous tentative decision was that lessees and lessors would continue to recognise existing carrying amounts at the beginning of the earliest comparative period presented, even when the lease contract includes terms relating to option periods and variable lease payments. Subsequent to transition, the transition guidance would specify which aspects of the new proposals should apply (e.g., an entity would continue to account for the lease liability (lessee) or the lease receivable (lessor) arising from a capital/finance lease using the amortised cost basis already applied, subject to impairment testing). Put another way, recognition and measurement remain unchanged from existing guidance, but subsequent amortisation/accretion charges would be subject to specific paragraphs of the new proposals.

One FASB member questioned how the approach outlined by the two IASB members (referred to as Approach D herein) differed from Approach B above. The staff noted that Approach B would require application of the new proposals in their entirety subsequent to transition. In contrast, Approach D would specifically dictate which aspects of the new proposals should be applied subsequent to transition. An example of an aspect of the new proposals which would not be applicable to existing capital/finance leases on transition is the reassessment requirements associated with the lease term.

Many Board members supported Approach D. However, they requested that the staff distribute a summary of which specific aspects of the new proposals would be referenced (and which excluded) in subsequent accounting under Approach D. One Board members also requested that the staff prepare a comparison of likely measurement differences arising between current capital/finance leases and leases under the proposed model so that Board members could assess the significance of allowing the reclassification of current carrying amounts on the date of transition. The staff agreed to distribute that information offline.

With little additional debate, both Boards tentatively supported Approach D.

The FASB was then asked to consider possible clarifications to the transition guidance related to leveraged leases. The FASB previously tentatively decided that a lessor would account for leveraged leases under the proposed new leases guidance (i.e., there would not be any specific transitional relief for leveraged leases). One Board member questioned whether the tentative support of Approach D above would influence the previous tentative decision on leveraged leases. However, other FASB members believed measurement under current leveraged lease accounting was too dissimilar to the new proposals to allow any type of transition relief. Without additional debate, the FASB tentatively decided there would be no transitional relief for leveraged leases.

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