Consequential amendments to IAS 40

The Technical Manager introduced the agenda paper.  She said that the agenda paper discussed consequential amendments to IAS 40 as part of the leases project. She said that the 2013 ED proposed amendments to IAS 40 stating that a ROU asset arising from a property lease would be within the scope of IAS 40 if the property would otherwise met the definition of investment property. She indicated that the change would represent a change to existing requirements because, according to the proposed amendments, a lessee would be required (not permitted) to apply IAS 40 to all investment property held under a lease, including leases currently classified as operating leases. Accordingly, a lessee would be required to, at a minimum, disclose fair value information about all investment property held under a lease, as compared to existing requirements that allowed a lessee to simply account for investment property held under an operating lease as an operating lease. She said that the staff did not recommend making any changes to the IASB’s tentative decision that leased investment property would be accounted for in the same way as owned investment property. Accordingly, the staff recommended that a lessee should account for all ROU assets of property in accordance with IAS 40 if the property would otherwise meet the definition of investment property in IAS 40. She indicated that most of the feedback received was supportive of the proposed amendment; however, there were some concerns related to the cost associated with the additional requirements. She also said that the agenda paper included the staff analysis for their assessment.

The majority of the Board expressed agreement with the staff recommendation.

One Board member asked based on the information provided in paragraph 8 of the agenda paper, if it would be reasonable to conclude that if a sublease was not material, then there would not be any cost to comply with the amendment. He asked whether the concerns raised for accidental lessors could not be answered in the context of materiality. The Technical manager confirmed that assessment.

Another member asked how to assess materiality; he also asked whether the one year rule (short-term lease exception) would be applicable, he believed that there was a common strategy to enter into short-term leases for example when an entity needed time to vacate a property. The Technical Manager confirmed that the exception would be applicable.  Another member pointed out that the one year exception applied for a lessee not for a lessor. The Project manager responded that for example if an entity owned a property and then decided that it would sell it but still the entity needed time to vacate the property, it would enter into a short-term lease until being able to vacate the property; she said that in that case the entity was a lessee. 

One member said that he disagreed with the staff recommendation. He was concerned that every single operating lease would have to comply with IAS 40. He said that there were small operating leases for which fair value information would need to be disclosed. The Technical Manager responded that in those cases an entity would apply materiality. The Project manager added that the requirements would only be applicable if the asset met the definition of investment property (to earn rentals, capital appreciation or both). The Board member was concerned that considering a right of use asset to be identical to owned assets for capital appreciation would not be appropriate. He also said that he did not find it essential to provide fair value information for those cases. Further, he also said that subleasing did not mean selling; also there was no market price for subleasing assets. The Vice-Chairman indicated that sub-leasing could be similar to selling. Also, the Project manager pointed out that for example in the UK and other countries there were long-term leaseholds for 80 or 90 years, which were effectively a sell. The Board member said that it would depend on each jurisdiction and on the economic environment in which an entity operated. He said that there could be jurisdictions where selling a right of use would not be practical.

Some Board members agreed with those concerns. One member said that it would be difficult to obtain the fair value information in certain markets, he suggested adding either in the standard or in the Basis of Conclusions the staff analysis from paragraph 13b of the agenda paper about accidental lessors which stated that a ROU asset of an accidental lessor in general would not meet the definition of investment property. The Chairman agreed with this recommendation.

Similarly, another member added one concern related to whether own assets were similar to right of use assets. He was concerned as to why an entity should be forced to provide fair value information for part of an asset; he said that he believed that there could be fair value information for an asset but not for part of an asset. He was also concerned that for example if an entity had owned investment property for which there was market information to provide fair value disclosures but it also had leased investment property for which there was no market information then both assets would be required to be similarly treated under IAS 40. The Project manager indicated that the proposal was not to differentiate owned and leased property, she also said that they did not receive negative feedback from users of investment property. The Board member expressed further concerns about unintended consequences, for example because there was no fair value for leased investment property, then an entity could also decide not to elect to account at fair value their owned investment property.

On the other hand, one member indicated that she agreed with the staff recommendation because it was a logical consequence for the changes introduced in lease accounting, she also said that IAS 40 already required finance leases to be treated as owned property. She also indicated that it was important to emphasise the materiality aspect and the analysis included in paragraph 13b, because of the fact that there was a sublease; it would not mean that there was investment property.

Another member pointed out that the analysis included in paragraph 14 of the agenda paper stated that the fair value information could be calculated easily; he was concerned that some members were saying that the estimate would be difficult. The Technical Manager indicated that their analysis in paragraph 14 was referring to plain vanilla leases in which there were no options, variable lease payments or other complexities; she acknowledged that if there were options, there would be more difficulties, particularly depending on the market where the user operated.

The Chairman called to vote and twelve Board members agreed with the staff recommendation.