Lease disclosures by lessees

Date recorded:

The Boards held a joint session to discuss agenda papers 3A and 3B Lessee Disclosure requirements, FASB and IASB respectively. Although it was a joint session, the discussions were held separately since both FASB and IASB had previously tentatively decided to have different lessee accounting models. The IASB tentatively decided to: (i) retain the lessee disclosure objectives in the 2013 ED; (ii) require the disclosure of certain quantitative amounts; (iii) require the disclosure of a maturity analysis for lease liabilities in accordance with IFRS 7 and (iv) require qualitative disclosure requirements based on a list of particular objectives. 

The summary below includes the IASB discussion only.

Overall disclosure objectives

The discussion started with the overall disclosure objective topic. The Project manager indicated that this topic was presented in the education session held on 20 January 2015 and since there were no further comments from the staff she opened the discussion to the Board.

No significant comments were raised by the Board members and the Chairman called to vote. All members approved the overall disclosure objectives.

Quantitative disclosure table

The staff introduced the topic and reminded the Board that this section was presented in the education session held on 20 January 2015. However, the staff had decided to introduce some changes given the concerns discussed by the Board. She said that (i) the staff was recommending to eliminate the subtotals in the table in order to avoid confusion and because the subtotals did not represent meaningful items. She said that there were also concerns that those subtotals could be misinterpreted as they would not tie in with any P&L line item.  However, the subtotals would not be prohibited; (ii) the staff would clarify in the drafting that sublease income would not be included in the table for entities for which subleasing was its main source of revenue and (iii) the split of lease expense by class of asset would be amended so that it would only be required for amortisation expense. She reminded the Board that the amortisation expense was required by equity analysts who used this information to estimate whole asset amounts by multiplying the lease expense by an estimated number that represented the average life of that class of asset.

There was general support for the changes introduced by staff although many Board members expressed concern about mandating a particular format for presenting the information.

One Board member said that he agreed with the changes introduced by the staff; however, he disagreed with the concept of having an explicit table, he said that leases were not special. He said that leases were only a particular mechanism through which an entity acquired an asset.  If an entity’s lease activity was incidental he said that it would make sense to have the lease in a table, or if an entity considered that it was relevant to explain their business.  He believed that it would make more sense to disclose leased assets with other acquired assets. In relation to the table he also said that adding a table would force preparers to move in a particular direction. He also said that lease liabilities should be considered like any other liability. The staff responded that the table was considered by the staff based on the feedback obtained from users; preparers indicated that the preparation of an entire reconciliation was costly to produce and staff also she said that investor were only interested in specific items in the reconciliation instead of a full reconciliation. She acknowledged that this would appear inconsistent with the fact that other standards required reconciliations, for example for PPE.

One Board member said that he agreed with the table presented and the changes introduced by the staff.

The Vice-Chairman said that he believed that users were asking for a table because in the old lease model it was more difficult to obtain all the information; however, he said that with the new lessee model, ROU assets would be capitalised and investors would not need to make adjustments.

One Board member said that the tabular format would be useful but he did not think that all the information should be mandated to be in one place. Another Board member said that the table was comprehensive and has everything in one place. He also said that they should consider for short-term leases only those leases over one month; otherwise, an entity would need to consider even one day hotel room leases.  

Another Board member said that he agreed on having similar disclosures for leases as IAS 16 or IFRS 7; however, it would be necessary to take into account what was special about leases. He also said that he disagreed with mandating a table and he would prefer to see ROU assets additions to be disclosed with fixed asset additions. He indicated that he agreed with the content of the table but not with mandating the format of it.

One Board member said that he disagreed with mandating a specific table; he said that it would be contradictory with the objectives of the disclosure initiative objectives. He also said that in many cases, an entity would need to supplement the table with footnotes; it was not clear where the notes should be presented, i.e. in the same table or in other sections.

Another Board member said that leases were special and disagreed with other comments that the table was too prescriptive, he agreed with the content but he would not like to prescribe a particular format. He also said that the requirement to present the weighted average remaining lease term was not meaningful if the information was not presented split by class of asset. The staff responded that the weighted average remaining lease term was requested by investors because they used this information to assess the entity’s renewal risk; she indicated that there would also be a maturity analysis.  

One Board member said that he believed that leases were not normal; particularly, with a new standard it would be important to give leases more prominence, he also agreed that the table should not be mandated.

Another Board member said that the standards usually recommended a tabular format, for example IFRS 7 said that an entity should use a tabular format unless another format is appropriate.

One Board member repeated his concerns presented in the education session about the need to add a requirement to disclose the discount rate for material leases and judgements made to estimate the discount rate.

Another Board member said that small lease asset expense should only be disclosed if it was material, that concept should be clarified in the drafting. The staff indicated that the materiality concept was always applicable and that the disclosure of short term lease expense was expected to pick up absolutely everything.

One Board member said that it would be necessary to add generic discussion on disaggregation. The Project manager said that the recent amendments in IAS 1 would be helpful because they discussed this matter.

There were concerns expressed by Board members regarding the current proposed amendments to IAS 7 which would require a reconciliation of debt while the lease standard would not require lease liability reconciliation. The Project manager said that she would prefer not to add duplications (in IAS 7 and in the lease standard) and also if necessary, consequential amendments could be issued after the IAS 7 amendments were approved.

The Vice-Chairman asked whether the information on short-term leases would be useful. On the other hand, he agreed with the disclosure of small lease assets because he said that those would only be triggered when material and they would be able to analyse over a period of time whether the exemption was useful.

The Chairman called to vote and it was agreed to take a vote on each particular item of the table and then on whether or not the table should be mandated.

Lease expense split Approved
Amortization expense split by class of asset– agree Approved
Short term lease expense as modified (i.e. short term leases over one month) Approved
Small lease asset expense Approved
Variable lease expense Approved
Sublease income (for entities for which subleasing is not their main business model) Approved
Cash flow for leases (with the modification of not subtracting sublease income and if material disclose cash inflows for sublease income separately) Approved
Additions ROU assets Approved
Weighted average remaining lease term Rejected
Gains on sale and leaseback Approved
Disclosures detailed above to be presented together Approved
Tabular format encouraged but not required Approved

The Board then approved the staff recommendation to eliminate the requirements in the 2013 ED to disclose a reconciliation of lease liabilities and ROU assets.

Maturity analysis for lease liabilities

The staff introduced the topic of the maturity analysis for lease liabilities. She said that the 2013 ED included a more granular maturity analysis requirement than the requirements of IAS 17 and IFRS 7. She said that under the requirements of the 2013 ED all entities would have disclosed the same type of information; however, she said that investors had identified understanding liquidity and cash flow risks as key in the maturity analysis and the staff concluded that those objectives were better achieved under the requirements of IFRS 7. Accordingly, the staff was proposing to eliminate the 2013 ED requirement and instead requiring a maturity analysis in accordance with IFRS 7. 

The Board members expressed support for the staff recommendation

One Board member asked the staff that it would be necessary to add in the basis for conclusions of the lease standard the reasons for not including prescriptive guidance (as explained in paragraph 109 of the agenda paper).

One Board member asked whether IFRS 7 was being well applied in practice. He said that the examples in IFRS 7 were focused on liquidity risks which would imply a short-term outlook only.  However, he said that leases also involved financing risk, and information about capital structure. He did not object to applying the concept of IFRS 7, but he said that there should be more clear definitions for leases.  The Project manager responded that the example in IFRS 7 was more focused on short-term liabilities; she said that they could add in the standard another example in the context of lease liabilities. The Board members expressed agreement with this suggestion.

The Chairman called to vote and all members agreed with the staff recommendations.

Additional qualitative disclosure requirements

The staff introduced the topic. She said that the 2013 ED contained a set of prescriptive requirements which constituents have expressed concerns about, including difficulty in applying the proposal for cases of very large and diverse lease portfolios, and the risk of generic or boiler plate disclosures. She said that the staff recommended eliminating the detailed requirement and instead adding disclosure objectives which were included in appendix B of the agenda paper and they were also proposing including illustrative examples.

One Board member said that it would be necessary to add in the examples in appendix B something on the discount rate and judgements made to determine the discount rate. He said that for most leases there would not be significant judgements; however, for others there could be. He also asked about the meaning of “any other operational effect” required in the example in appendix B. He said that it was too vague and too far reaching.  He also said that the example in appendix B.3 should require more information about residual value guarantees which was a very risky area for leases and it needed to require more information about how the amount was determined. The staff said that it would be difficult to require disclose for each residual value guarantee.

One Board member said that for many decentralised entities it would be very difficult to collect this information. An entity would need to gather all the information from their subsidiaries and then determine what was material or relevant for disclosure. The staff responded that the reason for making this recommendation was that an entity would not disclose all of those items. She said that management had an understanding of what was important and in the context of running a business it was expected that management would know the most relevant items related to their leases.

One Board member said that in order to meet the objectives it would also be necessary to have quantitative parameters. The staff responded that in the 2013 ED it was described as qualitative; however, she said that the staff was suggesting objectives with no indication as to whether they were qualitative or quantitative, she said that the title was confusing in the agenda paper and it would be amended in the standard.

The Chairman called to vote with considerations for the staff for drafting based on the comments raised by the Board.

The Board approved the staff recommendations on the topic and did not approve the Board member suggestion to add a disclosure requirement regarding judgement related to the discount rate.

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