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Leases

Date recorded:

Agenda paper 3 B — Additional disclosures

The staff analyst summarised the agenda paper. She indicated that the purpose of the paper was to discuss disclosure requirements in the annual reporting period in which a lessee first applied the requirements of the new leases standard. She said that the topic was discussed by the IASB in February 2015. The agenda paper did not revisit the analysis presented by the staff at that meeting. Instead, as requested by some board members, it presented example disclosures under two different approaches to explain the effect of adopting the new standard.

The staff proposed two alternatives for disclosures that should replace the disclosure requirements of IAS 17 paragraph 28(f) in a lessee’s financial statements:

Approach 1 (as presented in paragraph 5 of the agenda paper) is detailed below:

  1. the operating lease commitments that would have been reported if IAS 17 had been applied in that reporting period;
  2. the weighted average incremental borrowing rate at the date of initial application;
  3. explanation of any differences between:
    1. the result of discounting the operating lease commitments that would have been reported under IAS 17 at the end of the annual reporting period that includes the date of initial application using the incremental borrowing rate at the date of initial application; and
    2. lease liabilities recognised on the balance sheet at the end of that reporting period;
  4. the rental expense that would have been recognised if IAS 17 had been applied in that reporting period.

Approach 2 (as presented in paragraph 7 of the agenda paper) is detailed below:

  1. the weighted average incremental borrowing rate at the date of initial application;
  2. explanation of any differences between:
    1. the result of discounting the operating lease commitments reported under IAS 17 at the end of the annual reporting period preceeding the date of initial application; and
    2. lease liabilities recognised on the balance sheet immediately after posting the cumulative catch up adjustment on the date of initial application.

The staff thought that the most significant cost (as shown in the table in paragraph 21) would be the systems cost associated with establishing an additional balance sheet close position after posting the cumulative catch up transition adjustment on the date of initial application under Approach 2. The staff thought that in many cases it would be less costly for a lessee to continue running their existing operating lease system for one additional year as required under Approach 1. That was because IAS 17 operating lease commitments were not recognised on the balance sheet and consequently were recorded outside of a lessee’s double entry system.

She then said that the staff recommended approach 1 based on cost considerations. She also said that paragraph 21 of the agenda paper included a table comparing both approaches based on cost considerations. She then opened the discussion to the Board.

Several Board members disagreed with the staff conclusion that approach 2 would be more costly for preparers. They said that the information should be available by any entity regardless of the approach taken. Another concern was related to the fact that approach 2 was perceived as more connected, easier to understand, and would better explain the impact on transition. The staff analyst said that they still believed that alternative 2 was more costly because preparers would have to capture information that was outside of the financial statements. The Board members expressed disagreement because the cumulative catch up would have to be recorded no matter what approach was taken.

One Board member suggested adding in approach 2 the information related to rental expense that was being required only under approach 1. He said that whatever approach was taken it should be principles-based because either approach would not help to explain on its own the cumulative catch up.  He then asked about the impact of transition on the interim financial statements. He understood that the effects should be disclosed in the first interim financial statements rather than at year end and that was reflected in approach 2. The staff analysis responded that they were not recommending mandating any particular requirement at interim. The Board member said that given the requirement of IAS 34, the information should be provided anyway. The staff analyst confirmed that IAS 34 required the explanation of any material effect based on new standards and said that approach 2 would help provide the information at interim and final.  The project manager then said that paragraph 16a) of IAS 34 said that “if those policies or methods have been changed, a description of the nature and effect of the change”, so she said that if there was a significant difference they would expect disclosures of this information. Another Board member said that she was concerned that when they were not making specific amendments to IAS 34, users would understand that there were no specific requirements for interim financial statements. She suggested including an observation in the basis of conclusions about how the Board expected users to follow IAS 34.

One Board member asked why they were not following the requirements of IAS 8 for transition. The staff analyst clarified that in the previous meeting it was decided to provide an alternative between a full retrospective and a modified retrospective approach. The discussion held today was about aspects of the modified retrospective approach, so if an entity chose a full retrospective approach they would be following the requirements of IAS 8.

Another Board member asked whether under approach 2 an entity would have to revise prior year information. The staff analysis indicated that it was not correct; instead an entity would have to calculate the cumulative catch up effect.

The Chairman called to vote and 11 Board members voted for approach 2.

Agenda paper 3A Due process, re-exposure and permission to draft

The staff introduced the agenda paper. She said that the agenda paper presented a summary of due process steps taken by the IASB in developing the new lease standard. It also analysed whether the IASB had complied with the due process requirements and asked the Board for permission to proceed to ballot the draft on the new leases standard. The agenda paper also provided a summary of the decisions made in redeliberations by the IASB and the FASB in Appendix B. Finally, the agenda paper also included a summary of the project history.

No significant comments were made during the discussion.

The chairman then called to vote and (i) all Board members approved the staff recommendations that due process requirements had been met; (ii) all Board members approved the staff recommendation that re-exposure was not necessary; (iii) all Board members agreed to start the balloting process and (iv) one Board member indicated that he would dissent because of his disagreement with having different accounting model for lessees and lessors and disagreement with the small ticket exception.

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