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Leases

Date recorded:

Effective date (see Agenda Paper 3B)

The IASB was asked to decide on the effective date for the forthcoming IFRS on leases.  The staff recommended an effective date of 1 January 2019; with early application permitted but only if the entity is also applying IFRS 15 Revenue from contracts with customers.  

Feedback from respondents of the 2013 ED and additional outreach was that a majority of respondents thought that 3 years was needed to implement the standard. The staff also considered that IFRS 9 and IFRS 15 have an effective date 1 January 2018 and there is some interaction between them and the new lease standard.

IASB discussion and decision

All Board members agreed with the staff recommendation. There were no significant concerns raised by the Board during the discussion.

Sweep issues (see Agenda Paper 3A)

A fatal-flaw draft of the new lease standard was distributed to selected parties in July 2015.  The review highlighted some matters that the staff considered should be brought back to the IASB to have clarified in a public meeting.  These sweep issues do not affect the approval of the IASB to formally proceed with the IFRS, but provide the Board with the opportunity to comment on more significant drafting changes. 

Lease modifications treated as a separate new lease

The draft would require that a lessee recognise a new lease at the commencement of the extended period whereas a modification would be recognised at the date that the modified terms are agreed. Inconsistences were identified in the treatment of lease modifications depending on whether the option to extend was already included in the contract or it was subsequently included in the reassessment process. The staff recommended that a lease modification should be treated as a new lease only if the modification increases the scope of the lease by adding the right to use one or more underlying assets, because the lessee does not have control of the underlying asset until the underlying asset is available for use.

Reassessment of the discount rate for floating interest rate leases

The draft does not require to the discount rate to be updated when lease payments are revised due to changes in an index or a rate; however, IFRS 9 (paragraph B5.4.5) requires that the effective interest rate should be remeasured when future cash flows are re-estimated. One of the concerns identified was that a finance lease and a loan both with floating rates would be accounting for differently. Accordingly, the staff recommended that a lessee should be required to update the discount rate when the lease payments changes due to changes in the interest rate.

Cost associated with returning an underlying asset at the end of a lease

The draft lease standard does not include any specific requirements associated with a lessee’s obligations to return the asset in a specified condition or to dismantle or remove the asset. In contrast, IAS 16, IAS 37 and IFRIC 1 deal with these issues.  The staff recommended that (i) the initial estimate of the costs to be incurred should be included in the initial measurement of the right of use assets and the liability should be accounted for under IAS 37 (i.e. it should not be considered a lease liability) and (ii) the liabilities within the scope of IFRIC 1 should be recognised by adjusting the right of use of the asset.

Short term leases and leases of low value assets in a business combination

IFRS 3 requires an acquirer to recognise an intangible asset or a liability if the terms of an operating lease are favourable or unfavourable respectively relative to market terms. However, the draft lease standard an acquirer would not be required to recognise a lease if the lease term is for 12 months or less. Accordingly, the staff recommended that the in IFRS 3 for short-term lease and leases of low value assets be removed. 

Disclosure requirements for leases within the scope of IFRS 5 (see Agenda Paper 3C)

IFRS 5 specifies that disclosure requirements in other IFRS do not apply to assets in scope of IFRS 5 unless those IFRSs contain specific requirements. The staff recommended that the new lease standard should not require specific disclosures in respect of leases that are in scope of IFRS 5 beyond what was already required by IFRS 5. The main reason was that additional disclosures would not provide valuable information since assets in scope of IFRS 5 were already measured at the lower of their carrying amount and fair value less cost to sell.  

IASB discussion and decision

All Board members approved the staff recommendations on the sweep issues summarised above.

During the discussion the staff clarified in relation to the first issue (changes in scope) that an increase in scope would be a continuation of the original lease while the addition of a new asset would be considered a new lease, only the additional underlying asset should be considered a new lease; while the remaining asset should be accounted for with no changes.  The staff also indicated that the final standard would include application examples.

There was also some discussion regarding the second issue (interest rate). There was one concern raised as to why the FASB did not have the same sweep issue. The staff clarified that under the FASB model, a lessee would not be required to update lease payments based on changes on an index or a rate and accordingly, they did not need to analyse the interest rate side. The staff also pointed out that with this change, both standards would be more aligned.

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