IASB publishes preliminary views on leases

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19 Mar 2009

The International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) have published, for comment, a discussion paper (DP) 'Leases: Preliminary Views'. Comments are requested by 17 July 2009.

The DP is available on the IASB Website (PDF 594k). In the DP the IASB and the FASB propose a possible new model for lease accounting. The model is based on the principle that all leases give rise to liabilities for future rental payments and assets (the right to use the leased asset) that should be recognised in an entity's statement of financial position. Below are a few of the boards' preliminary views in the DP. Click for IASB press release (PDF 61k).

Lessee Accounting

Recognition principle. For all leases, the lessee will recognise:

  • an asset representing its right to use the leased item for the lease term (the 'right-of-use' asset)
  • a liability for its obligation to pay rentals.
Components of a lease contract. A lessee would not recognise the components of a lease contract separately (such as options to renew, purchase options, contingent rental arrangements or residual value guarantees). Instead, the lessee would recognise:
  • a single right-of-use asset that includes rights acquired under options; and
  • a single obligation to pay rentals that includes obligations arising under contingent rental arrangements and residual value guarantees.
Measurement of the liability. The lessee's obligation to pay rentals should be measured initially at the present value of the lease payments (including a probability-weighted estimate of contingent rentals) discounted using the lessee's incremental borrowing rate. Subsequent measurement would be on an amortised cost basis. Measurement of the asset. The lessee's right-of-use asset should be measured initially at cost. Cost equals the present value of the lease payments over most likely lease term (which might include renewal periods) discounted using the lessee's incremental borrowing rate. The lessee should amortise the right-of-use asset over the shorter of the most likely lease term and the economic life of the leased item.
Lessor Accounting
The discussion paper deals mainly with lessee accounting. However, it also describes some of the issues that will need to be addressed in a future proposed standard on lessor accounting.

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