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FASB and IASB Tentatively Agree to a Hybrid Model for Lessor Accounting

Published on: 22 Jun 2010

At the FASB’s and IASB’s June 17 joint meeting, the boards moved a step closer to the goal of releasing an exposure draft on leasing. Having nearly concluded their discussions on lessee accounting, the boards turned their attention to the topic of lessors.

Over the last several months, the boards have debated two models for lessor accounting: performance obligation and partial derecognition. At the June 17 meeting, the boards decided that both models have benefits for certain leasing arrangements but that neither approach fits every arrangement. Consequently, the boards tentatively agreed that a hybrid model is best.

Such hybrid model would use a performance obligation approach (see below) for leases in which a lessor’s exposure to risks associated with the underlying asset is significant. The partial derecognition approach (see below) would then apply to all other leases. The boards acknowledged that this model is similar to existing guidance under which entities must distinguish between operating and financing leases. Accordingly, the staffs of the IASB and FASB are developing criteria to be used to determine whether a lessor’s risks associated with the underlying are significant. Such criteria are expected to be debated at the boards’ July meeting. The boards expect to release an exposure draft after these remaining lessor issues have been deliberated.

Under the performance obligation approach, a lessor would recognize (1) an asset representing its right to receive rental payments and (2) a performance obligation liability representing its obligation to let the lessee use the underlying asset. Under this approach, the underlying asset would remain on the lessor’s books. Under the partial derecognition approach, the lessor would recognize a receivable and derecognize a portion of the underlying asset (a portion of the asset would remain on the lessor’s books, representing the lessor’s right to the asset at the end of the lease term). Under this approach, a lessor would recognize (1) sales for the present value of the lease payments and (2) cost of sales for the portion of the asset derecognized.

For more information, see the Project Update page on the FASB’s Web site.

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