Leases — FASB and IASB’s Deliberations Continue

Published on: 19 Dec 2011

The FASB and IASB (the “boards”) are getting closer to finalizing their proposed lease guidance. Now that the basic models for lessees and lessors have been established, the boards have been focusing on narrower topics. At their three joint meetings over the last six weeks, they reached tentative decisions on several topics related to transition, cancellable leases, rental income recognition by lessors of investment properties, leases acquired in a business combination, and lessor disclosures.

Transition Considerations

The boards discussed several transition issues and reached a tentative decision not to provide transition guidance on short-term leases, investment properties measured at fair value, subleases, useful lives of leasehold improvements, and build-to-suit leases.

The boards also tentatively decided on transition guidance for sale and leaseback transactions that were entered into before the final standard’s effective date. Treatment would depend on whether the related lease was a capital or operating lease.

For a sale and leaseback transaction that resulted in a capital lease, the seller/lessee would:

  • Not reevaluate the sale recognition conclusion previously reached.
  • Not remeasure lease assets and lease liabilities previously recognized on the balance sheet.
  • Continue to amortize any deferred gain or loss on the sale over the lease term in the income statement.

For a sale and leaseback transaction that resulted in operating lease classification or if the sale recognition criteria previously were not met, a seller/lessee would:

  • Reevaluate the sale conclusion previously reached on the basis of the criteria in the proposed revenue standard. If the sale criteria are met, a seller/lessee would measure lease assets and lease liabilities in accordance with the proposed lessee model and recognize any deferred gain or loss in opening retained earnings upon transition to the new lease guidance.
  • If, as a result of the reevaluation, the sale criteria are not met, the entire transaction would be accounted for as a financing.

In addition, the FASB tentatively decided that the transition exception in ASC 840-10-251 (formerly EITF Issue 01-82), which allowed for certain transactions to be grandfathered and not evaluated under the Issue 01-8 framework unless they were subsequently modified, would not be retained in the final standard.

Editor’s Note: During the comment letter process on the August 2010 leases exposure draft (ED), respondents expressed concern about the time and effort they would need to assess such contracts during the transition period and asked the boards to consider providing a similar exception in the final standard. The FASB decided not to retain this exception; therefore, an entity will need to evaluate arrangements that previously may not have been analyzed under the guidance on the definition of a lease. However, because the boards have made significant changes to this definition, under the revised guidance there may be substantially fewer arrangements (e.g., take-or-pay or supply contracts) that are treated as containing a lease than there were under Issue 01-8.

Cancellable Leases

The boards tentatively decided that a cancellable lease, which is defined as a lease in which both the lessee and lessor each have the right to cancel the lease at any time, would meet the definition of a short-term lease when the noncancelable period, plus any termination or notice period, is 12 months or less.

Accounting and Disclosure of Investment Property Leases Exempt From the Proposed Lessor Model

At its October 2011 meeting, the boards tentatively decided that lessors of investment properties would be exempt from applying the receivable and residual method in the proposed lessor model.

The boards tentatively decided that lessors of investment properties should recognize rental income on a straight-line basis or another systematic basis if that basis is more representative. Lessors that are considered investment property entities or investment companies, as defined in the FASB’s recently issued EDs on those topics, would recognize rental income in accordance with the respective proposed guidance (which would require revenue to be recognized on a contractual basis). The staff received feedback indicating that recognizing rental income on a contractual basis (for investment property entities) was more aligned with the fair value measurement basis proposed in the investment property entities ED.

The definition of investment property is expected to be addressed at a future meeting.

Editor’s Note: The boards acknowledged that in January they intend to revisit their previous decisions regarding the income statement recognition pattern for lessees. This was raised after the board’s recent decision to remove lessor’s leases of investment properties from the scope of the proposed receivable and residual method. Some board members stated that if, from the perspective of a lessor, there are different types of leases, then the boards should again discuss whether there are different types of leases for a lessee.

Business Combinations

The boards reached the following tentative decisions related to the acquisition of lease assets and liabilities in a business combination:

  • An acquired lease would be treated as a new lease as of the acquisition date and be measured in accordance with the proposed lease standard.
  • Lessors of investment properties would continue to apply current GAAP (IFRS 33 and ASC 805) with respect to measurement of acquired lease contracts.
  • Acquired short term leases (leases with maximum remaining terms of 12 months or less as of the acquisition date) would not result in separate assets or liabilities as of the acquisition date.
  • For existing favorable and unfavorable operating leases acquired through business combinations, upon transition, lessees would derecognize these amounts and book an offsetting adjustment to the right-of-use asset (under IFRSs) and or to retained earnings (under U.S. GAAP).

Lessor Disclosures

The boards tentatively decided on various items that lessors should disclose. The disclosures include the reconciliation of beginning and ending balances of the lease receivables and residual assets, a five-year maturity analysis of undiscounted cash flows related to lease receivables, various components of lease income, and lessors’ exposures to residual risks.

The final standard would include examples of such disclosures.

Editor’s Note: The boards intend to confirm that the disclosures are consistent with those required under other projects and, most importantly, are not redundant. Therefore, the boards plan to review the guidance being developed as part of other projects before finalizing their decisions about such disclosures.


[1] For titles of FASB Accounting Standards Codification references, see Deloitte’s "Titles of Topics and Subtopics in the FASB Accounting Standards Codification."

[2] EITF Issue No. 01-8, “Determining Whether an Arrangement Contains a Lease.”

[3] IFRS 3, Business Combinations.

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