Leases — FASB and IASB Reach More Tentative Decisions Related to ED

Published on: 23 Sep 2011

At their joint meetings this week, the FASB and IASB (the “boards”) continued redeliberating their exposure draft (ED) on leases. The boards reached tentative decisions on several topics, including (1) adding inventory to the scope of the leasing standard, (2) the applicability of financial asset guidance to the right to receive lease payments, (3) subsequent measurement issues related to lessors, (4) lessor accounting for residual value guarantees, and (5) lessor presentation in the statement of financial position and in the statement of cash flows. The boards also discussed transition requirements for a lessee upon an entity’s adoption of the proposed lease standard but did not reach a decision.

Details of the tentative decisions are as follows:

  • Adding inventory to the scope of the leasing standard:
    • The lease standard would provide no scope exception for inventory.

Editor’s Note: This decision would change accounting under U.S. GAAP. ASC 840-10-15-151 excludes inventory from the scope of lease accounting because the “assets are not depreciable.” However, the meeting materials indicated that the boards believe that the decision would not significantly change current practice and that assets in very few transactions would meet both the definition of inventory and the definition of a lease. We believe that this decision will result in increased scrutiny of the definition of a lease during reexposure of the ED.

  • Applicability of financial asset guidance to the right to receive lease payments:
    • The lease receivable would be excluded from the scope of existing financial asset guidance on initial and subsequent measurement. However, financial asset guidance would apply to lease receivables in the context of impairment and derecognition.
    • A fair value option would be prohibited for lease receivables. However, the boards instructed the staffs to analyze further whether there should be a requirement to measure the right to receive lease payments at fair value if they were held for sale.
  • Subsequent measurement issues related to lessors:
    • The lease receivable would be subsequently measured under the effective interest method and assessed for impairment in accordance with IFRS 9, Financial Instruments, or IAS 39, Financial Instruments: Recognition and Measurement, under IFRSs and ASC 310 under U.S. GAAP.
    • The residual asset would be assessed for impairment in accordance with IAS 36, Impairment of Assets, under IFRSs and ASC 360 under U.S. GAAP.
    • The lessor would recognize in profit or loss any changes related to the reassessment of variable lease payments that depend on an index or rate.
  • Lessor accounting for residual value guarantee:
    • The lessor would not recognize residual value guarantees (RVGs) before they are due from the guarantor. However, the lessor would take into account the existence of any RVGs when considering whether the residual asset is impaired.
  • Lessor presentation in the statement of financial position and in the statement of cash flows:
    • The lessor would present the receivable and residual asset either separately on the face of the statement of financial position or disclosed in the notes.
    • The lessor would present all cash receipts from lease payments as operating activity.

The boards also discussed potential transition requirements for lessees. The staff presented three alternatives: (1) full retrospective, (2) modified retrospective, and (3) optional full retrospective (otherwise modified retrospective). The modified retrospective approach would approximate the full retrospective approach but would not go back to lease inception. The boards discussed the proposed alternatives; however, they postponed a vote to a later meeting when they can also consider lessor transition requirements.

Editor’s Note: The modified retrospective approach differs from the simplified retrospective approach proposed in the ED. Some constituents expressed concerns about the simplified approach and the front-loading effect being exacerbated because the approach treated all leases as being entered into on the adoption date. The modified approach would address this concern by approximating full retrospective application. A liability would still be measured as the present value of the remaining lease payments. However, the right-of-use asset would be measured as a proportionate amount of the liability, with the difference recorded as a cumulative adjustment. The staff felt this approach would not be as costly to implement as a full retrospective approach.


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

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