Leases — FASB and IASB Address Classification

Published on: 31 Jan 2013

At their joint meeting yesterday, the FASB and IASB discussed three topics related to the classification of lease components in an arrangement. First, the boards tentatively decided that an entity should analyze the lease components in an agreement separately when the lessee can benefit from the use of the separately identifiable assets in the arrangement. For example, if a lease arrangement includes both a manufacturing plant and removable machinery, the contract would be evaluated as two separate lease components. In determining whether an arrangement should be separated into its components, the entity would consider whether the use of the asset depends on other assets that are readily available to the entity and whether the use of the asset is interrelated with other assets identifiable under the contract.

Second, the boards tentatively agreed that the classification of a lease component should be based on the primary asset of the lease component. According to the boards’ agenda paper for the meeting, the “primary asset would be the predominant asset for which the lessee has contracted for the right to use — the main purpose of leasing other assets that form part of the overall lease component might be to facilitate the lessee obtaining benefits from use of the primary asset.” For example, if a lease arrangement includes both a turbine and a building that is directly tied to the life of the turbine, the entire lease component would be considered “other than property” for classification purposes.

Finally, the boards decided not to require land and building elements of a property lease to be assessed separately for classification purposes. The economic life of the building would be considered the economic life of the property in the determination of lease classification.

The boards expect to issue a revised exposure draft on leases during the first quarter of 2013.

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