Lease accounting — FASB and IASB make progress during redeliberations

Published on: 20 Mar 2014

At joint board meetings this week, the FASB and IASB continued redeliberating their revised exposure draft (ED)1 on lease accounting. The boards discussed the use of alternative approaches to address stakeholder concerns related to (1) the proposed lessee accounting model; (2) the proposed lessor accounting model; (3) small-ticket leases; (4) determining the lease term, including considerations related to lease extension and termination options, the proposed lease-term reassessment requirements, and the accounting for purchase options; and (5) short-term leases.

The following table summarizes the tentative decisions reached at the meetings:


Lessee accounting — classification

The boards did not reach a consensus on the subsequent accounting for right-of-use assets recorded by a lessee under the proposal.

  • Most FASB members supported a dual-model approach like the ED’s; however, lessees would classify a lease by using criteria similar to the lease classification criteria in IAS 17.2 FASB members also indicated that they expect most current capital leases to be treated as “Type A” leases and most operating leases to be treated as “Type B” leases.
  • In contrast, most IASB members generally supported a single-model approach under which lessees would account for all leases as Type A (or finance-type) leases.

Lessor accounting — classification

The boards tentatively agreed to make only minor modifications to the current lessor model. That is, lessors would consider criteria similar to the existing lease classification criteria under IAS 17 to determine the accounting from the lessor standpoint. However, the boards’ approaches differed as follows:

  • FASB approach — Type A leases that include a manufacturer’s profit would be precluded from immediate profit recognition unless control of the leased asset (as evaluated under the proposed revenue recognition standard) is transferred to the lessee.
  • IASB approach — Profit recognition should be accounted for in accordance with existing manufacturer or dealer-lessor guidance.
Small-Ticket Leases

Explicit materiality requirement exception

Members of both boards overwhelmingly agreed not to permit a scope exception for immaterial leases on the basis of an explicit materiality exception. Rather, they indicated that IAS 83 and ASC 1054 provide sufficient guidance on assessing leases from a materiality standpoint.

Portfolio approach

Members of both boards supported their staffs’ recommendation to allow leases to be accounted for on a portfolio basis. However, their views differed regarding whether guidance on applying a portfolio approach should be (1) included in the standard, (2) included in the standard’s Basis for Conclusions, or (3) communicated by some other means.

Exemption for small-ticket leases

The boards did not reach a consensus on providing a recognition and measurement exemption for leases of “small-ticket” items.

While many IASB members favored a scope exception for small-ticket items, the FASB asked its staff to perform additional research to determine the potential impact of a small-ticket scope exception. The FASB asked the staff to provide additional information about
(1) what threshold to use in determining whether a lease qualifies for the small-ticket exception, (2) whether that approach would result in significant implementation relief, and (3) whether the approach could be applied consistently to all companies. The boards are expected to revisit this topic at a later date.

Lease Term

Determination of the lease term

The boards reached a consensus that both the lessor and lessee should (1) consider all relevant factors that may give the lessee economic incentive to exercise a renewal (or termination) option and (2) include the option as part of the lease term if it is determined that it is reasonably certain that the lessee will exercise the option.

The boards asked their staffs to add language to the final standard clarifying that “reasonably certain” is a high threshold that is substantially the same as “reasonably assured” in existing U.S. GAAP.

Reassessment of lease terms

The boards decided that only lessees should reassess the lease term after the initial determination. The reassessment would be triggered by the occurrence of a significant event or change in circumstances that is directly attributable to the actions of the lessee and are clearly outside the control of the lessee (e.g., a change in market conditions).

Purchase options accounting

The boards decided that the evaluation of whether a purchase option is expected to be exercised should be consistent with the evaluation associated with renewal (or termination) options.

Lessee Accounting for Short-Term Leases

Recognition and measurement exemption for short-term leases

The boards agreed that the recognition and measurement exemption for short-term leases, as proposed in the ED, should be retained in the final standard. In addition, they agreed that the exemption should focus on whether the lease is for 12 months or less.

Renewal option

The boards agreed that the evaluation of whether a lease qualifies for the short-term lease scope exception should be based on the lease term rather than on the maximum possible term (as was proposed under the ED).

Disclosure requirements

The boards agreed that the expense related to short-term leases should be separately disclosed for the reporting period and that additional qualitative disclosures would be required when the lease expense for the period is not indicative of the expected lease obligation.



1 FASB Proposed Accounting Standards Update, Leases.

2 IAS 17, Leases.

3 IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors.

4 FASB Accounting Standards Codification Topic 105, Generally Accepted Accounting Principles.

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