Leases — FASB and IASB continue redeliberations

Published on: 24 Jul 2014

At their joint meeting yesterday, the FASB and IASB continued redeliberating revisions to lease accounting. The boards discussed (1) sale-leaseback transactions and (2) lessor disclosure requirements.

Sale-Leaseback Transactions

An entity (seller-lessee) may enter into an arrangement in which it sells an asset it owns to another entity (buyer-lessor) and then contemporaneously leases back all or part of the same asset. The boards’ May 2013 exposure draft (ED)1 includes guidance on how to evaluate whether a sale has occurred in these transactions. At yesterday’s joint meeting, the boards made the following tentative decisions related to determining whether a sale has occurred in a sale-leaseback transaction: 

  • The seller-lessee should apply the definition of a sale in the new revenue guidance in ASC 6062 (U.S. GAAP) and IFRS 153 (IFRSs) when determining whether the transfer of underlying asset in the sale-leaseback qualifies as a sale.
  • The final leases standard should affirm that the existence of a leaseback would not prevent the seller-lessee from concluding that the underlying asset was sold.
  • A leaseback transaction that would result in a Type A lease would preclude sale accounting of the underlying asset by the seller-lessee (FASB only).

The boards also discussed how a substantive repurchase option held by the seller-lessee to reacquire the underlying asset in a sale-leaseback transaction would affect the conclusion about whether a sale has occurred. The IASB tentatively agreed that a seller-lessee’s substantive repurchase option would preclude sale recognition, whereas the FASB did not vote on this topic and asked the staff to perform additional analysis. The FASB’s concerns centered on how fair value repurchase options should affect the sales analysis.

Finally, the boards discussed whether the final leases standard should include additional guidance on applying the revenue recognition standard’s control principle to sale-leaseback transactions. While the IASB tentatively decided against such implementation guidance, concluding that the guidance in IFRS 15 should be sufficient, the FASB abstained from voting on this question until it reaches a conclusion about the accounting for substantive repurchase options in a sale-leaseback transaction (as discussed above). 

Gain Recognition on the Sale

The FASB reaffirmed the guidance in the May 2013 ED and tentatively agreed that if a transaction is based on “at-market” terms, any gain resulting from the sale in the transaction should be recognized immediately, which is consistent with the treatment for sales of nonfinancial assets that do not involve a leaseback. In contrast, the IASB tentatively decided to limit the immediate recognition of gains from the sale to only the portion associated with the residual asset. Accordingly, a pro rata portion of the gain related to the portion of the underlying asset leased back would be recorded as a reduction to the leaseback right-of-use (ROU) asset.

Both boards tentatively agreed that a seller-lessee should recognize any loss resulting from the sale in a sale-leaseback transaction in a manner similar to losses resulting from the sale of other nonfinancial assets. Further, the buyer-lessor in the arrangement should account for the purchase of the asset in accordance with other existing accounting.

Accounting for the Leaseback

The boards tentatively decided that the leaseback in a sale-leaseback transaction should be accounted for in a manner consistent with other leases. That is, the seller-lessee would consider the guidance on lessee accounting under the new leases model and the buyer-lessor would consider the guidance on lessor accounting.

Accounting for “Off-Market” Terms

The boards discussed the accounting for sale-leaseback transactions that include “off-market” terms and tentatively decided that both parties to the transaction would determine whether an adjustment is required as a result of the off-market terms by assessing whether there is a difference between (1) the sales price and fair value of the asset sold or (2) the present value (PV) of the contractual lease payments and the PV of the lease payments at fair market value. The seller-lessee would account for any difference either as an adjustment to the ROU asset or additional financing from the buyer-lessor (i.e., separate from the lease liability). The buyer-lessor would recognize any difference as a prepayment of rent or additional financing to the seller-lessee (i.e., separate from the lease receivable).

Accounting for “Failed” Sale-Leaseback Transactions

The boards also discussed the appropriate accounting for transactions that result in a “failed” sale in a sale-leaseback transaction (i.e., whether the failed sale should be accounted for as a financing transaction). Ultimately, the FASB decided that it wants to consider the additional staff analysis related to substantive repurchase options (as discussed above) before making a decision. The IASB tentatively agreed that a transaction that results in a failed sale should be accounted for as a financing arrangement (i.e., the buyer-lessor would account for the payment received as a financial asset and the seller-lessee would record a liability).

Transition for Sale-Leaseback Transactions

Rather than discussing transition specifically for sale-leaseback transactions, the boards agreed that they would discuss all transition requirements at a future meeting.

Lessor Disclosure Requirements

The May 2013 ED introduced a number of disclosure requirements for lessors to allow “users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases.” While the boards concluded during their March redeliberations that lessor accounting should generally remain unchanged, they decided that additional disclosures would be useful for financial statement users. See Deloitte’s March 27, 2014, Heads Up for additional information.

At yesterday’s meeting the boards made certain tentative decisions about the nature and extent of lessor disclosures. Specifically, the boards:

  • Reaffirmed the requirements in the May 2013 ED for a lessor to disclose (1) information about the nature of its leases, (2) the significant assumptions and judgments it used when applying the leases guidance, and (3) a table detailing the lease income for the period.
  • Tentatively decided that a lessor should disclose certain quantitative and qualitative information about its practices for managing risks related to the residual value of its leased assets.
  • Tentatively decided that lessors should apply the disclosure requirements in ASC 3604 (U.S. GAAP) or IAS 165 (IFRSs) for all assets that are subject to a Type B lease. In addition, the boards tentatively decided that when applying this guidance, the lessor should disclose (by major class (U.S. GAAP) or as a class of property, plant, and equipment (IFRSs)) assets that are subject to a lease separately from those that are held and used by the lessor.
  • Tentatively decided to require lessors to provide a maturity analysis of the future undiscounted cash flows that make up the Type A lease receivable balance. The amounts included in the maturity analysis should be reconciled to the balance sheet. 
  • Tentatively decided to require lessors to provide a maturity analysis of the future undiscounted cash flows that will be received for all Type B leases. 

In addition, the FASB decided to eliminate the requirements related to lease receivables and residual asset reconciliation that were proposed in the May 2013 ED. Instead, the FASB tentatively decided only to require additional disclosures about significant changes in the value of the residual assets during the period. As part of its project on impairment, the FASB will decide whether any incremental disclosures about changes to the receivable balance should be required. The IASB similarly decided to eliminate the proposed requirements for lease receivables and residual asset reconciliation. However, the IASB tentatively decided to require additional disclosures about significant changes in lessors’ net investment in leases (i.e., for both the receivable and residual asset components).

Next Steps

While the boards have made significant progress, they still need to redeliberate a number of aspects of their proposed leases guidance, including the following:

  • Disclosures for lessees.
  • Transition.
  • Effective date.
  • Cost-benefit.
  • Leveraged leases and private-company/not-for-profit issues (FASB only).
  • Other (e.g., related-party leases, consequential amendments).

Other items that the boards may need to revisit include lessee accounting and small-ticket lease exceptions.


1 FASB Proposed Accounting Standards Update, Leases.

2 FASB Accounting Standards Codification Topic 606, Revenue From Contracts With Customers.

3 IFRS 15, Revenue From Contracts With Customers.

4 FASB Accounting Standards Codification Topic 360, Property, Plant, and Equipment.

5 IAS 16, Property, Plant and Equipment.

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