Leases — FASB and IASB discuss lessee disclosure requirements

Published on: 23 Jan 2015

At their joint meeting this week,1 the FASB and IASB continued redeliberating their revisions to the lease accounting guidance. Specifically, they discussed feedback received on, and the staffs’ analyses of, the disclosure requirements in the boards’ May 2013 exposure draft (ED), Leases, which would require lessees to provide more robust qualitative and quantitative disclosures about their leasing activities.

Disclosure Objective

The boards reaffirmed the 2013 ED’s lessee disclosure objective, which states that such disclosures should “enable users of financial statements to understand the amount, timing and uncertainty of cash flows arising from leases.” In addition, the boards decided to retain the ED’s requirement for lessees to determine the level of detail that disclosures would need to contain to meet this objective (i.e., whether to aggregate or disaggregate the information provided). 

Qualitative Disclosures

The 2013 ED required that a lessee provide qualitative information about (1) the nature of its leases, (2) leases that have not yet commenced but that create significant rights and obligations for the lessee, (3) significant assumptions and judgments used in applying the lease standards, (4) the main terms and conditions of any sale-and-leaseback transactions, and (5) its accounting policy election for short-term leases. Feedback has indicated that while such disclosures could result in useful information, they could also contain “boilerplate” language depending on the nature and diversity of the preparer’s lease portfolio. Users suggested that the boards could avoid “boilerplate” disclosures by providing additional guidance on the level of disaggregation required for these disclosures. The FASB tentatively agreed to reaffirm the 2013 ED’s proposal under which lessees would be required to provide qualitative disclosures about their leases; however, they also agreed not to provide additional guidance on the level of disaggregation for presenting this information. The IASB decided not to retain the qualitative disclosure requirements and instead agreed to require a lessee to disclose sufficient additional information to satisfy the overall disclosure objective.

Quantitative Disclosures

FASB and IASB Decisions

Reconciliation of Lease Liabilities

The 2013 ED required entities to provide a reconciliation of the opening and closing lease liabilities, including the periodic unwinding of the discount on these liabilities and other items that provide further insight into the liabilities’ carrying amounts. However, feedback has indicated that this requirement could be costly and burdensome to implement. In addition, many respondents pointed out that similar requirements are not in place for other financial liabilities. The boards therefore tentatively agreed to eliminate this proposed requirement.

Total Lease Expenses

The FASB voted to retain the 2013 ED’s requirement to present Type A and Type B lease expenses separately (the IASB had previously decided that lessees should account for all leases as Type A). The boards tentatively decided to require separate disclosure of the amortization expense of right-of-use (ROU) assets (by asset class for the IASB) and interest expense of lease liabilities for Type A leases. The FASB also decided to clarify that the expense items disclosed would include any portions capitalized or embedded in other income statement line items.

Short-Term Lease Expenses

The boards agreed that expenses related to short-term leases should be separately presented but decided that entities would only be required to include short-term leases of more than 30 days but less than one year in their disclosures. This provision would eliminate the burden of providing disclosures about immaterial short-term leases (e.g., daily car rentals for employee travel).

Variable Lease Expense

The boards agreed that disclosures related to variable lease payments (e.g., lease payments that are contingent on a retailer’s revenue) are useful, since such information is not separately presented in the income statement, statement of cash flows, or supplemental disclosures. Therefore, the boards agreed to retain the 2013 ED’s requirement to disclose variable lease expenses incurred during the period.

Sublease Income

The 2013 ED did not include disclosure requirements related to sublease income. However, the staffs indicated that additional disclosures about sublease income could help users understand an entity’s leasing activities. Accordingly, the boards tentatively decided to require lessees to disclose sublease income.

Cash Paid for Amounts Included in Lease Liabilities

The FASB tentatively decided that cash flows for Type A and Type B leases should be presented separately given the nature of each type of lease. The IASB reaffirmed its June 2014 tentative decision to require lessees to separately disclose cash flows for leases. However, the IASB clarified that such disclosures would only include cash outflows and would not be netted with any sublease cash inflows.

Weighted-Average Remaining Lease Term

Although neither current guidance nor the 2013 ED includes specific requirements related to disclosing the remaining lease term, the boards believe that presenting such information is useful because it (along with a maturity analysis of lease liabilities) allows users to better understand the lessee’s future liquidity requirements. The FASB therefore tentatively agreed that lessees should disclose this information and that this information should be separately disclosed for Type A and Type B leases.

Gains and Losses on Sale-and-Leaseback Transactions

The 2013 ED required that gains and losses recognized in sale-and-leaseback transactions be separately disclosed. Although constituents did not provide specific feedback on this requirement, the boards tentatively decided to retain it since it would provide users with information unique to sale-and-leaseback transactions.

Tabular Presentation

The boards discussed whether information related to lease expenses should be presented in a tabular format. While the boards generally agreed that a tabular format is preferable, neither the FASB nor IASB decided to prohibit the use of another format. In addition, the IASB tentatively decided to require entities to provide all lessee disclosures in a single note or separate section in its financial statements.

Maturity Analysis of Lease Liabilities

The boards discussed whether to retain the current requirement to disclose a maturity analysis of lease liabilities. While some believe that such information is redundant, the boards ultimately decided to keep this disclosure requirement since it would result in useful information at little additional cost to preparers. 

The IASB tentatively decided to retain the requirement in the 2013 ED related to providing a maturity analysis but decided to amend the disclosure time frames. The 2013 ED requires entities to disclose undiscounted cash flows for each of the next five years and the aggregate balance for the remaining years. The IASB decided to amend this requirement to reconcile with IFRS 7, Financial Instruments: Disclosures, which requires entities to use judgment to determine the appropriate time frames.

FASB-Only Decisions

ROU Assets Obtained in Exchange for Lease Liabilities

The FASB voted to retain, for both Type A and Type B leases, the 2013 ED’s requirement for lessees to disclose ROU assets acquired in exchange for lease liabilities as supplemental noncash transactions, since the Board believes that users may find such information helpful. In addition, the FASB decided to label such items more clearly by referring to them as “liabilities created due to leases commenced.”

Weighted-Average Discount Rate for Type B Leases

While interest expense for Type A leases is disclosed, and users are able to compute a weighted-average discount rate for Type A leases, feedback on the 2013 ED indicated that lessees should disclose the discount rate for Type B leases. Therefore, the FASB agreed to also require lessees to disclose the weighted-average discount rate for Type B leases.

Commitments for Nonlease Components

The 2013 ED required entities to disclose a maturity analysis for commitments related to nonlease components of a lease arrangement. Feedback received by the FASB has indicated that while this requirement could be useful for understanding a lessee’s committed future cash flows, it could also lead to comparability issues and be costly and time-consuming to comply with. Therefore, the FASB agreed to eliminate this requirement and qualitative disclosures about significant nonlease commitments in the 2013 ED.

IASB-Only Decisions

ROU Assets by Asset Type

The IASB tentatively decided to require lessees to disclose the additions and carrying value of ROU assets by class of underlying asset, since such information would allow users to better understand an entity’s leasing portfolio. This decision is consistent with the 2013 ED.

Small-Asset Lease Expenses

At its March 2014 meeting, the IASB tentatively decided to provide an exemption for recognition and measurement of small-asset leases. The exemption provides relief related to the accounting for immaterial small-asset leases. The IASB tentatively decided to require that small-asset lease expenses be separately disclosed.

Reconciliation of ROU Assets

The IASB’s ED required lessees to disclose a reconciliation of the opening and closing ROU asset balances — including changes related to ROU asset additions, extensions, and amortization expense for the period — by class of underlying asset. The disclosure requirements would be similar to those in IAS 16, Property, Plant and Equipment. The IASB received feedback on the cost and complexity of implementing this requirement and, on the basis of this feedback, tentatively decided to eliminate the reconciliation requirement for ROU assets.

Considerations for Nonpublic Entities

The 2013 ED includes an option under which nonpublic entities would not be required to reconcile the opening and closing lease liability balances. The FASB tentatively decided to remove this requirement for all entities. In addition, the FASB tentatively decided that the other disclosure requirements should be identical for public and nonpublic entities. 

Next Steps

The boards expect to discuss remaining items related to their proposed leases guidance, including transition, effective date, and sweep issues, at future meetings.


1 While the boards are diverging on certain aspects of the guidance, they continue their joint deliberations to minimize any future differences between U.S. GAAP and IFRSs.

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