At its meeting yesterday, the FASB¹ continued to redeliberate its lease accounting guidance. Specifically, the Board discussed (1) reassessment of variable lease payments, (2) lessee and lessor transition, (3) sale-and-leaseback transition, and (4) build-to-suit lease arrangements.

Reassessment of Variable Lease Payments

The Board affirmed its previous tentative decision to require a lessee to reassess variable lease payments that depend on an index or rate only when the lease liability is reassessed for other reasons (e.g., because of a reassessment of the lease term).

Lessee and Lessor Transition

The Board discussed the transition requirements for a lessee and a lessor upon adoption of the lease accounting guidance. It tentatively decided to require a modified retrospective transition method for a lessee’s existing capital and operating leases and a lessor’s existing sales-type, direct financing, and operating leases. When applying the modified retrospective transition method, a lessee and a lessor would be allowed to use hindsight in their evaluation of renewal and purchase options on existing leases.

The Board also tentatively decided that the lease accounting guidance will provide the following transition relief (an entity that elects to apply such relief would have to adopt all of the relief provisions):

• A lessee or lessor is not required to reassess whether any expired or existing contracts are leases or contain leases.
• A lessee or lessor is not required to reassess the lease classification for any expired or existing leases.
• A lessee or lessor is not required to reassess initial direct costs for any existing leases.

A lessee or lessor would not be allowed to apply the transition relief on a lease-by-lease basis and would be required to disclose as an accounting policy election the transition relief applied.

Sale-and-Leaseback Transition

The Board discussed transition requirements related to sale-and-leaseback transactions and made the following tentative decisions:

• An entity would be required to reassess the sale of a sale-and-leaseback transaction under ASC 606² only if the sale is still considered to be a failed sale upon the effective date of the new lease accounting guidance.
• An entity would continue to amortize the gain or loss on capital leasebacks as it currently does in accordance with ASC 840³ (which is consistent with the guidance in the May 2013 proposal).
• The seller in a sale-and-operating-leaseback transaction would be required to recognize any deferred gain or loss not resulting from off-market terms as a cumulative effect adjustment to equity as of the later of the date of initial application (i.e., the beginning of the earliest period presented) or the date of sale.
• The seller in a sale-and-operating-leaseback transaction would be required to recognize any deferred gain or loss resulting from off-market terms as an adjustment to the leaseback right of use (loss) or lease liability (gain) as of the date of initial  application.
• The seller-lessee and the buyer-lessor in a sale-and-leaseback transaction would be required to account for the leaseback in accordance with the general lessee and lessor transition requirements, respectively.

Build-to-Suit Lease Arrangements

The Board discussed build-to-suit lease arrangements in which the lessee is involved in the construction of the asset that it will lease and tentatively decided to retain the May 2013 proposal’s amendment to eliminate specific guidance formerly contained in EITF 97-10⁴ on understanding which party to a build-to-suit arrangement is the accounting owner during the construction phase.

In addition, the Board tentatively decided that a lessee would apply the modified retrospective transition approach to its build-to-suit lease arrangements.

Next Steps

Although the Board still expects to discuss at future meetings Private Company Council–related issues, costs and benefits, and the effective date of the new guidance, the FASB staff is expected to begin drafting the new lease accounting guidance.

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1 Although the project on the accounting for leases is a joint project between the FASB and IASB, the FASB held a board meeting separately from the IASB because the boards’ respective proposed lessee models differ and therefore require different transition considerations by each board.

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

3 FASB Accounting Standards Codification Topic 840, Leases.

4 EITF Issue No. 97-10, “The Effect of Lessee Involvement in Asset Construction.”