This week, the FASB and IASB reached tentative decisions about the presentation, disclosure, and transition requirements for leases that a lessee accounts for under the single lease expense (SLE) approach, which the boards developed at their June 2012 joint meeting.¹ The boards also discussed the interim disclosure requirements and certain aspects of the lessor model. In addition, they confirmed that they expect to issue a revised exposure draft (with a 120-day comment period) during the fourth quarter of 2012.

Lessee Presentation and Disclosure

For leases accounted for under the SLE approach, the boards decided that lessees should present right-of-use (ROU) assets (1) as if the underlying asset were owned by the lessee and (2) either separately within the statement of financial position or within the notes to the financial statements. If a lessee opts to disclose the amount of ROU assets in the notes to the financial statements, it should clearly identify the line item in the statement of financial position that includes them. The boards also decided that the lease liability under the SLE approach should either be presented either separately within the statement of financial position or be disclosed in the notes to the financial statements. Likewise, if a lessee opts to disclose these amounts in the notes to the financial statements, it should clearly identify the line item in the statement of financial position that includes the lease liability.

The boards also agreed that lessees using the SLE approach should present cash paid for such leases in the operating section of the statement of cash flows. In contrast, they would present leases accounted for under the interest and amortization (I&A) approach as a financing activity. In addition, the boards decided that ROU assets accounted for under the SLE approach that are acquired in exchange for lease liabilities would be included in the supplemental noncash transaction disclosure.

Further, the boards agreed on the disclosure requirements for lease obligations and noted that a lessee should include the obligation related to leases in a single maturity analysis for all lease liabilities. The analysis should include the undiscounted cash flows for all leases and should reconcile to the lease liability in total. The FASB alone also decided to require lessees to disclose only one analysis of the maturity of contractual commitments associated with services and other nonlease components. However, both boards agreed that a lessee should include a reconciliation of beginning and ending balances of its lease liability under both the SLE and I&A approaches (i.e., a separate rollforward of the lease liability under each approach).

The boards also decided that expenses related to variable lease payments (those not included in the lease liability) should be disclosed.

The boards did not agree on whether a reconciliation of beginning and ending balances of a lessee’s ROU asset should be required. The FASB decided that such reconciliations would not be required under either the SLE or I&A approach, whereas the IASB decided that such reconciliations would be required for both approaches.

Regarding interim disclosures, the boards decided that IAS 34, Interim Financial Reporting, and FASB Accounting Standards Codification Topic 270, Interim Reporting, should not be amended.

Lessee Transition

The boards decided that upon transition, when a lessee applies the SLE approach it can either (1) recognize an ROU asset “for each outstanding lease, measured at the amount of the related lease liability, adjusted for any uneven lease payments”² or (2) apply the full retrospective transition method. The boards also decided not to change any other previous decisions related to transition.

Lessor Accounting

The boards decided that when a lease is prematurely terminated, a lessor should rerecognize the underlying asset at “the sum of the carrying amounts of the lease receivable (after any impairment) and the net residual asset”³ (i.e., no gain/loss would be recognized).

Regarding interim disclosures, the FASB decided that lessors should include a table of lease-related income as part of their interim financial statements. The table would include items such as the profit recognized at lease commencement, interest income, variable income, and short-term lease income. The IASB believed that such approach was too prescriptive and instead decided to require disaggregation when appropriate.

[1] For additional details of the boards’ June meeting, refer to Deloitte’s June 14, 2012, journal entry.

[2] See the FASB’s Summary of Board Decisions for the July 17 meeting.

[3] See footnote 2.

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