Lessee accounting — right-of-use (ROU) model

• The lessee recognizes an ROU asset and a liability for all lease contracts (other than short-term leases).
• The ROU asset represents the lessee’s right to use the leased asset for the lease term; the liability represents the lessee’s obligation to make lease payments.

Scope

• Similar overall to scope in current U.S. GAAP.

Definition of a lease

• A leased asset must be specifically identifiable either explicitly (e.g., by a specific serial number) or implicitly (e.g., the only asset available to satisfy the lease contract).
• A physically distinct portion of a larger asset could represent a specified asset.
• A lease contract would convey the right to control the use of the specified asset. The concept of control would be similar to that in the proposed revenue recognition standard (i.e., the customer has the ability to direct the use, and receive benefits from the use, of that asset).
• Obtaining all the output from an asset is, in isolation, no longer determinative of control.

Lease term

• Noncancellable term plus renewal options if there is a significant economic incentive for an entity to exercise an option to extend the lease.
• Entities should consider contract-based, asset-based, market-based, and entity-specific factors when assessing whether there is a significant economic incentive for renewal.
• Reassessment of lease term is required when relevant factors change significantly (i.e., lessee would have, or no longer have, significant economic incentive to renew). Market-based factors are not considered upon reassessment.

Lease payments

• Measurement of the ROU asset and lease liability would include fixed payments and only those variable payments that are:
  • Based on an index or rate.
  • In-substance fixed lease payments (e.g., lease contains disguised fixed lease payments).
• The index or rate that exists at the end of each reporting period (i.e., the spot rate) would be used to adjust lease payments that are based on an index or a rate.

Subsequent measurement for lessees — profit and loss recognition

• Two approaches are used for amortizing the ROU asset: (1) interest and amortization (I&A) and (2) straight-line or single-line expense (SLE).
• The amortization approach would be based on whether the lessee acquires and consumes more than an insignificant portion of the underlying asset.

Lessor accounting

• The lessor would account for a lease under either the receivable and residual (R&R) model or a model similar to that used in current operating lease accounting (“operating lease model”) depending on whether the lessee acquires and consumes more than an insignificant portion of the underlying asset.
• For leases accounted for under the R&R model, a lessor would derecognize the underlying asset and would recognize a receivable for lease payments and a residual asset in its place. The receivable would be amortized under the effective-interest method and the residual would be accreted at the rate the lessor charges the lessee.
• For leases accounted for under the operating lease model, a lessor would continue to recognize both the underlying asset and periodic lease revenue.