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Leases

IASB meeting summaries and observer notes


 IASB / FASB February 2011


 

 

The IASB and FASB discussed the definition of a lease, types of leases, definition of 'specified asset', assets that are incidental to the delivery of specified services, a portion of a larger asset, right to control the use of a specified asset, variable lease payments, residual value guarantees, and term option penalties.

The IASB and the FASB tentatively decided that the lease term should be defined, for both lessees and lessors, as follows:

The lease term is the non cancellable period for which the lessee has contracted with the lessor to lease the underlying asset, together with any options to extend or terminate the lease when there is a significant economic incentive for an entity to exercise an option to extend the lease, or for an entity not to exercise an option to terminate the lease.

This definition was supported by the IASB (13 members supporting with 2 disagreeing) and the FASB (4 members supporting with 1 disagreeing).

The boards tentatively decided that a lessee and a lessor should reassess the lease term only when there is a significant change in relevant factors such that the lessee would then either have, or no longer have, a significant economic incentive to exercise any options to extend or terminate the lease. This decision was supported by 14 members of the IASB and all members of the FASB.

Definition of a lease

A lease is defined as a contract in which the right to use a specified asset is conveyed, for a period of time, in exchange for consideration. The Leases exposure draft included two principles relating to that definition to help to assess whether a contract contains a lease:

  1. the fulfilment of the contract depends on providing a specified asset or assets; and
  2. the contract conveys the right to control the use of a specified asset for an agreed period of time.

At this meeting, the boards discussed how those principles might be clarified to address comments received from respondents to the exposure draft and through other outreach activities.

Types of leases

The FASB and the IASB tentatively decided to identify a principle for identifying two types of leases for both lessees and lessors, with different profit and loss effects, as follows:

  • a finance lease with a profit or loss recognition pattern that is consistent with the proposals in the exposure draft, and
  • an other-than-finance lease with a profit or loss recognition pattern that is consistent with an operating lease under existing IFRSs/US GAAP.

The boards directed the staff to seek input through targeted outreach on the approaches detailed below. The purpose of the outreach is to:

  • obtain a better understanding of the implications of any proposed changes to the Leases exposure draft;
  • understand whether a principle for identifying two types of leases for both lessees and lessors would provide more useful information; and
  • test whether the proposed changes would provide a better basis on which to determine whether a contract contains a lease.

The feedback received will provide the boards with input to help make final decisions at a future meeting about the definition of a lease and about types of lease.

Definition of 'specified asset'

The boards expressed support for defining a 'specified asset' as an asset of a particular specification. The boards also discussed an alternative approach that defines a 'specified asset' as a uniquely identified or identifiable asset, which is closer to the application of current requirements in IFRSs and US GAAP. The boards will seek input on both of those approaches.

Assets that are incidental to the delivery of specified services

The boards expressed support for specifying that a contract would not contain a lease if an asset is incidental to the delivery of specified services.

A portion of a larger asset

The boards expressed support for clarifying that both physical and non-physical portions of a larger asset can be specified assets. The boards tentatively decided that such a clarification would be made only in conjunction with revising the definition of the right to control the use of an asset. This is to maintain consistency with how control is articulated in the revenue recognition exposure draft Revenue from Contracts with Customers. The boards also discussed an alternative approach of clarifying only that physically distinct portions of a larger asset can be specified assets. The boards will seek input on both approaches.

Right to control the use of a specified asset

The exposure draft proposed that the right to control the use of an asset is conveyed if any one of three particular conditions is met. Comments received from respondents suggested that the third condition (set out in paragraph B4(c) of the Leases exposure draft) raised a number of questions about its application. Some respondents also questioned why 'control' was defined differently in the Leases exposure draft to how it is defined in other publications. The boards expressed support for an approach that defines the right to control the use of an asset consistently with how control is articulated in the revenue recognition exposure draft Revenue from Contracts with Customers. This approach would state that a customer has the right to control the use of a specified asset if it has the ability to direct the use, and receive the benefit from use, of the asset throughout the lease term. The boards also discussed an alternative approach of retaining the three conditions in paragraph B4 of the exposure draft but to clarify the principle underlying condition (c) of paragraph B4. The boards will seek input on both approaches.

Variable lease payments

The FASB and the IASB considered which variable lease payments should be included in the lessee's liability to make lease payments and the lessor's right to receive lease payments. Variable lease payments include any lease payments that arise under the contractual terms of a lease because of changes in facts or circumstances occurring after the date of inception of the lease, other than the passage of time.

The boards tentatively decided that:

  1. The lessee's liability and lessor's receivable should include:
    1. lease payments that depend on an index or rate. All of the members of both the IASB and FASB supported this.
    2. lease payments for which the variability lacks commercial substance (all the members of both the IASB and FASB supported this);
    3. lease payments that meet a high recognition threshold (such as reasonably certain) (8 members of the IASB supported this, with 7 against, while all of the members of the FASB supported it).
  2. Variable lease payments that depend on an index or a rate should be measured initially based on the spot rate (12 members of the IASB supported this, with 3 against, while 3 members of the FASB supported it with 2 against).
  3. Recognition of variable lease payments by a lessee and lessor should be subject to the same reliable measurement threshold. However, the need for such a threshold will depend on the basis for recognising variable lease payments. All of the members of both the IASB and FASB supported this.

The boards will continue their discussion of initial and subsequent measurement of variable lease payments at a future meeting.

Residual value guarantees (RVGs)

The boards tentatively decided to clarify that the lease payments should include amounts expected to be payable under residual value guarantees, except for amounts payable under guarantees provided by an unrelated third party. All of the members of both the IASB and FASB supported this.

Term option penalties

The boards tentatively decided that the accounting for term option penalties should be consistent with the accounting for options to extend or terminate a lease. That is, if a lessee would be required to pay a penalty if it did not renew the lease and the renewal period has not been included in the lease term, then that penalty should be included in the recognised lease payments. All of the members of both the IASB and FASB supported this.

Date: 2/16/2011