At the technical plan meeting in June 2008 the staff presented a revised project plan for leases. This envisages the publication of a new lease accounting standard by mid-2011 and is based on various assumptions subsequently confirmed at this meeting.
At this meeting, the Board discussed:
- the scope of the project and whether to include or exclude lessor accounting
- options to extend or terminate a lease
- contingent rentals
- the initial and subsequent measurement of a lessee�s right-of-use asset and obligation to make rental payments
- whether to retain the requirement to classify leases as operating or finance leases.
The Board decided to defer the development of a new accounting model for lessors. It also decided on an overall approach that would apply the present finance lease model, adapted when necessary, to all leases.
The Board discussed lease contracts that give the lessee an option to extend the lease for an additional period or an option to terminate the lease early. The Board tentatively decided that the lessee should not recognise these options as separate assets. Instead, the assets and liabilities recognised by the lessee should be based upon the lease term. The Board considered three possible approaches to determining the lease term:
- including optional periods in the lease term when exercise of the option is reasonably certain
- using a best estimate of the lease term, without probability weighting
- using a probability-weighted best estimate of the lease term.
The Board rejected the first of these approaches. A number of Board members expressed a preference for using a probability-weighted best estimate of the lease term. However, no formal decision was reached. The Board also discussed some of the factors that affect whether a lessee will exercise an option to extend or terminate the lease. The Board tentatively decided that contractual, non-contractual and business factors should be considered when determining the lease term.
The Board also decided tentatively:
- to develop a new approach for contingent lease payments using a probability-weighted best estimate of the rentals payable.
- that a lessee should initially measure both its right-of-use asset and its lease obligation initially at the present value of the lease payments.
- that a lessee should discount the lease payments using the lessee�s incremental borrowing rate for secured borrowings. At present IAS 17 requires a finance lessee to use the interest rate implicit in the lease if practicable to determine and, if not, to use the lessee�s incremental borrowing rate.
- that on subsequent measurement, a lessee should amortise the right-of-use asset over the shorter of the lease term and the economic life of the leased asset based upon the pattern of consumption of economic benefits embodied in the right-of-use asset. The lessee should apportion the lease payment between interest and the reduction of the outstanding liability.
Finally, the Board tentatively decided to remove the existing requirement to classify a lease as a finance lease (in-substance purchase) or an operating lease. Thus, the same approach would apply for all leases.