Welcome to the website of the IFRS Foundation and the IASB

Monday 22 December 2014

Banner graphic

Leases

IASB meeting summaries and observer notes


 IASB July 2010


 

 

Scope - purchase or sale of underlying asset

The IASB and FASB tentatively decided to keep the requirement to exclude contracts that are purchases or sales of the underlying asset from the scope of the proposed new leases requirements. However, the boards tentatively decided to remove the following two criteria from the list of indicators that a contract is a purchase and sale:

  • the contract covers the whole of the expected useful life of the asset; and
  • the contract specifies a fixed return to the transferor.

For determining whether a contract is a purchase or sale (both for scope purposes and for sale and leaseback transactions), the boards confirmed their previous tentative decision that a contract is a purchase or sale of an underlying asset if, at the end of the contract, an entity transfers to another entity control of the underlying asset and all but a trivial amount of the risks and benefits associated with the underlying asset.

Lessor accounting - accounting for arrangement with service and lease components

The boards had differing views. The FASB tentatively decided that lessors should not bifurcate non-distinct services from the lease components in a lease arrangement under the derecognition approach to lessor accounting. The IASB tentatively decided that under the derecognition approach to lessor accounting, the lessor should be required to bifurcate non-distinct services from the lease components. The IASB also tentatively decided that the service element of the contract should be accounted for in accordance with the proposed new guidance on revenue recognition. Although the FASB decided that non-distinct services should not be bifurcated, they tentatively decided that if non-distinct services were bifurcated, the lessor should recognise a receivable for both the service and lease elements, and should recognise a separate performance obligation for the service component.

Consequential amendments - Business combinations

The boards tentatively decided that, for leases acquired in a business combination, an adjustment would be made to the right-of-use asset for the lessee and the performance obligation for the lessor, reflecting the difference between the rate charged in the lease and market rates.

The boards also tentatively decided that if the acquired entity is a lessor under the derecognition approach to lessor accounting, the acquirer would measure the right to receive rentals initially at the present value of the remaining rental payments, discounted using the acquirer's discount rate. The lessor's residual asset would be measured at fair value.

Additional disclosures

The boards tentatively decided that a lessor shall disclose:

  • its accounting policy regarding which accounting model(s) the lessor applies;
  • the types of risks/benefits of the underlying asset that the lessor considered when deciding which accounting model to apply; and
  • any impairment recognised, separately for each accounting model.

The boards also tentatively decided that lessors and lessees should disclose the existence and principal terms of any purchase options.

Application guidance on when to use the performance obligation or derecognition approach to lessor accounting

The boards tentatively decided that a lessor shall account for a lease contract based on whether the lessor retains exposure to significant risks or benefits associated with the underlying asset either:

  • during the expected term of the current lease contract; or
  • subsequent to the term of the current lease contract, by having the expectation or ability to generate significant returns by leasing that asset multiple times subsequent to the current contract, or by selling the underlying asset.

For the purposes of this assessment, risks associated with the counterparty credit risk of the lessee shall not be considered.

A lessor that retains exposure to significant risks or benefits associated with the underlying asset shall apply the performance obligation approach to such leases. A lessor that does not retain exposure to significant risks or benefits associated with the underlying asset would apply the derecognition approach to such leases. This assessment would be made at the inception of the lease and would not be reassessed subsequently.

The boards tentatively decided that a lessor shall consider the following factors when determining whether it retains exposure to significant risks or benefits associated with the underlying asset during the expected term of the current lease contract:

  • significant contingent rentals during the expected lease term that are based on the use or performance of the underlying asset;
  • options to extend or terminate the current lease term; and
  • material non-distinct services provided under the current lease contract.

The boards tentatively decided that a lessor shall consider the following factors when determining whether it retains exposure to significant risks or benefits associated with the underlying asset subsequent to the term of the current lease contract.

  • whether the lease term is short in relation to the useful life of the asset; and
  • whether a significant change in the value of the underlying asset at the end of the lease term is expected. In making this assessment, the lessor shall consider the present value of the underlying asset at the end of the lease term and the effect that any residual value guarantees may have on the lessor's exposure to risks and benefits.

The board also tentatively decided:

  • to consider third party residual value guarantees when determining whether a lessor is exposed to significant risks and benefits associated with the underlying asset; and
  • not to include specific guidance on long-term leases of land in the application guidance.

 

Date: 7/22/2010