At its meeting in March 2007 the Board tentatively concluded that in a simple lease, the lessee�s contractual right to use the leased item meets the definition of an asset (right to use asset) and its contractual obligation to make payments to the lessor meets the definition of a liability. At this meeting, the Board discussed the measurement of these assets and liabilities both on initial recognition and subsequently.
The Board did not discuss the treatment of transaction costs on initial recognition. This will be discussed at a later meeting.
The Board considered two possible approaches to measuring the lessee�s liability on initial recognition. The first approach was to measure the liability at fair value. The second approach was to measure it at an amount equal to the present value of the expected cash flows discounted using the interest rate implicit in the lease, if this is practicable to determine; if not the lessee�s incremental borrowing rate would be used. This second approach is consistent with the current requirements of IAS 17 Leases.
The Board considered three approaches to subsequent measurement of the lessee�s liability:
- fair value
- amortised cost using the effective interest method
- amortised cost using the effective interest method with an option to fair value the liability.
The Board tentatively concluded that the lessee�s obligation to make payments to the lessor is a financial liability as defined by IAS 39 Financial Instruments: Recognition and Measurement. Consequently, the measurement of this liability both on initial recognition and subsequently should be consistent with the measurement of other financial liabilities. Therefore, the Board tentatively concluded that the liability should be measured initially at fair value. Subsequent measurement should be at amortised cost using the effective interest method with an option to fair value (subject to the restrictions in IAS 39).
The Board considered three possible approaches to measuring the lessee�s right to use asset:
- Intangible asset approach�the lessee�s right to use asset meets the definition of an intangible asset. Thus, the initial and subsequent measurement should be consistent with the Board�s existing requirements on intangible assets (IAS 38 Intangible Assets).
- Nature of the leased item approach�the accounting for the lessee�s right to use asset should be determined by the nature of the item the lessee obtains the use of via the lease contract. Thus, for example, the right to use asset arising in a lease of property, plant and equipment would be measured (both initially and subsequently) in the same way as property, plant and equipment under IAS 16 Property, Plant and Equipment.
- Separate accounting model approach�a separate accounting model should be developed for measurement of the lessee�s right to use asset. That measurement approach might make more use of fair value.
The Board expressed a preference for the nature of the leased asset approach. The Board noted that under this approach it would still be possible to present leased assets separately from owned assets.
The Board also discussed the initial recognition of assets and liabilities in lease contracts. In particular, the Board discussed whether assets and liabilities arise when the contract is signed and whether those assets and liabilities should be recognised between the date of signing of the lease contract and the date of acceptance or delivery of the leased item.
The Board noted that in some leases there could be a significant delay between signing of the lease contract and delivery of the leased item. This delay could affect the measurement of any assets or liabilities recognised when the leased item is delivered. Hence, the Board instructed the staff to further analyse the rights and obligations arising in lease contracts between contract signing and acceptance or delivery of the leased item.