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IASB meeting summaries and observer notes


 IASB March 2007


 

The Board held its first discussions on the lease accounting project. The project is a joint project with the FASB that will lead to a fundamental reconsideration of lease accounting. The first step in the project will be the publication of a discussion paper in 2008.

The Board first discussed a paper that identified the rights and obligations arising in a simple non-cancellable lease contract and analysed whether the rights and obligations identified meet the current definitions of assets and liabilities in the Framework.

The Board tentatively concluded that in the simple non-cancellable lease described in the paper, the lessee has:

  • a right to use the leased item that meets the definition of an asset; and
  • an obligation to make payments that meets the definition of a liability.

The Board tentatively concluded that the lessee�s obligation to return the leased item at the end of the lease does not meet the definition of a liability. However, the Board noted that liabilities might exist because of asset retirement obligations or requirements to return the equipment in a specified condition.
In addition, the Board tentatively concluded that in the simple non-cancellable lease described in the paper, the lessor�s right to receive payments from the lessee meets the definition of an asset but that the lessor�s obligation to permit the lessee to use the leased item does not meet the definition of a liability.

The Board also discussed whether this analysis would be the same if the working definitions of assets and liabilities developed by the conceptual framework team were applied to the rights and obligations identified. The Board tentatively concluded that the answer would be the same.
The Board concluded that the staff should analyse the rights and obligations arising in lease contracts in terms of the existing definitions of assets and liabilities. However, the Board asked the staff to ensure that any possible inconsistencies between the existing definitions and the working definitions are brought to its attention.

The Board then considered a paper on various accounting models for lease accounting. The Board discussed: 

  •  the right of use approach. In this approach, the lessee recognises its right to use the leased item and an obligation to pay for that item. The lessor recognises as an asset its right to receive payments from the lessee and its residual interest in the leased item at the end of the lease.
  •  the whole asset model. In this approach, the lessee records the whole of the physical item on its balance sheet. To correspond to that asset, the lessee recognises two liabilities�the obligation to make payments to the lessor and an obligation to return the physical item at the end of the lease. The lessor recognises its right to receive payments from the lessee and its right to have the leased item returned at the end of the lease.
  • the executory contract model. In this approach, the lessee recognises no assets or liabilities upon entering into the lease contract. Lease rentals are recognised in profit or loss as they become due. The lessor recognises the leased item as an asset.
  • the model used in current standards�the lessee either accounts for the lease as an executory contract or recognises an asset and liability depending upon the classification of the lease contract. Lessor accounting similarly depends upon the lease classification.

The Board tentatively concluded that the right of use approach is the only approach that results in the recognition of the assets and liabilities identified in a simple lease. Consequently, the Board directed the staff to develop this model further.
Lastly, the Board noted that there are important issues relating to measurement and recognition that have not yet been considered that might change these preliminary conclusions.

Date: 3/22/2007