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Friday 31 October 2014

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Leases

IASB meeting summaries and observer notes


 IASB March 2010


 

 

The Board deliberated leases in three separate sessions, all of which were held jointly with the FASB.

Lessee disclosure requirements

The boards tentatively approved a set of disclosure requirements for the forthcoming exposure draft.

An entity should disclose the quantitative and qualitative financial information that identifies and explains the amounts recognised in its financial statements arising from lease contracts. That disclosure should include:

  • A general description of the lessee's leasing activities, including disaggregated information about its leasing activities (eg by nature or function).
  • If a lessee applies a simplified form of lease accounting for short-term leases, that fact should be disclosed. The lessee should also disclose the amounts recognised in the financial statements under the simplified model.
  • If a lessee enters into a sale and leaseback transaction, the lessee should disclose that fact, any material terms and conditions related to that transaction, and any gains or losses arising from that transaction, separately from other types of sales of assets
  • A lessee should provide a reconciliation between opening and closing balances for its right-of-use assets and its obligation to pay rentals.
  • A lessee should provide a narrative disclosure of its assumptions and estimates on the amortisation method used, options, contingent rentals, residual value guarantees, and the discount rate used.
  • A lessee should disclose a maturity analysis of the gross obligation to pay rentals showing the remaining contractual maturities and total obligations. The lessee would also have to reconcile the total gross obligation to the total obligation to pay rentals presented in the financial statements. In addition, the lessee would disclose a maturity analysis on an annual basis for the first five years and a lump sum figure for the remaining amounts.
  • A lessee should disclose the quantitative and qualitative financial information that helps users to evaluate the nature and extent of the amount, timing and uncertainty of future cash flows arising from lease contracts, and the way in which the lessee manages those uncertainties.

The boards also tentatively decided not to require the fair value disclosures of a lessee's obligation to pay rentals.

Lessor transitional provisions

The boards tentatively decided:

  • To require the lessor to recognise and measure all outstanding leases as of the date of initial application of the proposed new leases requirements, using a simplified retrospective approach. Under that approach, the lessor's receivable would be measured at the present value of the remaining lease payments. The performance obligation should be measured on the same basis as the receivable.
  • The original rate that the lessor is charging the lessee should be used to discount the lease payments.
  • A lessor should reinstate previously derecognised leased assets at depreciated cost, adjusted for impairment and revaluation (IFRS preparers only).
  • For IFRS preparers, transition disclosures should be required in accordance with the guidance in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors without the disclosure of adjusted basic and diluted earnings per share.

Measurement at initial recognition

The boards tentatively decided that initial measurement of assets and liabilities arising in lease contracts should be determined at the inception of the lease.

Lessor accounting for residual value guarantees

The boards tentatively decided that:

  • The lease receivable recognised by the lessor would include amounts payable under a residual value guarantee, if the amount could be measured reliably.
  • The receivable would be measured using an expected outcome technique; however, not every possible scenario would need to be taken into account when measuring the receivable.
  • The carrying amount of the receivable would be reassessed at each reporting date if any new facts or circumstances indicate that there is a material change in the receivable.
  • Any change in the receivable arising from a change in amounts payable under a residual value guarantee would be treated as an adjustment to the lessor's receivable and performance obligation, consistent with the boards' tentative decision on the accounting for contingent rentals.
  • Residual value guarantees from an unrelated third party should be accounted for in accordance with the accounting for other guarantees.

Presentation by Lessees

The boards tentatively decided that:

  • A lessee would present separately its obligation to pay rentals from other financial liabilities on the face of the statement of financial position.
  • A lessee would present its right-of-use asset with property, plant, and equipment, but separately from other assets that are owned but not leased, on the face of the statement of financial position.
  • Both amortization and interest expense arising in lease contracts would be separated from other amortization expense and other interest expense either on the face of the statement of comprehensive income or in the notes of financial statements.
  • Both cash repayments of amounts borrowed and interest payments arising in lease contracts would be classified as financing activities separately in the statement of cash flows. The boards instructed the staff to consider how total cash rentals paid in the period should be presented or disclosed in the financial statements.

For the first three items described above, the boards will ask for comments in an Exposure Draft on leases about whether the lessee's asset, liability and expenses should be presented on the face of the financial statements or in the notes to the financial statements.

Presentation by Lessors

The boards tentatively decided that the lessor would present the leased asset, the lease receivable, and the performance obligation separately in the statement of financial position totaling to a net lease asset or a net lease liability.

The IASB tentatively decided that interest income, lease income, and depreciation expense would be presented separately in the statement of comprehensive income. The FASB tentatively decided that interest income, lease income, and depreciation expense would be presented separately in the statement of comprehensive income totaling to a net lease income or net lease expense.

The boards tentatively decided that:

  • Repayments of the lease receivable would be classified as operating activities in the statement of cash flows.
  • Interest income arising from the lease receivable would be classified as operating activities in the statement of cash flows.

Lessor Accounting Model

The IASB indicated that it would like to reconsider an alternative accounting model for lessors (the 'derecognition approach').

The boards will continue discussion of lessee and lessor accounting at the April 2010 meeting.

Date: 3/17/2010