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Leases

IASB meeting summaries and observer notes


 IASB / FASB November 2011


 

 

The IASB discussed how a first-time adopter of IFRSs would apply the proposed leases standard in its first IFRS financial statements; consequential amendments to the business combinations guidance in IFRSs and US GAAP; transition issues related to business combinations; consequential amendments to the borrowing costs guidance in IFRSs and US GAAP; and transition requirements for secured borrowings.

IASB�First-time adoption

The IASB tentatively decided that a first-time adopter would be permitted to apply, to all of its lease contracts, the transitional provisions and reliefs that are applicable to the operating leases of an existing IFRS preparer. In addition, the IASB tentatively decided to permit a first-time adopter to initially measure a right-of-use asset at fair value in its opening IFRS statement of financial position and to use that amount as deemed cost.

All IASB members voted in favour of these decisions.

Business combinations and borrowing cost consequential amendments

The boards tentatively decided the following in relation to the measurement of lease assets and lease liabilities acquired in a business combination:

a. If the acquiree is a lessee, an acquirer should recognise a liability to make lease payments and a right-of-use asset. The acquirer should measure:

i. the liability to make lease payments at the present value of future lease payments in accordance with the proposed leases guidance, as if the associated lease contract is a new lease at the acquisition date; and

ii. the right-of-use asset equal to the liability to make lease payments, adjusted for any off-market terms in the lease contract.

b. If the acquiree is a lessor applying the receivable and residual approach, an acquirer should recognise a right to receive lease payments and a residual asset. The acquirer should measure:

i. the right to receive lease payments at the present value of future lease payments in accordance with the proposed leases guidance, as if the associated lease contract is a new lease at the acquisition date; and

ii. the residual asset as the difference between the fair value of the underlying asset at the acquisition date and the carrying amount of the right to receive lease payments.

c. If the acquiree is a lessor of investment property, an acquirer should apply the guidance in IFRS 3 Business Combinations or Topic 805 Business Combinations that relates to acquired operating leases.

d. If the acquiree has short-term leases (that is, leases for which, at the date of acquisition, the maximum remaining term of the lease contract is twelve months or less), an acquirer should not recognise separate assets or liabilities related to the lease contract at the acquisition date.

10 IASB members and 6 FASB members agreed.

The boards tentatively decided that, upon transition, a lessee that previously recognised assets or liabilities relating to favourable or unfavourable terms in acquired operating leases should derecognise those assets or liabilities and adjust the carrying amount of the right-of-use asset by the amount of any asset or liability derecognised. All IASB members and 5 FASB members agreed.

The FASB tentatively decided that a lessor applying the receivable and residual approach that previously recognised assets or liabilities relating to favourable or unfavourable terms in acquired operating leases should derecognise those assets or liabilities and make a corresponding adjustment to retained earnings. All FASB members agreed.

The boards tentatively decided that interest expense incurred in a lease should be included in the scope of IAS 23 Borrowing Costs and Topic 835 Interest for the purposes of determining the interest costs or borrowing costs that could be capitalised. All IASB and FASB members agreed.

Transition-secured borrowings

The boards tentatively decided that, on transition to the new leases guidance, a lessor would continue to account for the securitisation of lease receivables associated with current operating leases as secured borrowings in accordance with existing US GAAP and IFRSs. This tentative decision applies to a lessor regardless of whether it elects a fully retrospective approach to transition. All IASB and FASB members agreed.

Date: 11/15/2011