The IASB and the FASB discussed issues that have been raised about the boards’ tentative decisions regarding sale and leaseback transactions; issues on how a lessee would account for leases under the single lease expense (SLE) approach; and issues about determining which lease approach should be applied.
Sale and leaseback transactions
The boards discussed how the revenue recognition guidance being developed by the boards should be applied within the context of sale and leaseback transactions. The boards tentatively decided to clarify the following:
- When determining whether a sale has occurred in a sale and leaseback transaction, an entity should apply the guidance developed in the Revenue Recognition project to the entire transaction.
- The existence of the leaseback does not, in isolation, prevent the transaction from being accounted for as a sale and a leaseback.
- However, if the leaseback is of such a nature that the seller/lessee has the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset, a sale has not occurred. For the purpose of a sale and leaseback transaction, the seller/lessee is assumed to have the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset if:
- the lease term is for the major part of the economic life of the underlying asset; or
- the present value of the minimum lease payments accounts for substantially all of the fair value of the underlying asset.
- If there are multiple lease components in the transaction, the assessment should be performed for each lease component separately.
- If an entity concludes that a sale has not occurred in accordance with the revenue recognition guidance, the entire transaction should be accounted for as a financing arrangement. The wording in the revised Leases Exposure Draft will be aligned with the wording in the revenue recognition guidance in this respect.
All IASB members and all FASB members agreed.
SLE Approach—accounting after impairment of the ROU asset
The boards discussed the accounting after an impairment of the right-of-use (ROU) asset under the SLE approach, noting that the current tentative decision is to refer to existing impairment guidance in IFRSs and US GAAP when assessing the ROU asset for impairment.
The boards tentatively decided that when the ROU asset is impaired, the lessee should continue to recognise the remaining lease expense in each period on a straight-line basis. However, the total lease expense recognised in any period should not be lower than the amount of the periodic unwinding of the discount on the lease liability. When the ROU is fully impaired, this would result in the lessee recognising the remaining lease expense in an amount equal to the periodic unwinding of the discount on the lease liability (ie, the remaining lease expense would no longer be recognised on a straight-line basis). The lessee should present lease expense recognised in the remaining periods in accordance with the decisions reached under the SLE approach.
All IASB members and all FASB members agreed, for the case in which the ROU asset is fully impaired. Nine IASB members and four FASB members agreed for the case in which the ROU asset is only partially impaired.
SLE Approach—lease expense recognition pattern
The boards tentatively decided that, under the SLE approach, a lessee should be required to recognise total lease expense on a straight-line basis.
Eleven IASB members and four FASB members agreed.
Lease approach—date of assessment
The boards discussed the timing of the assessment of which lease approach to apply and tentatively decided that an entity should determine the lease approach at lease commencement only.
All IASB members and five FASB members agreed.
Lease approach—which asset to evaluate in a sublease
The boards tentatively decided that, for the purpose of assessing which lease approach to apply, a lessor and a lessee should evaluate the lease with reference to the underlying asset (not the ROU asset) to determine the appropriate accounting approach to apply to the sublease.
Nine IASB members and six FASB members agreed.
There are a few remaining FASB-only issues to be addressed, and then the staff will draft the revised Leases Exposure Draft. The plan is to publish the Exposure Draft in the first quarter of 2013.