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IASB meeting summaries and observer notes


 

IASB / FASB November 2011

 30 December 1899


IASB / FASB 15 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.

 

IASB / FASB 1 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.

 

The FASB and the IASB discussed the disclosure requirements for lessors that account for leases under the receivable and residual approach, transition requirements for sale and leaseback transactions and other transition considerations for the proposed leases guidance.

Lessor disclosure

The boards tentatively decided to require disclosure of the following items for lessors that account for leases under the receivable and residual approach:

  1. A table of all lease-related income items that were recognised in the reporting period, disaggregated into (a) profit, recognised at lease commencement (split into revenue and cost of sales, if that is how the lessor has presented the amounts in the statement of comprehensive income); (b) interest income on the lease receivable; (c) interest income on the residual asset; (d) variable lease income; and (e) short-term lease income. All board members present agreed.
  2. Information about the basis and terms on which variable lease payments are determined as required in paragraph 73(a)(ii) of the 2010 exposure draft. All board members present agreed.
  3. Information about the existence and terms of options, including options for renewal and termination as required in paragraph 73(a)(iii) of the 2010 exposure draft. All board members present agreed.
  4. A qualitative description of purchase options in leasing arrangements, including information about the extent to which the entity is subject to such agreements. Ten IASB members and six FASB members agreed.
  5. A reconciliation of the opening and closing balance of the right to receive lease payments and residual assets. All board members present agreed.
  6. A maturity analysis of the undiscounted cash flows included in the right to receive lease payments. Twelve IASB members and all FASB members agreed. The maturity analysis should show, at a minimum, the undiscounted cash flows to be received in each of the first five years after the reporting date and a total of the amounts for the years thereafter. The analysis should reconcile to the right to receive lease payments. The boards noted a potential redundancy with disclosures proposed in other active projects and agreed to avoid redundancy wherever possible. All IASB members present and 6 FASB members agreed.
  7. In addition to the disclosure about residual asset risk and residual value guarantees proposed in the 2010 exposure draft, information about how the entity manages its exposure to the underlying asset, including (a) its risk management strategy in this respect; (b) the carrying amount of the residual asset that is covered by residual value guarantees; and (c) whether the lessor has any other means of reducing its exposure to residual asset risk (for example, buyback agreements with the manufacturer from whom the lessor purchased the underlying asset, or options to put the underlying asset back to the manufacturer). Eleven IASB members and six FASB members agreed.

Additionally, the boards tentatively decided that a lessor is not required to disclose the following:

  1. The initial direct costs incurred in the period (12 IASB members and all FASB members agreed);
  2. The weighted average or range of discount rates used to calculate the right to receive lease payments (10 IASB members and 4 FASB members agreed); and
  3. The fair value of the right to receive lease payments or the residual asset (10 IASB members and 4 FASB members agreed).

Sale and leaseback transition

The boards reached the following tentative decisions regarding transition accounting for sale and leaseback transactions entered into prior to the effective date:

  • For a sale and leaseback transaction that resulted in a capital lease (US GAAP) or finance lease (IFRS) classification, a seller/lessee would not re evaluate the sale recognition conclusion reached previously, would not remeasure lease assets and lease liabilities that had been previously recognised in the statement of financial position, and would continue to amortise any deferred gain or loss on sale over the lease term in the statement of comprehensive income.
  • For a sale and leaseback transaction that resulted in an operating lease classification or for which the sale recognition criteria were previously not met, a seller/lessee would re evaluate the sale conclusion based on the criteria for transfer of control of an asset in the proposed revenue standard. If the criteria were met, a seller/lessee would measure lease assets and lease liabilities in accordance with the boards' previous tentative decisions regarding transition for leases that are currently classified as operating leases and would recognise any deferred gain or loss in opening retained earnings upon transition to the new leases guidance.
  • Alternatively, a seller/lessee may elect to apply the requirements in the proposed leases standard retrospectively.

All board members present agreed.

Other transition considerations

The boards tentatively decided that no transition guidance was necessary for short-term leases, investment property measured at fair value, subleases, useful lives of leasehold improvements, build to suit leases, and in-substance purchases and sales. The boards plan to consider at a future meeting whether transition guidance is necessary for secured borrowings and investment property that is not measured at fair value. All board members present agreed.

Next Meeting

The next meeting will be held on the afternoon (London time) of Monday 7 November. The only item scheduled to be discussed is the proposal to defer the effect date of IFRS 9 Financial instruments.