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IASB meeting summaries and observer notes


 

 IASB meetings March 2011


IASB / FASB 21 March 2011

 

The IASB and the FASB discussed inception versus commencement, discount rate, initial direct costs, separating lease and non-lease components of a contract and sale and leaseback transactions.

Inception versus commencement

The boards discussed the accounting for elements of a lease contract at the date of inception versus the date of commencement from both the lessee's and lessor's perspective.

The boards tentatively decided that the Leases standard would:

  1. Require a lessee and a lessor to recognise and initially measure lease assets and lease liabilities (and derecognise any corresponding assets and liabilities) at the date of commencement of the lease. All board members supported this decision.
  2. Require a lessee and a lessor to use a discount rate calculated at the date of commencement when initially measuring lease assets and lease liabilities. Four FASB members and 11 IASB members supported this decision (3 FASB members and 4 IASB members voted against).
  3. Include application guidance on the accounting for costs incurred by the lessee before the date of commencement of a lease. All board members supported this decision.
  4. Include application guidance on the accounting for lease payments made by the lessee before the date of commencement of a lease. All board members supported this decision.
  5. Include application guidance on the accounting for incentives provided by the lessor to the lessee. This would clarify that a lessee will deduct all lease incentives from the initial measurement of the right-of-use asset. Six FASB members and 13 IASB members supported this decision (1 FASB member and 2 IASB members voted against).

The boards also discussed the accounting for a lease contract between the date of inception and the date of commencement of a lease when the contract meets the definition of an onerous contract. The IASB affirmed the proposal in the Leases exposure draft proposal to exclude lease contracts that meet the definition of an onerous contract from the scope of the Leases standard between the date of inception and the date of commencement. Such leases would be accounted for in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets, until the date of commencement. The FASB also indicated support for applying Topic 450 Contingencies to those contracts that meet the definition of an onerous contract before the date of commencement, but noted that this issue would be reviewed when the boards consider impairment at a future meeting.

Initial direct costs

The boards discussed the definition of initial direct costs and the accounting by lessees and lessors for initial direct costs.

The boards tentatively defined initial direct costs as follows:

  • Costs that are directly attributable to negotiating and arranging a lease that would not have been incurred had the lease transaction not been made.
  • All board members supported this decision for lessees. Seven FASB members and 9 IASB members supported this decision for lessors (6 IASB members voted against).

The boards affirmed the decision in the Leases exposure draft that lessees and lessors should capitalise initial direct costs by adding them to the carrying amount of the right-of-use asset and the right to receive lease payments, respectively. Six FASB members and 14 IASB members supported this decision (1 FASB member and 1 IASB member voted against).

Discount rate

The boards discussed how lessees and lessors would determine the discount rate to use to initially measure lease payments at present value.

The boards tentatively reaffirmed the proposals in the Leases exposure draft, but clarified the following (all board members supported this decision):

  1. The lessee would use the rate the lessor charges the lessee when that rate is available; otherwise the lessee would use its incremental borrowing rate.
  2. The lessor would use the rate the lessor charges the lessee.
  3. The rate the lessor charges the lessee could be the lessee's incremental borrowing rate, the rate implicit in the lease, or, for property leases, the yield on the property. When more than one indicator of the rate that the lessor charges the lessee is available, the rate implicit in the lease should be used.

The boards also tentatively decided to provide application guidance for the determination of the discount rate when considering the use of a group discount rate and determining the yield on property. All board members supported this decision.

 

Separating lease and non-lease components of a contract

The boards tentatively decided that an entity should be required to identify and separately account for the lease and the non-lease components of a contract. Four FASB members and 13 IASB members supported this decision (3 FASB members and 2 IASB members voted against).

The boards tentatively decided that in allocating payments in a contract between the lease and non-lease components of the contract:

  1. The lessor should allocate payments in accordance with the guidance on revenue recognition. All board members supported this decision.
  2. The lessee should allocate payments as follows:
    1. If the purchase price of each component is observable, the lessee would allocate the payments on the basis of the relative purchase prices of individual components. Six FASB members and 14 IASB members supported this decision (1 FASB member and 1 IASB member voted against);
    2. If the purchase price of one or more, but not all, of the components is observable, the lessee would allocate the payments on the basis of a residual method. Six FASB members and all IASB members supported this decision (1 FASB member voted against) ; or
    3. If there are no observable purchase prices, the lessee would account for all the payments required by the contract as a lease. All FASB members and 13 IASB members supported this decision (2 IASB members voted against).

The boards directed the staff to include application guidance on how a lessee should determine what would be an observable price, taking into consideration the relevance of guidance in other projects such as revenue recognition.

Sale and leaseback transactions

The boards affirmed the decision in the Leases exposure draft that when a sale has occurred, the transaction will be accounted for as a sale and then a leaseback. If a sale has not occurred, the entire transaction will be accounted for as a financing. All board members supported this decision.

The boards tentatively decided that an entity should apply the control criteria described in the revenue recognition project to determine whether a sale has occurred. Six FASB members and 12 IASB members supported this decision (1 FASB member and 3 IASB members voted against).

The boards affirmed the decision in the Leases exposure draft (all board members supported this decision) that in a transaction accounted for as a sale and leaseback:

  1. When the consideration is at fair value, the gains and losses arising from the transaction should be recognised when the sale occurs.
  2. When the consideration is not established at fair value, the assets, liabilities, gains and losses recognised should be adjusted to reflect current market rentals.

The boards affirmed the decision in the Leases exposure draft that the seller/lessee would adopt the 'whole asset' approach in a sale and leaseback transaction. The 'whole asset' approach deems that in a sale and leaseback transaction, the seller/lessee sells the entire underlying asset and leases back a right-of-use asset relating to part of the underlying asset. All FASB members and 11 IASB members supported this decision (4 IASB members voted against).

The boards tentatively decided that the leases guidance would not prescribe a particular type of lessee accounting model for entities that are accounting for the leaseback part of a sale and leaseback transaction. All board members supported this decision.

Next steps

The boards will continue their redeliberations of the Leases exposure draft in April 2011.

 

IASB / FASB 14 March 2011

 

The IASB and the FASB discussed how to distinguish between a lease and a purchase or a sale, the accounting for purchase options, and short-term leases.

Distinguishing between a lease and a purchase or a sale

The boards discussed whether the leases standard should provide guidance for distinguishing a lease from a purchase or a sale.

The boards tentatively decided that guidance should not be provided in the leases standard for distinguishing a lease of an underlying asset from a purchase or a sale of an underlying asset. That is, if an arrangement does not contain a lease, it should be accounted for in accordance with other applicable standards (for example, property, plant, and equipment or revenue recognition). The IASB voted 11 in favour and 4 against, while the FASB voted unanimously in favour.

Accounting for purchase options

The boards discussed how lessees and lessors should account for options to purchase the underlying assets that are included within an arrangement that contains a lease.

The boards tentatively decided that lessees and lessors should include the exercise price of a purchase option (including bargain purchase options) in the measurement of the lessee's liability to make lease payments and the lessor's right to receive lease payments, if the lessee has a significant economic incentive to exercise the purchase option. If it is determined that the lessee has a significant economic incentive to exercise the purchase option, the right-of-use asset recognised by the lessee should be amortised over the economic life of the underlying asset, rather than over the lease term. The IASB voted 13 in favour and 2 against, while the FASB voted unanimously in favour.

The boards also discussed whether a lessee and a lessor should reassess how to account for a purchase option included within an arrangement that contains a lease in subsequent periods. The boards tentatively indicated a preference for specifying the same reassessment guidance for purchase options as was tentatively decided for options to extend or terminate a lease. However, the boards instructed the staff to seek input through targeted outreach on the costs and benefits of requiring reassessment.

The boards will continue their redeliberations of the Leases exposure draft at future meetings.

Short-term leases

The IASB and the FASB discussed the accounting for short-term leases by lessees and lessors. The boards tentatively decided that:

  1. A short-term lease, for both lessees and lessors, is defined as 'a lease that, at the date of commencement of the lease, has a maximum possible term, including any options to renew, of 12 months or less'. The IASB and the FASB both voted unanimously in favour.
  2. Lessees and lessors may elect:
    • as an accounting policy for a class of underlying asset(s) (the IASB voted 8 in favour and 7 against, while the FASB voted 5 in favour and 2 against), to account for all short-term leases by not recognising lease assets or lease liabilities (the IASB voted 10 in favour and 5 against, while the FASB voted 4 in favour and 3 against); and
    • to recognise lease payments in profit or loss on a straight-line basis over the lease term, unless another systematic and rational basis is more representative of the time pattern in which use is derived from the underlying asset. All the IASB and FASB members supported this decision.

    Next steps

    The boards will continue their redeliberations of the Leases exposure draft at the meeting in the week beginning 21 March.