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Leases

IASB meeting summaries and observer notes


 IASB/FASB October 2011


 

 

The IASB and FASB discussed lessor accounting, the subsequent measurement of a lessor's residual asset when the lease contract includes variable lease payments that are not recognised as a part of the lease receivable at lease commencement, transfers of lease receivables, presentation requirements for lessors in the statement of comprehensive income, and transition.

Lessor accounting

The IASB and the FASB tentatively decided that a lessor's lease of investment property would not be within the scope of the receivable and residual approach. Instead, for such leases, the lessor should continue to recognise the underlying asset and recognise lease income over the lease term. Thirteen IASB members and all FASB members agreed.

The boards discussed the receivable and residual approach and tentatively decided that for all lease contracts within the scope of that approach, a lessor should:

  1. Initially measure the right to receive lease payments at the present value of the lease payments, discounted using the rate that the lessor charges the lessee, and subsequently measure it at amortised cost applying an effective interest method.
  2. Initially measure the residual asset as an allocation of the carrying amount of the underlying asset. The initial measurement of the residual asset comprises two amounts: (a) the gross residual asset, measured at the present value of the estimated residual value at the end of the lease term, discounted using the rate that the lessor charges the lessee and (b) the deferred profit, measured as the difference between the gross residual asset and the allocation of the carrying amount of the underlying asset.
  3. Subsequently measure the gross residual asset by accreting to the estimated residual value at the end of the lease term using the rate that the lessor charges the lessee. The lessor would not recognise any of the deferred profit in profit or loss until the residual asset is sold or re-leased.
  4. Present the gross residual asset and the deferred profit together as a net residual asset.

Eight IASB members and six FASB members agreed.

The boards also tentatively decided that there should be no distinction between when profit is or is not reasonably assured. Thirteen IASB members and all FASB members agreed.

Variable lease payments

The IASB and the FASB discussed the subsequent measurement of a lessor's residual asset when the lease contract includes variable lease payments that are not recognised as a part of the lease receivable at lease commencement.

The boards tentatively decided that:

  1. if the rate that the lessor charges the lessee does not reflect an expectation of variable lease payments, the lessor would not make any adjustments to the residual asset with respect to variable lease payments.
  2. if the rate that the lessor charges the lessee reflects an expectation of variable lease payments, the lessor would adjust the residual asset by recognising a portion of the residual as an expense when the variable lease payments are recognised in profit or loss. The adjustment is made on the basis of the expected variable payments. No adjustment is made to the residual asset for any difference between actual and expected variable lease payments.

Eleven IASB and all FASB members agreed.

Transfer/securitisation of lease receivables

The boards discussed the measurement of lease receivables held for the purpose of sale and the derecognition guidance to be applied when lease receivables are transferred or sold.

The boards tentatively decided that a lessor:

  1. should not measure a lease receivable at fair value, even if part or all of that receivable is held for the purpose of sale. Fourteen IASB and five FASB members agreed.
  2. should apply existing derecognition requirements (in IFRS 9 Financial Instruments, or Topic 860 Transfers and Servicing in the FASB Accounting Standards Codification�) to lease receivables, but allocate the carrying amount of a lease receivable on the basis of its fair value excluding any option elements and variable lease payments that are not transferred. All IASB and FASB members agreed.
  3. should apply the disclosure requirements in IFRS 7 Financial Instruments: Disclosures, and Topic 860 for transferred lease receivables. All IASB and FASB members agreed.

Lessor presentation

The boards discussed presentation requirements for lessors in the statement of comprehensive income. The boards tentatively decided that a lessor should present:

  1. the accretion of the residual asset as interest income. All IASB and FASB members agreed.
  2. the amortisation of initial direct costs as an offset to interest income. All IASB and FASB members agreed.
  3. lease income and lease expense (for example, revenue and cost of sales) in the statement of comprehensive income either in separate line items (gross) or in a single line item (net), depending on which presentation best reflects the lessor's business model. Thirteen IASB and all FASB members agreed.

The boards also tentatively decided that a lessor should separately identify income and expenses arising from leases either by separate presentation in the statement of comprehensive income or by disclosure in the notes to the financial statements. If disclosed, the notes should reference the line item in which the income is presented. All IASB and FASB members agreed.

Transition

The boards discussed transition requirements and transition disclosures for lessees and lessors.

Lessees

The boards tentatively decided that for capital or finance leases existing at the beginning of the earliest comparative period presented, a lessee would not be required to make any adjustments to the carrying amount of the lease assets and lease liabilities. However, the entity would reclassify the lease assets and lease liabilities as right-of-use assets and liabilities to make lease payments. Thirteen IASB members and five FASB members agreed.

The boards tentatively decided that for each operating leases at the beginning of the earliest comparative period presented, a lessee should:

  1. Recognise liabilities to make lease payments at the present value of the remaining lease payments, discounted using the lessee's incremental borrowing rate as of the effective date for each portfolio of leases with reasonably similar characteristics. The incremental borrowing rate for each portfolio of leases should take into consideration the lessee's total leverage, including leases in other portfolios.
  2. Recognise right-of-use assets on the basis of proportion of the liability to make lease payments at lease commencement, relative to the remaining lease payments.
  3. Record to retained earnings any difference between the liabilities to make lease payments and the right-of-use assets at transition.

The boards also tentatively decided that when lease payments are uneven over the lease term, a lessee should adjust the right-of-use asset recognised at the beginning of the earliest comparative period presented by the amount of any recognised prepaid or accrued lease payments. Thirteen IASB members and four FASB members agreed.

Lessors

The boards tentatively decided that for finance- or sales-type leases and direct finance leases existing at the beginning of the earliest comparative period presented, a lessor would not be required to make adjustments to the carrying amount of the assets associated with those leases. All IASB and FASB members agreed.

For operating leases existing at the beginning of the earliest comparative period presented, the boards tentatively decided that a lessor should:

  1. Recognise a right to receive lease payments, measured at the present value of the remaining lease payments, discounted using the rate charged in the lease that was determined at the date of commencement of the lease, subject to any adjustments that are required to reflect impairment.
  2. Recognise a residual asset that is consistent with the initial measurement of the residual asset under the receivable and residual approach, using information available at the beginning of the earliest comparative period presented.
  3. Derecognise the underlying asset.
  4. The boards also tentatively decided that when lease payments are uneven over the lease term, a lessor should adjust the cost basis in the underlying asset that is derecognised at the date of the earliest comparative period presented by the amount of any recognised prepaid or accrued lease payments.

Thirteen IASB members and six FASB members agreed.

Lessees and lessors

To ease the potential burden of applying the final standard in the first year of application, the boards tentatively decided that lessees and lessors may elect the following reliefs:

  1. An entity is not required to evaluate initial direct costs for contracts that began before the effective date.
  2. An entity may use hindsight in comparative reporting periods including the determination of whether or not a contract is a lease or contains a lease.

Thirteen IASB members and five FASB members agreed.

The boards also tentatively decided that lessees and lessors should provide transition disclosures that are consistent with Topic 250 Accounting Changes and Error Corrections in the FASB Accounting Standards Codification� and IAS 8 Accounting Policies, Changes in Estimates and Errors, but that they would not need to disclose the effect of the change on income from continuing operations, net income, any other affected financial statement line item, and any affected per-share amounts for the current period and any prior periods adjusted retrospectively. In addition, if an entity elects any of the available reliefs, the entity should disclose which reliefs it elected. Notwithstanding all of the above tentative decisions on transition, the boards tentatively decided that a lessee or lessor could choose to apply the requirements in the new leases standard retrospectively in accordance with Topic 250 or IAS 8. All IASB and FASB members agreed.

Date: 10/19/2011