Tentative Board Decisions
Tentative Board decisions are provided for those interested in following the Board’s deliberations. All of the reported decisions are tentative and may be changed at future Board meetings.
April 23, 2014 Joint FASB/IASB Videoconference Board MeetingLeases. The FASB and the IASB (the Boards) continued redeliberating the proposals in the May 2013 Exposure Draft, Leases, specifically discussing the following topics: (1) lease modifications and contract combinations, (2) variable lease payments, (3) in-substance fixed payments, and (4) discount rate.
Lease Modifications and Contract Combinations
The Boards decided to define a lease modification as any change to the contractual terms and conditions of a lease that was not part of the original terms and conditions of the lease and that the substance of the modification should govern over its form.
The Boards decided that both a lessee and a lessor should account for a lease modification as a new lease, separate from the original lease, when (1) the lease grants the lessee an additional right-of-use not included in the original lease and (2) the additional right-of-use is priced commensurate with its standalone price (in the context of that particular contract).
For lease modifications that are not accounted for as separate new leases, the Boards decided that:
- When a lease modification results in a change in the scope or consideration of the lease, a lessee should remeasure the lease liability using a discount rate determined at the effective date of the modification. For modifications that increase the scope of, or change the consideration paid for, the lease, the lessee should make a corresponding adjustment to the right-of-use asset. For modifications that decrease the scope of the lease, the lessee should decrease the carrying amount of the right-of-use asset to reflect the partial or full termination of the lease and should recognize a gain or a loss on a proportionate basis to the decrease in scope.
- A lessor should account for (a) modifications to a Type B lease as, in effect, a new lease from the effective date of the modification, considering any prepaid or accrued lease rentals relating to the original lease as part of the lease payments for the modified lease and (b) modifications to a Type A lease in accordance with IFRS 9, Financial Instruments (IFRS), or Topic 310, Receivables (U.S. GAAP).
Variable Lease Payments
The Boards decided that only variable lease payments that depend on an index or a rate should be included in the initial measurement of lease assets and lease liabilities and that an entity should measure those payments using the index or rate at lease commencement.
The FASB decided that a lessee should reassess variable lease payments that depend on an index or a rate only when the lessee remeasures the lease liability for other reasons (for example, because of a reassessment of the lease term).
The IASB decided that a lessee should reassess variable lease payments that depend on an index or a rate when the lessee remeasures the lease liability for other reasons (for example, because of a reassessment of the lease term) and when there is a change in the cash flows resulting from a change in the reference index or rate (that is, when an adjustment to the lease payments takes effect).
The Boards decided that a lessor should not be required to reassess variable lease payments that depend on an index or a rate.
In-Substance Fixed Payments
The Boards decided (1) to retain the principle that variable lease payments that are in-substance fixed payments should be included in the definition of lease payments and provide additional clarifying guidance and (2) to note in the Basis for Conclusions that the concept that some variable lease payments are in-substance fixed payments exists under current practice.
With respect to the determination of the discount rate, the Boards decided:
- To clarify in the implementation guidance what “value” refers to in the definition of the lessee’s incremental borrowing rate, but otherwise make no changes to the definition in the May 2013 Exposure Draft.
- To describe the rate the lessor charges the lessee as the rate implicit in the lease, consistent with existing lessor guidance.
- To include initial direct costs of the lessor in determining the rate implicit in the lease.
- To require a lessee to reassess the discount rate only when there is a change to either the lease term or the assessment of whether the lessee is (or is not) reasonably certain to exercise an option to purchase the underlying asset.
- Not to require a lessor to reassess the discount rate.
The Boards will continue their joint redeliberations of the May 2013 Exposure Draft at a future Board meeting.