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.
Leases. The Board continued redeliberating the proposals in the May 2013 Exposure Draft, Leases, specifically discussing the following topics:
- Lessor accounting model—collectibility
- Lessor Type A lease modifications
- Impairment of lessor Type A lease assets
- Accounting for the purchase of a leased asset by the lessee during the lease term.
The Board decided to incorporate collectibility into the lessor accounting model by requiring the following:
- All leases that do not, in effect, transfer control of the underlying asset to the lessee and for which collectibility of the lease payments is not probable should be classified and accounted for as Type B leases.
- All leases that, in effect, transfer control of the underlying asset to the lessee should be assessed and accounted for in accordance with the collectibility guidance applicable to all sales of nonfinancial assets in Topic 606, Revenue from Contracts with Customers, and Topic 610, Other Income.
The Board decided that when a Type A lease is modified and that modification is not accounted for as a separate, new lease, the lessor should do the following:
- If the modified lease is classified as a Type A lease, adjust the discount rate for the modified lease so that the initial net investment in the modified lease equals the carrying amount of the net investment in the original lease immediately before the effective date of the modification. However, if the original lease did not, in effect, transfer control of the underlying asset to the lessee, but the modified lease does, the lessor should adjust the discount rate for the modified lease so that the initial net investment in the modified lease equals the carrying amount of the net investment in the original lease, net of any deferred selling profit, immediately before the effective date of the modification.
- If the modified lease is classified as a Type B lease, recognize the underlying asset at the carrying amount of the net investment in the original lease immediately before the effective date of the modification.
The Board decided to require a lessor to assess the lessor’s entire net investment in the lease (that is, both its lease receivable and any unguaranteed residual asset) for impairment in accordance with Topic 310, Receivables. That is, the unguaranteed residual asset should not be assessed for impairment in accordance with Topic 360, Property, Plant, and Equipment.
Accounting for the Purchase of a Leased Asset by the Lessee during the Lease Term
The Board decided that the guidance in paragraph 840-30-35-14 applicable to the purchase of an asset subject to a capital lease by the lessee during the lease term should be included in the final leases standard and should be applicable for all leases (that is, both Type A and Type B leases). Therefore, if a lessee purchases a leased asset during the lease term, any difference between the purchase price and the carrying amount of the lease liability should be recorded as an adjustment of the carrying amount of the asset. No gain or loss should be recognized.
The staff has begun drafting a final leases standard based on the tentative decisions reached by the Board. Later in the drafting process, the Board will discuss any additional issues that arise during drafting, the benefits and costs of the new leases standard, and the effective date.
Simplifying the Subsequent Measurement of Inventory. The Board discussed the results of outreach performed on the July 2014 proposed Accounting Standards Update, Inventory (Topic 330): Simplifying the Measurement of Inventory, and made the following decisions.
The Board decided to exclude inventory measured using the last-in, first-out (LIFO) and retail inventory methods from the scope of the proposed changes. There is no change to the accounting for inventory measured using the LIFO or retail inventory methods.
Lower of Cost and Net Realizable Value
The Board affirmed its proposal to require that inventory within the scope of the amendments be measured at the lower of cost and net realizable value. As a result, a reporting entity would no longer be required to consider replacement cost or net realizable value less an approximately normal profit margin when measuring inventory within the scope of the amendments.
Method of Transition and Disclosures in the Period of Transition
The Board affirmed its proposal that entities should apply the amendments prospectively and disclose in the period of adoption the nature of and reason for the accounting change.
The Board affirmed that the amendments would not require additional disclosures in periods after the amendments are adopted.
The Board decided that public business entities would be required to apply the amendments in annual reporting periods beginning after December 15, 2016, including interim reporting periods within those annual reporting periods.
The Board decided that entities other than public business entities would be required to apply the amendments in annual reporting periods beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning after December 15, 2017.
The Board decided to allow all entities the option of early adopting the changes as of the beginning of any interim or annual reporting period.
Permission to Ballot
The Board decided that it has received sufficient information and analysis on the proposed amendments to make an informed decision on the issues presented and that the expected benefits of those amendments justify the perceived cost of change. The Board directed the staff to draft a final Update for vote by written ballot.