Project Update

Leases—Joint Project of the FASB and the IASB

Last updated on March 28, 2014. Please refer to the Current Technical Plan for information about the expected release dates of exposure documents and final standards.

(Updated sections are indicated with an asterisk *)

This project update summarizes the project activities and decisions of the FASB and the IASB (Boards). It was prepared by the staff and is for the information and convenience of their constituents. All decisions of the Boards are tentative, may change at future Board meetings, and do not change current accounting and reporting requirements. Decisions of the Boards become final only after extensive due process.

Due Process Documents
Project Objective and Summary of the Proposed Model
Outreach/Field Work
*Decisions Reached at the Last Meeting
Summary of Decisions Reached to Date
Next Steps
*Board/Other Public Meeting Dates
Background Information
Contact Information

DUE PROCESS DOCUMENTS

On May 16, 2013, the FASB issued a proposed Accounting Standards Update, Leases (Topic 842): a revision of the 2010 proposed Accounting Standards Update, Leases (Topic 840).

PROJECT OBJECTIVE AND SUMMARY OF THE PROPOSED MODEL

Leasing is an important activity for many organizations—whether a public or private company, or a not-for-profit organization. It is a means of gaining access to assets, obtaining financing, and reducing an organization’s exposure to the risks of asset ownership. Many organizations lease assets such as real estate, airplanes, trucks, ships, and construction and manufacturing equipment. Because of the prevalence of leasing, it is important for users of financial statements to have a complete and understandable picture of an organization’s leasing activities.

The existing accounting models for leases require lessees and lessors to classify their leases as either capital leases or operating leases and to account for those leases differently. Those models have been criticized for failing to meet the needs of users of financial statements because they do not always provide a faithful representation of leasing transactions.

As a result, there has been a widespread request from users of financial statements and other stakeholders to change the accounting guidance so that lessees would be required to recognize assets and liabilities arising from leases.

In addition, the U.S. Securities and Exchange Commission (SEC) issued a report on off-balance sheet activities in 2005 and recommended that changes be made to the existing lease accounting requirements to ensure greater transparency in financial reporting. A number of academic studies have made similar recommendations.

The objective of the revised Exposure Draft is to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information.

The core principle of the proposed requirements is that an organization should recognize assets and liabilities arising from a lease. This represents an improvement over existing leases standards, which do not require lease assets and lease liabilities to be recognized by many lessees.

A lessee would recognize assets and liabilities for leases with a maximum possible term of more than 12 months.

The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee would depend primarily on whether the lessee is expected to consume more than an insignificant portion of the economic benefits embedded in the underlying asset. For practical purposes, this assessment would often depend on the nature of the underlying asset.

OUTREACH/FIELD WORK

Preparer Outreach
The Boards and staff participated in fieldwork meetings, where members of the Boards and staff visited financial statement preparers, both public and nonpublic, lessees and lessors. During these meetings, the members of the Boards and staff met with more than 20 different companies, who provided detailed information about the types and volume of leases that they enter into, as well as the systems that they currently use to track their leases. The purpose of these meetings was for the Boards and staff to use the information provided by the preparers to obtain a detailed understanding of the practical application of the 2013 revised Exposure Draft to help them evaluate the costs of implementation and any potential ongoing compliance costs.

Investor/Analyst Outreach

The Boards and staff conducted outreach with investors and analysts in the months of May through September 2013. This outreach mainly focused on the lessee proposals, but the Boards and staff also received feedback on the lessor proposals. For a summary of investor and analyst feedback on the lessee proposals, click here.

Public Roundtable Meetings


The Boards hosted several public roundtable meetings on their revised joint proposals on leases that were published in May 2013: the revised proposed FASB Accounting Standards Update, Leases (Topic 842) and the IASB’s Exposure Draft, Leases.

The roundtable meetings are an important part of the Boards’ due process. The meetings provided an opportunity for those that submitted a comment letter to discuss the proposals with the Boards and staff in further detail. To ensure that they received input covering a variety of perspectives, the Boards and staff sought participation from preparers, auditors, investors, and others.

The public roundtable meetings were scheduled as follows:

  • Tuesday, September 10th at Conselho Regional de Contabilidade do Estado de Sao Paulo in Sao Paulo, Brazil (one session)
    • An audio replay is available here.
  • Monday, September 16th at the IASB Office in London, UK (two sessions)
    • An audio replay is available here.
  • Monday, September 23rd at the FASB Office in Norwalk, Connecticut, USA (two sessions)
    • An audio replay is available here.
  • Thursday, October 3rd at Sheraton Gateway in Los Angeles, California, USA (two sessions, one of which was focused on nonpublic entities)
    • An audio replay is available here.
  • Friday, October 4th at Suntec Singapore Convention & Exhibition Centre in Singapore (one session)
    • An audio replay is available here.

Webcast

On Monday, May 20, the Boards and staff hosted IN FOCUS: THE LEASES PROJECT, a live webcast taking place from 10:30 to 11:30 a.m. EDT (3:30 to 4:30 p.m. GMT). The webcast featured FASB member Russell Golden, IASB member Darrel Scott, and FASB and IASB staff members discussing the proposal and answering questions submitted by viewers.

*DECISIONS REACHED AT THE LAST MEETING (March 18-19, 2014)


Leases

The Boards continued redeliberations of the proposals included in the May 2013 Exposure Draft, Leases, specifically discussing the following topics: (1) lessee accounting model, (2) lessor accounting model, (3) lessor Type A accounting, (4) lessee small-ticket leases, (5) lease term, and (6) lessee accounting: short-term leases.

Lessee Accounting Model

The FASB decided on a dual approach for lessee accounting, with lease classification determined in accordance with the principle in existing lease requirements (that is, determining whether a lease is effectively an installment purchase by the lessee). Under this approach, a lessee would account for most existing capital/finance leases as Type A leases (that is, recognizing amortization of the right-of-use (ROU) asset separately from interest on the lease liability) and most existing operating leases as Type B leases (that is, recognizing a single total lease expense).

The IASB decided on a single approach for lessee accounting. Under that approach, a lessee would account for all leases as Type A leases (that is, recognizing amortization of the ROU asset separately from interest on the lease liability).

Lessor Accounting Model

The Boards decided that a lessor should determine lease classification (Type A versus Type B) on the basis of whether the lease is effectively a financing or a sale, rather than an operating lease (that is, on the concept underlying existing U.S. GAAP and on IFRS lessor accounting). A lessor would make that determination by assessing whether the lease transfers substantially all the risks and rewards incidental to ownership of the underlying asset. In addition, the FASB decided that a lessor should be precluded from recognizing selling profit and revenue at lease commencement for any Type A lease that does not transfer control of the underlying asset to the lessee. This requirement aligns the notion of what constitutes a sale in the lessor accounting guidance with that in the forthcoming revenue recognition standard, which evaluates whether a sale has occurred from the customer’s perspective.

Lessor Type A Accounting

The Boards decided to eliminate the receivable and residual approach proposed in the May 2013 Exposure Draft. Instead, a lessor will be required to apply an approach substantially equivalent to existing IFRS finance lease accounting (and U.S. GAAP sales type/direct financing lease accounting) to all Type A leases.

Lessee Small-Ticket Leases

The Boards decided that the leases guidance should not include specific requirements on materiality.

The Boards also decided to permit the leases guidance to be applied at a portfolio level by lessees and lessors. The FASB decided to include the portfolio guidance in the basis for conclusions; the IASB decided to include the portfolio guidance in the application guidance.

The IASB decided to provide an explicit recognition and measurement exemption for leases of small assets for lessees.

Lease Term

The Boards decided that, when determining the lease term, an entity should consider all relevant factors that create an economic incentive to exercise an option to extend, or not to terminate, a lease. An entity should include such an option in the lease term only if it is reasonably certain that the lessee will exercise the option having considered the relevant economic factors. Reasonably certain is a high threshold substantially the same as reasonably assured in existing U.S. GAAP. The Boards also decided that an entity should account for purchase options in the same way as options to extend, or not to terminate, a lease.

The Boards decided that a lessee should reassess the lease term only upon the occurrence of a significant event or a significant change in circumstances that are within the control of the lessee.

The Boards decided that a lessor should not reassess the lease term.

Lessee Accounting: Short-Term Leases

The Boards decided to retain the recognition and measurement exemption for a lessee’s short-term leases. The Boards also decided that the short-term lease threshold should remain at 12 months or less. Additionally, the Boards decided to change the definition of a short-term lease so that it is consistent with the definition of lease term.

Finally, the Boards decided to require disclosure of the amount of expense related to short-term leases recognized in the reporting period as well as any qualitative disclosures the Boards decide upon for leases generally. If the short-term lease expense does not reflect the lessee’s short-term lease commitments, a lessee should disclose that fact and the amount of its short-term lease commitments.

Next Steps

The staff will perform additional analysis regarding the recognition and measurement exemption of leases of small assets for lessees. The Boards will continue their joint redeliberations of the May 2013 Exposure Draft at a future Board meeting.

SUMMARY OF TENTATIVE DECISIONS REACHED TO DATE (As of January 23, 2014)


January 23rd, 2014

The Boards began their redeliberations of the proposals included in the May 2013 Exposure Draft, Leases. The objective of the meeting was to have an in-depth discussion of the following topics:

  1. Lessor accounting model
  2. Accounting for “Type A” leases by lessors
  3. Lessee accounting model
  4. Lessee small-ticket leases.

The Boards did not make any decisions.

November 20th, 2013

The Boards discussed a summary of the feedback received in response to the proposed FASB Accounting Standards Update, Leases (Topic 842), and the IASB Exposure Draft, Leases.

The Boards also discussed the plans for redeliberating the issues raised by stakeholders.

The Boards did not make any decisions. 

NEXT STEPS

The Boards will continue redeliberations of all significant issues in the first quarter 2014.

Please see the Current Technical Plan for more information about the project timeline.

*BOARD/OTHER PUBLIC MEETING DATES (AFTER THE ISSUANCE OF THE 2013 EXPOSURE DRAFT)

The IASB meeting summaries and FASB meeting minutes are provided for the information and convenience of constituents who want to follow the Boards’ deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final Accounting Standards Update.

(View list of meetings prior to the issuance of the Exposure Draft)

Topic

IASB Meeting Summaries and Observer Notes

FASB Board Minutes

Joint IASB/FASB Board Meeting
The Boards discussed the lessee accounting model, the lessor accounting model, small ticket leases, lease term, and short-term leases.
March 2014 March 18-19, 2014
Joint IASB/FASB Board Meeting
The Boards began their redeliberations of the proposals included in the May 2013 Exposure Draft, Leases.
January 2014 January 23, 2014
Joint IASB/FASB Board Meeting
The Boards discussed a summary of feedback received on the leases project through outreach activities, roundtable meetings, and comment letters. The Boards also discussed the plans for redeliberations.
November 2013
November 20, 2013

CONTACT INFORMATION

FASB

Danielle Zeyher
Project Manager
dtzeyher@fasb.org

IASB

Patrina Buchanan
Technical Principal
pbuchanan@ifrs.org

Scott Muir
Practice Fellow
samuir@fasb.org

Roberta Ravelli
Practice Fellow
rravelli@ifrs.org
Nicholas Cappiello
Project Manager
ntcappiello@fasb.org
Sarah Geisman
Technical Manager
sgeisman@ifrs.org
Lisa Muehlbauer
Assistant Project Manager
lamuehlbauer@fasb.org

Kathryn Donkersley
Technical Manager
kdonkersley@ifrs.org

Steve Winick
Postgraduate Technical Assistant
smwinick@fasb.org

Anna Heining
Technical Associate
aheining@ifrs.org

Jaffer Alqamoussi
Postgraduate Technical Assistant
jealqamoussi@fasb.org
 


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