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Project Update
Leases—Joint Project of the IASB and FASB
Last Updated: November 17, 2009 (Updated sections are indicated with an asterisk *)
This project update summarizes the project activities and decisions of the IASB and the FASB (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.
Project Objective
Due Process Documents
*Decisions Reached at the Last Meeting
*Summary of Decisions Reached to Date
*Next Steps
*Board/Other Public Meeting Dates
Background Information
Contact Information
Project Objective
The objective is to create a common standard on lease accounting to ensure that the assets and liabilities arising from lease contracts are recognized in the statement of financial position.
Due Process Documents
On March 19, 2009, the Boards published, for public comment, a Discussion Paper, Leases: Preliminary Views (Discussion Paper).
- Download the FASB Discussion Paper. Download the IASB Discussion Paper which is the same except for minor differences in spelling, style, and format.
- Read the press release introducing the Discussion Paper.
- Read a snapshot of the Boards’ preliminary views in the Discussion Paper.
The comment period for the Discussion Paper ended on July 17, 2009.
The Boards plan to publish an Exposure Draft in 2010.
*Decisions Reached at the Last Meeting (October 28, 2009)
The Boards discussed:- Reconfirmation of the right-of-use approach for lessees
- In-substance purchases/sales
- Lessor accounting models
- Timing of initial recognition.
- An asset representing its right to use the leased item for the lease term (the right-of-use asset)
- Aliability for its obligation to pay rentals.
The Boards considered the following models for how a lessor would apply a right-of-use approach:
- Derecognition approach
- Performance obligation approach
- Operating lease approach
- Dual model approach (derecognition and performance obligation).
- Recognize an asset representing its right to receive rental payments (a lease receivable)
- Recognize a liability representing its performance obligation under the lease—that is, its obligation to permit the lessee to use one of its assets (the leased item). The lessor would recognize revenue as that performance obligation is satisfied over the lease term. That means that a lessor would not recognize revenue at the inception of a lease contract.
The Boards decided that:
- Assets and liabilities arise when a contract is signed.
- Between contract signing and delivery, the unit of account is the contract as a whole, and the contract position would be presented net in the statement of financial position of both the lessee and the lessor.
- An entity would initially and subsequently measure the net contract asset or liability on a cost basis, subject to impairment. (Generally, initial measurement of the contract asset would equal the initial measurement of the contract liability.)
- An entity would provide disclosures about the assets and liabilities that arose upon contract signing.
*Summary of Decisions Reached to Date (As of October 28, 2009)
Lessor Accounting (see May 2009, July 2009, and October 2009 minutes and meeting summaries)
The Boards decided that a lessor would recognize an asset representing its right to receive rental payments from the lessee (a lease receivable) and a liability representing its performance obligation under the lease—that is, its obligation to permit the lessee to use one of its assets (the leased item). The lessor would satisfy that performance obligation (and will recognize revenue) over the lease term.
Initial measurement of the right to receive rental payments
- Initial measurement of the lessor’s right to receive rental payments would follow existing literature for the accounting for financial assets under either IFRSs or U.S. GAAP (IAS 39, Financial Instruments: Recognition and Measurement, for IFRSs and Section 310-10-30 of the FASB Accounting Standards Codification™ for U.S. GAAP).
- Initial measurement of the lessor’s right to receive rental payments under U.S. GAAP would be discounted using the interest rate implicit in the lease.
Initial measurement of the performance obligation
A lessor’s performance obligation would equal the customer consideration received (that is, on initial measurement the performance obligation would equal the lessor’s receivable).
Subsequent measurement of the performance obligationA lessor’s performance obligation would reflect decreases in the entity’s obligation to permit the lessee to use the leased item over the lease term.
These tentative decisions were reached on the basis of a model that would result in the lessor’s recognizing a performance obligation. However, the Boards asked the staff to provide additional analysis on an accounting model for lessors that would result in partial derecognition of the leased item. Consequently, the Boards will revisit those tentative decisions following discussion of this additional analysis.
Lessee Accounting (see June 2009 and October 2009 minutes and meeting summaries)
Right-of-Use Approach
The Boards reaffirmed the right-of-use approach for lessees. That approach, as described in the Discussion Paper, Leases: Preliminary Views, proposes that a lessee should recognize for all leases an asset representing its right to use the leased item for the lease term (the right-of-use asset) and a liability for its obligation to pay rentals.
In-substance Sales/Purchases
The scope of the leases standard will exclude the contracts that represent the purchase (lessee) or sale (lessor) of the subject item. The staff will develop criteria for an entity to use in determining whether an arrangement is the purchase or sale of an asset and is not a lease.
Timing of Initial Recognition
The Boards decided that assets and liabilities arise when a contract is signed. Between contract signing and delivery, the unit of account is the contract as a whole, and the contract position would be presented net in the statement of financial position of both the lessee and the lessor. An entity would initially and subsequently measure the net contract asset or liability on a cost basis, subject to impairment (generally, initial measurement of the contract asset would equal the initial measurement of the contract liability) and would provide disclosures about the assets and liabilities that arose upon contract signing.
Sale and leaseback transactions
In a sale and leaseback transaction, a seller/lessee would consider whether the entire leased asset qualifies for derecognition. If the entity determines, after applying the applicable guidance for the underlying asset, that the transaction qualifies as a sale, it would derecognize the leased item and recognize a right-of-use asset and an obligation to make rental payments for the leaseback. The Board will consider whether additional criteria are needed to help entities determine whether a sale and leaseback transaction represents a sale and how to account for a sale and leaseback transaction when the sales prices or rental payments are not at market rates.
Impairment of the right-of-use asset
A lessee preparing financial statements in accordance with international financial reporting standards would follow the guidance in IAS 36, Impairment of Assets, to determine whether its right-of-use asset is impaired and a loss should be recognized. A lessee applying U.S. generally accepted accounting principles would follow FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, to determine whether its right-of-use asset is impaired and a loss should be recognized.
Revaluation of the right-of-use asset
A lessee would subsequently report a right-of-use asset at cost adjusted for amortization and impairment losses, if any. A lessee would not be permitted to subsequently remeasure its right-of-use asset to fair value unless required to do so to recognize an impairment loss.
Initial direct costs
A lessee would expense any initial direct costs as incurred.
Transition
A lessee would apply the new lease standard by recognizing an obligation to pay rentals and a right-of-use asset for all outstanding leases at the transition date. The obligation and the asset would be measured at the present value of the lease payments, discounted using the lessee’s incremental borrowing rate on the transition date.
See also decisions reached within the FASB Discussion Paper.*Next Steps
The Boards will continue discussing lessee and lessor accounting issues at future meetings.*Board/Other Public Meeting Dates (subsequent to the issuance of the discussion paper)
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 standard.
(View list of meetings prior to the issuance of the discussion paper)
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Topic |
IASB Meeting Summaries and Observer Notes |
FASB Board Minutes |
| *Joint IASB/FASB Board Meeting—Reconfirmation of the right-of-use approach for lessees, In-substance purchases/sales, Lessor accounting models, Timing of initial recognition | October 2009 | October 28, 2009 |
| *Joint IASB/FASB Board Meeting—Comment Letter Analysis and Plan for Redeliberations | September 2009 | September 16, 2009 |
| Joint Working Group Meeting (London) | ||
| Joint IASB/FASB Board Meeting—Lessor: Measurement and Presentation of the Lessor’s Receivable and Performance Obligation | July 2009 | July 23, 2009 |
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Joint IASB/FASB Board Meeting—Lessee: Sale and Leaseback Transactions, Impairment of Right-of-use Asset, Revaluation of Right-of-use Asset, Initial Direct Costs, and Transition |
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Joint IASB/FASB Board Meeting—Lessor Accounting under the Right-of-Use Model |
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Joint IASB/FASB Board Meeting (via videoconference)—How to Proceed with a Joint Leases Discussion Paper |
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IASB/FASB Board Meeting—Project Scope, An Overview of Lessor Accounting, and Consideration of Sublessor Accounting |
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Joint International Working Group
The first joint working group meeting was held on February 15, 2007, in London. A copy of the full meeting agenda, agenda papers, and the audio webcast of the meeting can be found on the IASB website for the first meeting of the Joint Working Group on Lease Accounting. View the summary report of the February 2007 joint working group meeting.
The working group also met on October 7, 2008, in Norwalk. A copy of the full meeting agenda and agenda papers can be found on the IASB website for the leases working group meeting. View the summary report of the October 2008 joint working group meeting.
The working group last met on September 3, 2009, in London. A copy of the full meeting agenda and agenda papers can be found on the IASB website for the leases working group meeting. View the summary report of the September 2009 joint working group meeting.
Contact Information
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FASB Danielle Zeyher |
IASB Rachel Knubley |
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Brad Homant |
Li Li Lian |
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Danielle Helmus |
Aida Vatrenjak |
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Michael Gonzales |
Sunhee Kim |
| Vita Martin Postgraduate Technical Assistant vmartin@fasb.org |
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| Louis (A.J.) Phillips Postgraduate Technical Assistant lphillips@fasb.org |