Projects
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Project Update
Leases—Joint Project of the IASB and FASB
Last Updated: December 30, 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 (December 16, 2009)
The Boards discussed:- How to account for leases that include contingent rental arrangements and residual value guarantees
- The scope of the proposed new requirements for leases.
Contingent Rentals
The Boards tentatively decided that:
- The obligation to pay rentals recognized by the lessee, and the receivable recognized by the lessor, would include amounts payable under contingent rental arrangements.
- A lessor would only recognize a receivable for amounts due under contingent rental arrangements if the receivable could be measured reliably, which is consistent with the Boards' tentative decisions on revenue recognition.
- The obligation/receivable would be measured using an expected outcome technique. The final requirements would clarify that not every possible scenario would need to be taken into account when measuring the obligation/receivable.
- Contingent rentals based on an index or rate would be measured using readily available forward rates. If forward rates are not available, the rates at the inception of the lease would be used.
- The carrying amount of the obligation/receivable would be reassessed at each reporting date if any new facts or circumstances indicate that there is a material change in the obligation/receivable.
The Boards instructed the staff to provide additional analysis on how to account for changes in the obligation/receivable arising from reassessments of the amounts payable under contingent rental arrangements.
The Boards also tentatively decided that lessees should account for residual value guarantees in the same way as for contingent rental arrangements.
Scope
The Boards tentatively decided to exclude the following from the scope of the proposed new requirements:
- Leases of intangible assets
- Leases to explore for or use natural resources, such as minerals, oil, and natural gas
- Leases of biological assets.
The Boards tentatively decided not to provide a scope exclusion for leases of noncore assets.
The Boards discussed whether to provide a scope exclusion for short-term leases and instructed the staff to provide additional analysis on this issue.
*Summary of Tentative Decisions Reached to Date (As of December 16, 2009)
Scope
The following will be excluded from the scope of the proposed new leases guidance:- 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.
- Leases of intangible assets
- Leases to explore for or use natural resources, such as minerals, oil, and natural gas
- Leases of biological assets.
The Boards tentatively decided not to provide a scope exclusion for leases of noncore assets.
Timing of initial recognition
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.
Sale and leaseback transactions
In a sale and leaseback transaction, a seller/lessee would consider whether the entire leased asset qualifies for derecognition. After applying the applicable guidance for the underlying asset, if the entity determines 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 Boards 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.
Contingent rentals and residual value guarantees
The obligation/receivable would be measured using an expected outcome technique. The final requirements would clarify that not every possible scenario would need to be taken into account when measuring the obligation/receivable.
Contingent rentals based on an index or rate would be measured using readily available forward rates. If forward rates are not available, the rates at the inception of the lease would be used.
The carrying amount of the obligation/receivable would be reassessed at each reporting date if any new facts or circumstances indicate that there is a material change in the obligation/receivable.
Lessor Accounting (see May, July, October, and November 2009 minutes and meeting summaries)
Performance obligation approach
The Boards decided to adopt the performance obligation approach to lessor accounting. Under that approach, a lessor would recognize:
- An asset representing its right to receive rental payments from the lessee (a lease receivable)
- 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 lessor's right to receive rental payments receivable would be at the present value of the lease payments discounted using the interest rate implicit in the lease plus any initial direct costs incurred by the lessor.
Initial measurement of the lessor's performance obligation would be at the transaction price (that is, the customer consideration, which will be measured at the present value of the lease payments discounted using the interest rate implicit in the lease).
Subsequent measurement of the lessor’s receivable and the performance obligation
Subsequent measurement of the lessor's receivable would be at amortized cost using the effective interest method.
Subsequent measurement of the lessor's performance obligation would reflect decreases in the obligation to permit the lessee to use the leased item over the lease term.
Lease contracts with options to extend or terminate the lease
The Boards made the following decisions regarding lease contracts that grant the lessee the right to extend or terminate the lease:
- The accounting by lessors for those options would be symmetrical with the accounting by lessees for those options; however, the Boards noted that the objective of symmetry might not result in the same measurement of lease payments by the lessee and the lessor.
- A lessor's receivable and performance obligation should be recognized based on the lease payments that will be received over the lease term. The recognized leased term would be the longest possible lease term that is more likely than not to occur.
- The lease term would be reassessed at each reporting date. Detailed examination of every lease would not be required unless there is a change in facts or circumstances that would indicate that the lease term may need to be revised.
- Any change to the lease receivable resulting from a reassessment of the lease term would be recorded as an adjustment to the performance obligation.
The receivable recognized by the lessor would include amounts payable under contingent rental arrangements.
A lessor would only recognize a receivable for amounts due under contingent rental arrangements if the receivable could be measured reliably, which is consistent with the Boards' tentative decisions on revenue recognition.
Lessee Accounting (see June, October and November 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.
Initial measurement of the right-of-use asset and lease obligation
Initial measurement of the lessee's right-of-use asset would be at cost, where cost is the present value of the lease payments plus any initial direct costs incurred by the lessee.
Initial measurement of the lessee's obligation to pay rentals would be at the present value of the lease payments discounted using the lessee's incremental borrowing rate. The Boards noted that the interest rate implicit in the lease will often equal the incremental borrowing rate.
Consequently, they tentatively decided that the interest rate implicit in the lease can be used if it can be readily determinable.
Subsequent measurement of the right-of-use asset and lease obligation
Subsequent measurement of the lessee's right-of-use asset would be at amortized cost and would be described as amortization rather than as rental expense.
Subsequent measurement of the lessee's obligation to pay rentals would be at amortized cost using the effective interest method; the obligation arising in a simple lease would not be revised for any changes in the lessee's incremental borrowing rate. The Boards will consider, at a future meeting, whether the incremental borrowing rate would be reassessed when there are changes in the expected lease term. Subsequent measurement of the obligation at fair value is not permitted.
Impairment of the right-of-use asset
The lessee's right-of-use asset would be considered for impairment by referring to existing applicable standards for impairment. A lessee preparing financial statements in accordance with IFRS would follow IAS 36, Impairment of Assets. A lessee applying U.S. GAAP would follow Topic 350, Intangibles - Goodwill and Other of the FASB Accounting Standards CodificationTM.
Revaluation of the right-of-use asset
IFRS preparers would be permitted to revalue their right-of-use assets using the revaluation model in IAS 38, Intangible Assets; U.S. GAAP preparers would not be permitted to revalue their right-of-use assets unless required to do so to recognize an impairment loss.
Lease contracts with options to extend or terminate the lease
The Boards made the following decisions regarding lease contracts that grant the lessee the right to extend or terminate the lease:
- Uncertainty about the lease term would be addressed through recognition - that is, one of the possible lease terms is selected and the accounting is based on that term.
- The recognized lease term would be the longest possible lease term that is more likely than not to occur.
- In determining the lease term, the lessee would consider all relevant factors.
- Options to renew a lease that are priced at market value at the date of renewal would be considered when determining the lease term.
- The lease term would be reassessed at each reporting date. Detailed examination of every lease would not be required unless there is a change in facts or circumstances that indicate that the lease term may need to be revised.
- Any change to the obligation to pay rentals resulting from a reassessment of the lease term would be recorded as an adjustment to the right-of-use asset.
The obligation to pay rentals recognized by the lessee would include amounts payable under contingent rental arrangements.
Lessees should account for residual value guarantees in the same way as that of contingent rental arrangements.
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—Scope: Purchases and Sales | January 2010 |
January 5, 2010 |
| *Joint IASB/FASB Board Meeting—Lessee Accounting: Contingent Rentals, Lessor Accounting: Contingent Rentals, Scope: Intangibles, Scope: Non-core and short-term leases | December 2009 | December 16, 2009 |
| Joint IASB/FASB Board Meeting—Lessee Accounting: Initial and Subsequent Measurement, Lessor Accounting: Initial and Subsequent Measurement, Lessee Term Options, and Lessor Term Options | November 2009 | November 18, 2009 |
| 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
|
FASB Danielle Zeyher |
IASB Rachel Knubley |
|
Brad Homant |
Li Li Lian |
|
Danielle Helmus |
Aida Vatrenjak |
|
Michael Gonzales |
Sunhee Kim |
| Louis (A.J.) Phillips Postgraduate Technical Assistant lphillips@fasb.org |