OUR THOUGHTS ON:

FASB and IASB Reach Lease Accounting Decisions

Audit

By Donald Applegarth

At their May 17, 2011 meeting, the FASB and IASB reached several tentative decisions relative to lease accounting: 

  • Leasee Accounting – The Boards tentatively decided that a single accounting approach should be applied for all leases consistent with the approach proposed in the Lease Exposure Draft. This approach would require a lease to:
    • Initially recognize a liability to make lease payments and a right-of-use asset, both measured at the present value of the lease payments.
    • Subsequently measure the liability to make lease payments using the effective interest method.
    • Amortize the right-of-use asset on a systematic basis that reflects the pattern of consumption of the expected future economic benefits.
  • Lessor Accounting – The Boards discussed the accounting by lessors under a right-of-use model, but agreed to discuss at a future meeting whether there should be one or two approaches to lessor accounting. The Boards directed the staff to provide further analysis at a future meeting that compares accounting described below with the accounting for lessors applying operating lease accounting in existing IFRS and US GAAP.
    • One Approach
      • The lessor would derecognize a portion of the carrying amount of the underlying asset.
      • The lessor would initially measure the residual asset as an allocation of the carrying amount of the underlying asset.
      • The lessor would subsequently measure the residual asset by accreting the amount of the residual asset over the lease term, using the rate that the lessor charges the leasee.
    • Two Approaches
      • Distinguishing between the two approaches would be based upon indicators relating to the definition of whether the lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset. These indicators would:
      • Include a “fair value indicator”
      • Include a “variable rent indicator”
      • Not include an embedded or integral services indicator

The Boards discussed the accounting for the underlying asset and the residual asset if there are two approaches to lessor accounting. If substantially all of the risks and rewards of ownership of the underlying asset are transferred to the leasee and the lessor does not apply operating lease accounting in existing IFRS and US GAAP, the Boards indicated a preference that the lessor would:

  • Derecognize the entire carrying amount of the underlying asset.
  • Initially measure the residual asset at the present value of the estimated value of the underlying asset at the end of the lease term, discounting using the rate that the lessor charges the leasee.
  • Subsequently measure the residual asset by accreting the amount of the residual asset over the lease term using the rate the lessor charges the leasee.

As for the accounting for the right to receive lease payments, the Boards indicated a tentative preference for measuring a lessor’s right to receive lease payments in accordance with requirements for other similar assets. The staff wasdirected to analyze whether this would create unintended consequences, specifically if two approaches for lessor accounting were adopted.

The Boards also tentatively decided that the right to receive payment asset would be presented separately from the any residual asset. 

 

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