The Financial Accounting Standards Board and the International Accounting Standards Board remain at odds over crucial elements of their lease accounting standards after joint meetings this week, but said they are still committed to reducing the distinctions.
“Today, the IASB and the FASB reached consistent conclusions on important areas of lease accounting, including lease term and short-term leases,” the boards said in a joint statement Wednesday after two days of meetings. “While differences remain, most notably in their preferred approaches to expense recognition, the boards are committed to working together to minimize these differences and to creating greater transparency around lease transactions for the benefit of investors worldwide.”
According to minutes of the boards’ joint meeting Tuesday and Wednesday, FASB and the IASB continued their redeliberations on the proposals that were included in an exposure draft they unveiled last May of their proposed lease accounting standards.
FASB said it has decided on a dual approach to lessee accounting, with the 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 and finance leases as “Type A leases,” which recognize amortization of the right-of-use, or ROU, asset separately from interest on the lease liability, and most existing operating leases as “Type B leases,” which recognize a single total lease expense.
The IASB, in contrast, decided on a single approach for lessee accounting. Under this approach, a lessee would account for all leases as Type A leases, recognizing amortization of the ROU asset separately from interest on the lease liability.
However, the boards agreed on some other matters within the lessor accounting model. They decided that a lessor should determine the 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, a concept underlying the existing lessor accounting standards. 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.
FASB also has decided that a lessor should be precluded from recognizing the selling profit and revenue at the commencement of a lease for any Type A lease that does not transfer control of the underlying asset to the lessee. This requirement would align the notion of what constitutes a sale in the lessor accounting guidance with what is expected in the forthcoming revenue recognition standard, which evaluates whether a sale has occurred from the customer’s perspective.
The two boards also decided to eliminate the receivable and residual approach proposed in the May 2013 exposure draft. Instead, a lessor would 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.
In the area of lessee small-ticket leases, the two boards also reached consensus in deciding that the guidance should not include specific requirements on materiality. The two boards also decided to permit the guidance to be applied at a portfolio level by lessees and lessors, but with some differences. While FASB decided to include the portfolio guidance in the basis for conclusions, the IASB decided to include the portfolio guidance in the application guidance. In addition, the IASB decided to provide an explicit recognition and measurement exemption for leases of small assets for lessees.
On the matter of determining the lease term, the two boards decided on when an entity should consider all the relevant factors that create an economic incentive to exercise an option to extend, or not to terminate, a lease. They decided that 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. The boards noted that “reasonably certain” is a high threshold that is substantially the same as “reasonably assured” under existing U.S. GAAP. The two 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.
In addition, 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 also decided that a lessor should not reassess the lease term.
On the issue of short-term leases in the lessee accounting standards, the boards both 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. In addition, both FASB and the IASB 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.
As a next step, the staff of the two boards will perform additional analysis of the recognition and measurement exemption of leases of small assets for lessees. The boards said they plan to continue their joint redeliberations of the lease exposure draft at a future meeting.