Leases – Permission to ballot for new standard

Leases – Permission to ballot for new standard

This IFRS Newsletter: Leases brings you the latest on the forthcoming leases standard.

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We examine the latest developments on the leases project and what the IASB’s decisions could mean for you.

Different lease accounting models are now under development for IFRS and US GAAP, with the IASB and the FASB deciding to prepare non-converged ballot drafts of their new standards.

A range of detailed implementation issues have also been up for discussion in the Boards’ most recent meetings on the leases project.

For more detail on these discussions, read Issue 17 of our IFRS Newsletter: Leases.

The end of substantive deliberations

A significant milestone was reached in March 2015, with the IASB and the FASB each instructing its staff to prepare a draft version of the new standard. The Boards will vote on these drafts later in the year.

This marks the end of substantive deliberations on the proposals included in the 2013 exposure draft.

 

“After almost ten years of joint work the IASB and the FASB have decided to ballot different lease accounting proposals.” 

 

However, the headline message coming out of the project remains unchanged – leases are coming on-balance sheet for lessees.

Definition of a lease and additional reliefs agreed

Despite diverging on some important aspects of lease accounting, in their latest project meetings the Boards decided to retain the key elements of their jointly proposed definition of a lease. 

This will disappoint constituents who were keen to explore alternative approaches.

The Boards have also agreed additional reliefs, including the details of an exemption for ‘small-ticket’ leases under IFRS and a new transition relief related to the definition of a lease. 

Effective date remains undecided

The most important outstanding decision is the effective date. However, the Boards expect to issue their respective new standards by the end of 2015.

Latest decisions at a glance

Topic

IASB decisions

FASB decisions

Lessee accounting model

Single lease accounting model

No lease classification test

All leases on-balance sheet:

  • lessee would recognise a right-of-use (ROU) asset and lease liability
  • treated as the purchase of an asset on a financed basis

Dual lease accounting model

Lease classification test based on IAS 17 Leases classification criteria

All leases on-balance sheet:

  • lessee would recognise a ROU asset and lease liability
  • Type A leases treated as the purchase of an asset on a financed basis
  • Type B leases would generally have straight-line recognition of total lease expense

Lessor accounting model

Dual lease accounting model for lessors

Lease classification test based on IAS 17 classification criteria

Type B accounting model based on IAS 17 operating lease accounting

Type A accounting model based on IAS 17 finance lease accounting with recognition of net investment in lease comprising lease receivable and residual asset

No restriction on recognising selling profit on commencement of Type A leases

Selling profit not recognised on commencement of leases that qualify for Type A classification solely due to the involvement of third parties other than the lessee

Lease term and purchase options

Payments for optional – e.g. renewal – periods and purchase options included in lease accounting if it is reasonably certain that the lessee will exercise those options, consistent with the high threshold in current GAAP

Lessees to reassess renewal and purchase options if there is a significant event or change in circumstances that is within the control of the lessee – e.g. construction of significant leasehold improvements

No reassessment of renewal and purchase options by lessors

Practical expedients and targeted reliefs

Optional lessee exemption for short-term leases – i.e. leases for which the lease term as determined under the revised proposals is 12 months or less

Portfolio-level accounting permitted if it does not differ materially from applying the requirements to individual leases

Optional lessee exemption for small-ticket leases – i.e. leases of assets with a value of $5,000 or less when new – even if material in aggregate

No exemption for small-ticket leases

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