Transcript Slide 1

April 2011
Leases Update
This presentation has been prepared to help stakeholders understand the updated workplan for the
projects in the Memorandum of Understanding between the FASB and IASB. The views expressed in this
presentation are those of the presenter. Official positions of the IASB and the FASB are reached only after
extensive due process and deliberations.
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Russ Golden – FASB Member
Susan Cosper – FASB Technical Director
April 2011
Agenda
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• Outreach
• Changes made from the Exposure Draft
– Definition of a lease
– Variable payments
– Renewal options
– Short-term leases
– Finance/Other-than-finance leases
• Next steps
April 2011
Outreach – comment letter period
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• Roundtables (7)
– London, Hong Kong, Chicago, Norwalk
• Preparer workshops (15)
• Various outreach meetings – over 1500
organizations, over 200 meetings
• Preparer questionnaires – 250 lessors, 400 lessees
• Project webcasts and podcasts
April 2011
Targeted outreach – March/April 2011
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• Over 20 meetings, 70 representatives
– Users, preparers, standard-setting organizations,
accounting firms and representatives of the leases joint
working group
• Industries: retail and trade, power and utilities, oil
and gas, life sciences, financial services, real
estate, airlines, outsourcing, shipping,
telecommunications and construction
April 2011
What we heard
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• Complexity and cost
• Definition of a lease
• Estimation and judgment
– Variable payments, renewal options
• P/L pattern
• Lessor accounting
• Investment properties
April 2011
Definition of a lease – ED
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A contract in which the right to use a specified asset (the underlying
asset) is conveyed, for a period of time, in exchange for
consideration.
The fulfillment of the contract depends on providing a specified
asset or assets (the ‘underlying asset’); and
The contract conveys the right to control the use of a specified asset
for an agreed period of time.
April 2011
Clarifications to definition of a lease –
specified asset
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• In response to feedback the Boards clarified
specified asset and control
• Specified asset = “specified” or “identifiable” asset,
rather than any one number of assets of the same
specification.
– Portions of a larger asset = physically distinct portion of
a larger asset can be a specified asset, but a capacity
portion of a larger asset that is not physically distinct
cannot
• See handout for draft wording
April 2011
Clarifications to definition of a lease –
control of the underlying asset
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• Control = aligns more closely the application of
control in the definition of a lease to how it is
applied in the revenue recognition project
– A customer has the right to control the use of a specified
asset if it has the ability to direct the use, and receive
benefits from use, of that asset
• See handout for draft wording
April 2011
Variable payments – ED
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• Include variable payments in the measurement of
the liability to make lease payments and the lease
receivable using the expected outcome technique
– Probability-weighted average of the cash flows for a
reasonable number of outcomes
– Include payments that can be reliably measured (lessor)
– Index or rate = forward rates or indices, or prevailing if
forward rates not available
– Estimate under option penalties
April 2011
Changes to variable payments
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• At the February 2011 joint Board meeting, the
FASB and the IASB tentatively decided that the
lessee’s liability and the lessor’s receivable should
include:
– Lease payments that meet a high threshold;
– Lease payments for which the variability lacks economic
substance; and
– Lease payments that depend on an index or a rate.
• At that meeting, the Boards directed the staff to
perform targeted outreach on those tentative
decisions.
April 2011
Changes to variable payments
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• In response to targeted outreach in March and
April the Boards tentatively decided:
– The measurement of the lessee’s liability and the
lessor’s receivable should not include variable lease
payments that meet a high threshold.
– The measurement of the lessee’s liability and the
lessor’s receivable should include lease payments that
are in-substance fixed lease payments but are structured
as variable lease payments in form.
– The Boards will discuss lease payments that depend on
an index or a rate, including reassessment, at a future
meeting.
April 2011
Renewal Options
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• ED: longest possible term that is more likely than
not to occur
• Changes:
– Options to extend or terminate when there is a
significant economic incentive to extend, or not to
terminate the lease
– Reassess only when there is a significant change in
relevant factors
April 2011
Short term leases
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• ED: Lessors do not have to recognize lease asset
or lease liability
– Lessees – must recognize undiscounted lease asset or
lease liability
• Changes: Lessors and lessees may account for all
short-term leases by not recognizing lease assets
or lease liabilities
– Recognize lease payments in profit or loss on a straightline basis over the lease term
April 2011
Lessee model – ED
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• Lessee
– Right-of-use model
– Initial measurement
• Liability = PV of the estimated future lease payments over the
lease term
• ROU asset = liability plus any initial direct costs
– Subsequent measurement
• Amortization expense on ROU asset
• Interest expense on the liability using the interest method to
recognize liability at amortized cost
April 2011
Lessor: performance obligation – ED
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• Performance obligation approach – lessor
exposed to significant risks or benefits associated
with the underlying asset
– Initial measurement
• Lease receivable = PV of estimated lease payments plus any
initial direct costs
• Performance obligation
– Subsequent measurement
• Systematic and rational approach to amortize to lease income
• Recognize interest income using the interest method
April 2011
Lessor: derecognition model – ED
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• Derecognition approach – lessor not exposed to
significant risks or benefits of the underlying asset
• Initial measurement
– Lease receivable = PV of estimated lease payments plus
any initial direct costs
– Residual asset
– Derecognize the underlying asset
• Subsequent measurement
– Amortize the receivable and recognize interest income
using the interest method
April 2011
Two types of leases
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• In response to feedback, the Boards discussed two models
for both lessees and lessors at the April 13th Board Meeting
• Boards decided that there should be two accounting
approaches for leases for both lessees and lessors
– Tentatively termed ‘other-than-finance’ and ‘finance’ leases
– Existing guidance in IAS 17 should be used to make that
distinction for both lessees and lessors – see handout for
draft wording
April 2011
Lessee – two types of leases
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• For both lessee accounting approaches, the boards
affirmed their proposals in the Leases ED that a
lessee should:
– initially recognize a liability to make lease payments and
a right-of-use asset, both measured at the present value
of lease payments.
– subsequently measure the liability to make lease
payments using the effective interest method.
April 2011
Lessee – finance lease
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• For finance leases, a lessee should, consistent with the
proposals in the exposure draft:
– amortize the right-of-use asset on a systematic basis that
reflects the pattern of consumption of the expected future
economic benefits in accordance with IAS 38 Intangible
Assets and Topic 350 Intangibles—Goodwill and Other.
– present amortization of the right-of-use asset and interest
expense on the liability to make lease payments separately
from other amortization and interest expense, either in profit
or loss or in the notes.
April 2011
Lessee – other-than-finance lease
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• For other-than-finance leases, a lessee should:
– amortize the right-of-use asset in a manner which would
result in total lease expense (including interest expense on
the liability) being recognized over the lease term on a
straight-line basis unless another systematic basis is
more representative of the time pattern of the user’s benefit
– present amortization of the right-of-use asset and interest
expense on the liability to make lease payments as a single
line item within operating expense (for example, as rent
expense)
April 2011
Lessor model
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• Next Board Meeting to decide the approaches for
lessor accounting
April 2011
Next steps
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• Continue redeliberations – technical decisions
• Public consultation document
– Draft language – see handout
• Timing
April 2011
Contact information
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• Russ Golden – [email protected]
• Susan Cosper – [email protected]
• Danielle Zeyher – [email protected]
• Grace Hinchman – [email protected]
April 2011
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QUESTIONS
April 2011