LEASING CONVERGENCE PROJECT UPDATE

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Aaron Sullivan, Manager, Assurance & Advisory


In mid-December 2011, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) reached a number of tentative decisions on certain aspects of their ongoing leasing project.

An initial exposure draft was issued by the boards in August 2010 which attracted close to 800 public comment letters questioning various proposals outlined in the draft.  Based on feedback received from comment letters, roundtables and other focused workshops, the boards made significant changes to their initial proposals and announced their intention to re-expose proposed lease accounting guidance for further comment. The revised exposure draft was originally expected to be published in the third quarter of 2011; however this deadline passed without an exposure draft being issued.  FASB have indicated they expect a revised exposure draft sometime in the first half of 2012.

In the meantime, the boards have announced tentative decisions reached on the leasing project following their joint meeting of December 14, 2011. The boards discussed cancellable leases, revenue recognition and disclosure requirements for lessors with leases of investment property.

  • Cancellable leases
    The boards tentatively decided that the lease proposals should only be applied to period for which enforceable rights and obligations arise. Accordingly, cancellable leases would be considered short-term leases if the initial non-cancellable period, along with any notice period is less than one year. In considering this, the boards also tentatively decided not to amend their previous decisions on the definitions of short-term leases and lease term. This is significant in that short-term leases fall outside the scope of the proposed guidance; lessees and lessors would not be required to recognize leased assets or lease liabilities.
  • Revenue recognition for lessors with leases of investment property
    The boards were unable to come to a resolution regarding revenue recognition for lessors with leases of investment property. IASB tentatively decided that, for leases of investment property, a lessor should recognize rental income on a straight-line basis or another systematic basis if that basis is more representative of the pattern in which rentals are earned from the investment property. However, FASB tentatively decided that, for leases of investment property, a lessor that is not an investment property entity or investment company should recognize rental income on a straight-line basis or another systematic basis if that basis is more representative of the pattern in which rentals are earned from the investment property.

    Both boards also tentatively decided that a lessor with leases of investment property not within the scope of the receivable and residual approach should recognize only the underlying investment property on its statement of financial position (as well as any accrued or prepaid rental income).
  • Disclosure requirements for lessors with leases of investment property
    The boards discussed disclosure requirements of lessors with leases of investment property not within the scope of the receivable and residual approach. It was tentatively decided to require the following disclosures:
    • A maturity analysis of the undiscounted future non-cancellable lease payments. The maturity analysis should show, at a minimum, the undiscounted cash flows to be received in each of the first five years after the reporting date and a total of the amounts in the years thereafter. That maturity analysis would be separate from the maturity analysis of the payments related to the right to receive lease payments under the receivable and residual approach.
    • Both minimum contractual lease income and variable lease payment income within the table of lease income.
    • The cost and carrying amount of property on lease or held for leasing by major classes of property according to nature or function, and the amount of accumulated depreciation in total.
    • Information regarding leases not within the scope of the receivable and residual approach, which would include a general description of the lease arrangements, information regarding the basis and terms on which variable lease payments are determined and the existence and term of options for both renewal and termination. Entities would also be required to disclose a qualitative description of purchase options along with restrictions imposed by lease arrangements.
See more details regarding the lease convergence project, tentative guidance and expected timing please at: http://tinyurl.com/7hxsemx.