The FASB and the IASB continued redeliberations of the proposals included in the May 2013 Exposure Draft, Leases, specifically discussing the following topics: (1) lessee accounting model, (2) lessor accounting model, (3) lessor Type A accounting, (4) lessee small-ticket leases, (5) lease term, and (6) lessee accounting: short-term leases.

Lessee Accounting Model

The FASB decided on a dual approach for lessee accounting, with 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/finance leases as Type A leases (that is, recognizing amortization of the right-of-use (ROU) asset separately from interest on the lease liability) and most existing operating leases as Type B leases (that is, recognizing a single total lease expense).

The IASB decided on a single approach for lessee accounting. Under that approach, a lessee would account for all leases as Type A leases (that is, recognizing amortization of the ROU asset separately from interest on the lease liability).

Lessor Accounting Model

The Boards decided that a lessor should determine 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 (that is, on the concept underlying existing U.S. GAAP and on IFRS lessor accounting). 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. In addition, the FASB decided that a lessor should be precluded from recognizing selling profit and revenue at lease commencement for any Type A lease that does not transfer control of the underlying asset to the lessee. This requirement aligns the notion of what constitutes a sale in the lessor accounting guidance with that in the forthcoming revenue recognition standard, which evaluates whether a sale has occurred from the customer’s perspective.

Lessor Type A Accounting

The Boards decided to eliminate the receivable and residual approach proposed in the May 2013 Exposure Draft. Instead, a lessor will 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.

Lessee Small-Ticket Leases

The Boards decided that the leases guidance should not include specific requirements on materiality.

The Boards also decided to permit the leases guidance to be applied at a portfolio level by lessees and lessors. The FASB decided to include the portfolio guidance in the basis for conclusions; the IASB decided to include the portfolio guidance in the application guidance.

The IASB decided to provide an explicit recognition and measurement exemption for leases of small assets for lessees.

Lease Term

The Boards decided that, when determining the lease term, an entity should consider all relevant factors that create an economic incentive to exercise an option to extend, or not to terminate, a lease. 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. Reasonably certain is a high threshold substantially the same as reasonably assured in existing U.S. GAAP. The 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.

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 decided that a lessor should not reassess the lease term.

Lessee Accounting: Short-Term Leases

The Boards 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. Additionally, the Boards 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.

Next Steps

The staff will perform additional analysis regarding the recognition and measurement exemption of leases of small assets for lessees. The Boards will continue their joint redeliberations of the May 2013 Exposure Draft at a future Board meeting.