IASB/FASB Joint Lease Working Group Meeting September 2009

Transcription

1 IASB/FASB Joint Lease Working Group Meeting September 2009 Agenda paper 8 Contact(s) Danielle Zeyher dtzeyher@fasb.org Project Topic Leases Lessor Accounting Objective 1. The objective of this paper is to discuss the application of a right-of-use model to lessors. Background 2. As discussed in the leases DP, in July 2008, the boards tentatively decided to defer consideration of lessor accounting and concentrate on developing an improved lessee accounting model. Consequently, the DP sets out some of the issues that will need to be resolved in developing any proposed new standard for lessors. However, it does not include any preliminary views on lessor accounting. 3. The FASB staff has undertaken some initial work on lessor accounting during the comment period of the DP. This work was discussed at board meetings in May and July At their meetings in May 2009, the boards discussed two different lessor accounting models (a derecognition approach and a performance obligation approach). The boards tentatively decided to develop the performance obligation approach in which the lessor retains the leased item in its statement of financial position and recognizes the following: Page 1 of 6 This paper has been prepared by the technical staff of the FASB and the IASCF for discussion at a public meeting of the FASB or the IASB. The views expressed in this paper are those of the staff preparing the paper. They do not purport to represent the views of any individual members of the FASB or the IASB. Comments made in relation to the application of IFRSs or U.S. GAAP do not purport to be acceptable or unacceptable application of IFRSs or U.S. GAAP. The tentative decisions made by the FASB or the IASB at public meetings are reported in FASB Action Alert or in IASB Update. Official pronouncements of the FASB or the IASB are published only after each board has completed its full due process, including appropriate public consultation and formal voting procedures.

2 an asset for its rights to receive rental payments from the lessee; and a liability for its performance obligations under the lease. 5. At their joint meeting in July 2009, the boards discussed presentation and measurement of the assets and liabilities arising under the performance obligation approach to lessor accounting. However, the staff was instructed by the boards to provide additional analysis on the derecognition approach for lessors, which would result in partial derecognition of the leased item by the lessor. 6. This paper describes the two lessor accounting models discussed by the boards and seeks the views of working group members on each of these approaches. Accounting models discussed by the boards 7. The two lessor accounting models discussed by the boards are described in the following sections. Please refer to the lessor accounting paper presented to the boards during May 2009 for additional staff analysis (IASB Agenda Paper 11A/ FASB Memo 30). The derecognition approach 8. Under the derecognition approach, the lessor is viewed as having transferred a portion of the leased item to the lessee in exchange for a right to receive payments over the lease term. Consequently, under this approach the lessor: (d) recognizes a right to receive rental payments derecognizes a portion of the leased item has an asset for its residual rights in the leased item at the end of the lease term recognizes revenue at the start of the lease. 9. The example in the appendix illustrates this approach. 10. The lessee s right to receive payments meets the definition of an asset because: Page 2 of 6

3 It is controlled by the lessor (it is legally enforceable). It arises out of a past event (the delivery of the leased item). It gives rise to future economic benefits (cash). 11. The lessor derecognizes a portion of the leased asset because it no longer controls the right to use that portion of the asset during the lease term. 12. The lessor continues to control the right to the leased item after the end of the lease. Future economic benefits will flow to the lessor through sale or re-lease of the leased item after the end of the lease term. Consequently, the lessor continues to recognize its rights over the leased item after the end of the lease term (the residual rights asset). 13. The lessor recognizes revenue at the start of the lease because it has effectively sold a portion of the leased item (the right-of-use asset) to the lessee. 14. The boards may need to discuss whether there are some transactions in which it is inappropriate for the lessor to recognize revenue at the start of the lease; for example, when the lessor has no economic interest in the underlying leased item (for example, some lease financing transactions provided by banks). The performance obligation approach 15. Under this approach, the lessor is viewed as having granted the lessee the right to use its economic resource (the leased item) in exchange for a right to receive rentals from the lessee. The lessor does not lose control of the leased property and thus continues to recognize the whole of the leased item. However, the lessor is committed to allowing the lessee to use the leased item over the lease term. Consequently, under this approach the lessor: recognizes a right to receive rental payments recognizes an obligation to allow the lessee to use the leased item (the performance obligation) continues to recognize the whole of the leased item Page 3 of 6

4 (d) recognizes revenue as the performance obligation is satisfied (over the lease term). 16. The example in the appendix illustrates this approach. 17. The lessee s right to receive payments meets the definition of an asset because: It is controlled by the lessor (it is legally enforceable) It arises out of a past event (the delivery of the leased item) It gives rise to future economic benefits (cash). 18. The obligation to allow the lessee to use the leased item (the performance obligation) meets the definition of a liability because it will result in an ongoing outflow of future economic benefits from the lessor to the lessee. That is, the lessor must continue to permit the lessee to use the lessor s economic resource (the leased item) over the lease term. 19. Under this approach, because the lessor is viewed as having retained control of the leased item, the leased item continues to be recognized in the financial statements of the lessor. 20. Under this approach to lessor accounting, the lessor is viewed as providing a service to the lessee (the ongoing right to use the leased item) over the lease term. Consequently, revenue is recognized as the lessor satisfies its performance obligation to the lessee (that is, revenue is recognized over the term of the lease). The lessor also would recognize interest income on its receivable over the lease term. 21. The boards may need to discuss whether there are some transactions that give rise to revenue at the start of the lease under this approach. For example, the boards may decide it is appropriate to recognize revenue at the start of the lease when the lessor is a manufacturer or dealer or the lease is an in-substance purchase of the leased item. Page 4 of 6

5 Question 1 Do you agree that the lessor has an asset for its right to receive rentals from the lessee? Question 2 What are the advantages, disadvantages, and practical problems associated with the two approaches to lessor accounting described above? Question 3 Which of the two approaches to lessor accounting described above do you support and why? Presentation under the performance obligation approach 22. Some board members have expressed concern that the performance obligation approach leads to a grossing up of the statement of financial position. Consequently, in July the boards discussed three different approaches to presentation of the assets and liabilities recognized under that approach. The approaches discussed include the following: Show all three items gross (the leased asset, the lease receivable, and the performance obligation). Show the lease receivable net of the performance obligation. Show the leased asset net of the performance obligation. Question 4 Which of these three approaches to presentation do you support and why? Page 5 of 6

6 Appendix Illustrative example A1. The following example illustrates the two approaches to lessor accounting and the presentation in the statement of financial position. Example A lessor enters into a five-year lease of a machine. Before the lease contract is signed, the machine is included in the lessor s financial statements at a carrying amount of CU10,000. The lessor measures the lease receivable initially at CU9,378. This example assumes that any performance obligation equals the lease receivable and that the residual value asset equals the difference between the carrying amount of the machine and the lease receivable. Derecognition approach CU Performance obligation approach CU Machine - 10,000 Lease receivable 9,378 9,378 Residual value asset Total assets 10,000 19,378 Performance obligation - 9,378 Total liabilities - 9,378 Net assets 10,000 10,000 Revenue 9,378 - Costs 9,378 - Net income - - Page 6 of 6