The discussion paper Leases: Preliminary Views, published in March 2009 presents the Board�s preliminary views on lessee accounting. However, some lessee accounting issues were left unresolved.
At this meeting, the Board discussed some of those unresolved issues, including:
- sale and leaseback transactions
- impairment of right-of-use assets
- revaluation of right-of-use assets
- initial direct costs
Sale and leaseback transactions
The Board discussed how to account for sale and leaseback transactions. In such a transaction, a seller/lessee sells an asset it owns to a buyer/lessor and then leases back that same asset.
The Board decided tentatively that the seller/lessee should:
- consider whether the entire asset qualifies for derecognition
- apply a control-based approach consistent with the revenue recognition project to determine when an asset has been sold and should be derecognised
- recognise any gain arising on a transaction that qualifies as a sale. The amount of the gain would be adjusted as appropriate if the sale proceeds or the terms of the leaseback are not at market value.
Impairment of right-of-use assets
The Board decided tentatively that lessees should refer to existing applicable impairment requirements in IAS 36 Impairment of Assets.
Revaluation of right-of-use assets
The Board decided tentatively that the standard applicable to the underlying leased asset would determine whether, and how, a lessee may revalue right-of-use assets. For example:
- if the underlying asset is property, plant and equipment, the lessee could revalue its right-of-use asset when IAS 16 Property, Plant and Equipment so permits, using the revaluation model in IAS 16.
- if the underlying asset is an intangible asset, the lessee could revalue it when IAS 38 Intangible Assets so permits, using the revaluation model in IAS 38.
The Board directed the staff to analyse how this conclusion would apply to investment property.
Initial direct costs
The Board discussed costs incurred by lessees when negotiating and arranging leases (initial direct costs) and decided tentatively that lessees should recognise them as an expense as incurred.
The Board decided tentatively that a lessee should recognise and measure all existing lease contracts on the date of initial application of the new standard as follows:
- the obligation to pay rentals should be measured at the present value of the lease payments, discounted using the lessee�s incremental borrowing rate
- the right-of-use asset should be measured on the same basis as the liability, subject to any adjustments required to reflect impairment.
The Board directed the staff to consider whether additional adjustments to the carrying amount of the right-of-use asset should be required when lease payments are uneven over the lease term, for example if the lease includes large upfront payments, or when the entity uses a revaluation model.
The Board will continue its discussion in July.