The Board discussed the following lease accounting issues:
- initial recognition and measurement of the lessee�s obligation to pay rentals when the lease includes optional periods, purchase options, contingent rentals or residual value guarantees
- subsequent measurement of the lessee�s right-of-use asset and its obligation to pay rentals
- presentation of leases in the statements of financial position and comprehensive income
Leases with options
The Board considered leases containing options to extend or terminate the lease term.
The Board tentatively decided to treat uncertainty about the lease term as a recognition question. For example, with a 10-year lease and an option to extend for an additional 5 years the lessee would decide whether to recognise a 10-year lease or a 15-year lease, on the basis of an estimate of the most likely lease term. The lessee would account for purchase options in the same way as options to extend or terminate the lease, on the basis of the most likely outcome.
Contingent rentals or residual value guarantees
In July the Board tentatively decided that the lessee�s obligation to pay rentals should include amounts payable under contingent rental arrangements. At this meeting, the Board tentatively decided that:
- the initial measurement of the lessee�s obligation to pay rentals should include a probability-weighted estimate of contingent rentals (an expected outcome technique).
- the assets and liabilities initially recognised by the lessee should include amounts payable under a residual value guarantee, measured initially using an expected outcome technique.
The Board tentatively decided that the lessee should:
- amortise its right-of-use asset over the shorter of the lease term and the economic life of the leased asset, on the basis of the pattern of consumption of economic benefits embodied in the right-of-use asset.
- recognise interest expense on the outstanding obligation to pay rentals.
- reassess at each reporting date the lease term and the obligation to pay rentals.
- account for changes in cash flow estimates using a catch-up approach. The interest rate used to discount cash flows would be revised to reflect current conditions. However, the Board did not reach a view on whether the interest rate should be revised at each reporting date or only when there is a change in estimated cash flows.
- recognise any change in the liability as a result of a change in the estimated rental payments by adjusting the carrying amount of the right-of-use asset.
The Board tentatively decided that lessees should present:
- the right-of-use asset based upon the nature of the underlying asset and disclose such assets separately from owned assets.
- the obligation to pay rentals as a financial liability.
The Board discussed possible approaches to accounting for subleases. No decisions were reached. The Board instructed the staff to include a description of the problems associated with subleases in the leases discussion paper.