Download In-substance purchases/sales

IASB/FASB Joint Lease Working
Group Meeting - September 2009
Contact(s)
Agenda Paper
Rachel Knubley
[email protected]
+44 (0) 20 7246 6904
Danielle Zeyher
[email protected]
+1 203 956 5265
Project
Leases
Topic
In-substance purchases/sales
Some board members have expressed concerns about the treatment of leases that
are in-substance purchases/sales of the leased item. They have asked the staff to
carry out additional analysis to determine the following:
(a)
whether leases that are in-substance purchases/sales should be excluded
from the scope of a new leases accounting standard
(b)
whether there should be different accounting for leases that are insubstance purchases/sales.
2.
This analysis has not yet been discussed by the boards.
3.
The purpose of this paper is to discuss the following:
(a)
what is meant by the term in-substance purchase/sale
(b)
whether transactions of that type should be within the scope of the
leases project
(c)
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Agenda
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Objective
1.
Agenda
paper
whether the boards may wish to require different accounting for leases
that are in-substance purchases/sales within a new lease accounting
standard.
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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.
IASB/FASB Staff paper
Background
4.
The boards have tentatively decided that the scope of the new lease accounting
standard should be based on the scope of the existing standards. The scopes of
existing standards include contracts that convey a right-to-use the leased item.
Purchase/sale transactions are outside the scope of the existing lease accounting
standards. This is the case even when payment for the purchased/sold asset is
deferred. However, contracts that are economically similar to outright
purchases/sales (in-substance purchases/sales) are within the scope of the
existing lease accounting standards. For example, a lease contract in which the
lessee obtains title to the leased asset at the end of the lease is within the scope
of the existing standards. The existing requirement to classify leases as finance
leases or operating leases can be viewed as an attempt to differentiate between
in-substance purchases/sales (finance leases/sales-type leases or direct financing
leases) and other lease contracts (operating leases).
5.
However, it can be argued that contracts that are economically similar to
outright purchases/sales of the underlying leased item should not be accounted
for in a standard that deals with leases. Instead, in-substance purchases/sales
should be accounted for in the same way as other asset purchases/sales.
6.
The issue of in-substance purchases was discussed before issuing the leases DP.
The boards tentatively decided that in-substance purchases should be within the
scope of the new lessee accounting standard. However, some board members
stated that they might want to exclude in-substance sales from the scope of a
lessor accounting standard.
7.
Other board members stated that they might want to specify different accounting
requirements within the new lease accounting standard for leases that are insubstance purchases/sales.
What are in-substance purchases?
8.
From the lessee’s perspective, an in-substance purchase could be defined as
being equivalent to an in-substance sale from the lessor’s perspective. The
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IASB/FASB Staff paper
revenue recognition project has proposed using a control-based approach to
determining whether a sale has taken place. That is, revenue is recognized when
control of the promised goods or services is transferred to the customer.
Consequently, an in-substance sale (and, hence, an in-substance purchase) could
be defined as any lease contract that transfers control of the leased item to the
lessee.
9.
It is important to differentiate between control of the leased item and control of
the right of use. The boards have tentatively decided that in a lease contract, the
lessee has obtained control of the right to use the leased item but the lessee has
not obtained control of the entire leased item. For example, in a five-year lease
of a machine, the lessee has obtained control over the right to use the machine
for five years but it has not obtained control of the entire machine. For example,
the lessee cannot sell the machine nor does it control the right to use the machine
after the end of the five-year lease.
10.
The revenue recognition project team has not developed detailed guidance for
when control is deemed to have passed. However, in a lease contract, control
could be argued to pass to the lessee if the lessee obtains or is expected to obtain
title to the underlying leased item. This could happen in a number of different
ways, including the following:
11.
(a)
The title transfers automatically (for example, at the end of a lease).
(b)
The lease includes a bargain purchase option.
(c)
The lease includes a purchase option that is expected to be exercised.
(d)
The lease includes a fixed price purchase option.
(e)
The lease includes a fair value purchase option.
It is possible that the boards may wish to define in-substance purchases/sales
more widely than just those leases that transfer control of the leased item to the
lessee. For example, they may wish to include leases that transfer substantially
all the risks and rewards of ownership of the leased item to the lessee (that is,
leases that would be classified as finance leases under the existing standards).
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IASB/FASB Staff paper
Circumstances in which the lessee is viewed to have obtained substantially all
the risks and rewards of ownership might include the following:
(a)
The lease is for a major part of the life of the leased item.
(b)
The present value of the lease payments equate to substantially all the
fair value of the leased item.
(c)
The leased item is a specialized asset.
Implications of excluding in-substance purchases/sales from the scope of
the new lease standard
12.
The boards could decide to exclude in-substance purchases/sales from the scope
of the new lease standard. The implications of this exclusion for lessees and
lessors are discussed in the following sections.
Lessees
13.
As noted above, the boards tentatively decided to include in-substance purchases
in the scope of a new lessee accounting standard. The boards’ reasons for
including in-substance purchases within the scope of a new lease accounting
standard include the following:
(a)
Attempting to define what is meant by an in-substance purchase may be
difficult and may require the development of rules similar to those in
the current lease accounting standards.
(b)
The lessee accounting proposed in the leases DP should result in
accounting that is similar to that required for assets that are purchased.
In other words:
(i)
The obligation to pay rentals will initially be measured at
the present value of the lease payments, discounted at the
lessee’s incremental borrowing rate. This measurement is
a reasonable approximation to the fair value of the
obligation to pay rentals.
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IASB/FASB Staff paper
(ii)
The obligation to pay rentals will be measured
subsequently on an amortized cost basis.
(iii) The right-of-use asset will initially be measured at cost.
(iv) For leases of items in which it is expected the lessee will
obtain title at the end of the lease term, the right-of-use
asset will be amortized over the economic life of the
leased item (the same period as for a purchased asset).
14.
Although the accounting proposed in the leases DP is similar to purchase
accounting, it is not identical. For example:
Area
Lease accounting
Purchase accounting
Acquisition
costs
Acquisition costs would be
excluded from the initial
measurement of the right-of-use
asset.
Acquisition costs may be included
in the initial measurement of the
recognized asset.
Liability
Subsequent measurement of the
liability will be on an amortized
cost basis only.
It may be possible to elect to fair
value the liability.
Options
Payments during optional periods
may be included in the obligation
to pay rentals.
Payments during optional periods
would be excluded from the
liability.
Presentation The right-of-use asset will be
presented separately but adjacent
to similar assets that are owned.
15.
The asset would be presented as
PP&E or as an intangible
depending on its nature.
Those differences could result in economically similar transactions being
accounted for differently, which could reduce comparability for users of
financial statements.
Lessors
16.
The boards tentatively decided to include in-substance sales in the scope of any
new lessor accounting standard. However, the accounting for an in-substance
purchase/sale could be very different depending on whether it is in or out of the
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IASB/FASB Staff paper
scope of the new lease accounting standard and which accounting model the
boards adopt for lessors.
17.
If an in-substance purchase/sale is outside the scope of the new lease accounting
standard, the transaction would be accounted for similar to the accounting for an
ordinary sales transaction (the seller would derecognize the asset and recognize
revenue in accordance with applicable revenue recognition standards).
18.
If an in-substance purchase/sale is inside the scope of the leases project and the
boards adopt a derecognition approach to lessor accounting, 1 the accounting for
a lease that is an in-substance sale would be similar to the accounting for an
ordinary sales transaction. That is, the lessor would derecognize the leased item
and recognize revenue at the start of the lease.
19.
If an in-substance purchase/sale is inside the scope of the leases project and the
boards adopt a performance obligation approach to lessor accounting, the lessor
would do the following:
(a)
recognize a receivable for its right to receive payments under the lease
contract
20.
(b)
recognize a performance obligation
(c)
not recognize any revenue at the start of the lease
(d)
not derecognize any of the underlying leased item.
Thus, if the performance obligation approach to lessor accounting were adopted,
including in-substance purchases within the scope of the new lease accounting
standard could result in economically similar transactions being accounted for
differently.
1
See Agenda Paper 8 for a description of the two approaches to lessor accounting considered by the
boards.
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IASB/FASB Staff paper
Different treatments for in-substance purchases/sales
21.
The boards could decide to include in-substance purchases/sales (however
defined) within the scope of the new lease accounting standard, but require
different accounting treatments for transactions that are in-substance purchases.
For example, the boards could decide to do the following:
(a)
Present assets acquired in a lease that is an in-substance purchase
differently (for example, present them as owned rather than as leased
assets).
(b)
Present depreciation of the right-of-use asset differently when the lease
is not an in-substance purchase (for example, as rental expense).
(c)
Require additional disclosures to allow users to differentiate between
leases that are similar to outright purchases and those that are not.
(d)
Prohibit derecognition of the leased asset in a sale and leaseback
transaction when the leaseback is an in-substance purchase.
(e)
Require deferral of gains in a sale and in leaseback transaction when
the leaseback is an in-substance purchase.
(f)
Require a lessor to recognize revenue and derecognize the leased asset
when the transaction is an in-substance sale.
22.
Alternatively, the boards could decide to exclude in-substance purchases/sales
(however defined) from the scope of a new lease accounting standard. This
would result in transactions that are economically similar to a purchase of an
asset to be accounted for the same as an asset purchase.
23.
Finally, the boards could decide not to define in-substance purchases/sales.
Trying to define in-substance purchases/sales could result in similar
classification problems that exist under the existing lease accounting standards.
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IASB/FASB Staff paper
Question 1
Do working group members think that the boards should attempt to
define in-substance purchases/sales? If so, how would you define insubstance purchases/sales?
Question 2
Do working group members think in-substance purchases/sales should
be excluded from the scope of the new leases accounting standard?
Question 3
Do working group members think different accounting treatment should
be required for leases that are in-substance purchases/sales? Please
describe the different treatment you would propose.
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