Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
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) Agen pap Agenda paper Agen pap 9 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. Page 1 of 8 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 Page 2 of 8 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). Page 3 of 8 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. Page 4 of 8 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 Page 5 of 8 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. Page 6 of 8 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. Page 7 of 8 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. Page 8 of 8