In one of their most important convergence projects, FASB and the International Accounting Standards Board (IASB) have reached tentative decisions on aspects of the treatment of leases in financial reporting.
How to account for leases is one of four remaining major areas in which FASB and the IASB are trying to reach convergence in standards.
The boards issued the initial exposure draft on leases in August 2010. In July, the boards announced a decision to re-expose a revised proposal. The boards intended to complete their deliberations in the third quarter of this year, with hopes of publishing a revised exposure draft shortly afterward.
That draft has yet to emerge. But the boards announced tentative decisions with regard to leases as a result of their joint meetings this week.
On cancellable leases, the boards tentatively decided that the lease proposals should apply only to periods when enforceable rights and obligations exist. Cancellable leases would be defined as short-term leases if the initial noncancellable period, combined with any notice period, is less than one year.
These standards would exist for leases that:
- Can be canceled by the lessee and lessor with minimal termination payments, or
- Include renewal options that the lessor and lessee must agree to.
The IASB tentatively decided that a lessor should recognize rental income on a straight-line basis or another systematic basis if that basis more closely represents the pattern of earnings from the investment property, according to a FASB summary of the joint board meeting.
FASB’s tentative decision follows a similar path, but only for lessors that are not investment property entities or investment companies.
According to FASB’s summary of the discussions, the boards also tentatively decided that a lessor with leases of investment property that doesn’t fall within the scope of the receivable and residual approach should recognize only the underlying investment property on its statement of financial position. Accrued or prepaid rental income should be recognized as well.
Disclosure requirements for lessors with leases of investment property also were discussed. The boards tentatively decided to require disclosure of:
- A maturity analysis of the undiscounted future lease payments not subject to cancellation. At a minimum, the maturity analysis should show the undiscounted cash to be received in each of the first five years after the reporting date, and a total of the amounts in the years afterward. That maturity analysis would be separate from the maturity analysis of the payments related to the right to receive lease payments under the receivable and residual approach.
- Minimum contractual lease income and variable lease payment income within the table of lease income.
- The cost and carrying amount of property on lease or held for leasing by major classes of property according to nature or function, and the total accumulated depreciation.
- Information about leases not covered by the receivable and residual approach consistent with paragraph 73 of the 2010 Exposure Draft, updated for decisions the boards have reached so far. That information would include a general description of those lease arrangements, information about the basis and terms on which variable lease payments are determined, and information about options, including those for renewal and termination. It also would include a qualitative description of purchase options, including information about the percentage of assets subject to such agreements, and any restrictions in the lease arrangements.
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