The joint IASB/FASB meeting of July 22-24, 2014, included leases on its agenda (on July 23). There were two main topics of conversation: sale/leaseback transactions and lessor disclosure requirements. The IASB summary is available online, with more discussion detail provided by Deloitte's IASPlus.
The boards reaffirmed that for a transaction to be considered a sale/leaseback, the sale must meet the requirements of the new Revenue Recognition joint standard (ASU 2014-09/ASC 606/IFRS 15). However, "continuing involvement" generally precludes sale recognition under that standard, and the boards clarified that an ordinary leaseback does not trigger that clause and preclude sale/leaseback accounting.
The FASB decided, however, that if the leaseback meets "type A" criteria (i.e., it's a capital lease), the transaction would not be considered a sale. In other words, if the risks and rewards of ownership are being transferred back to the seller-lessee, no sale really happened.
The IASB concluded that a "substantive repurchase option" precludes sale recognition while the FASB will explore further the effect of repurchase options at fair value.
The buyer-lessor accounts for the purchase like that of any other nonfinancial asset.(ignoring the leaseback).
The seller-lessee accounts for any loss on sale like that of any other sale.
Both parties treat the lease like any other lease.
For the gain, the two boards split: the FASB concluded that the full gain should be recognized just as with any other sale. The IASB held that only the portion of the gain applicable to the residual asset can be recognized at sale.
If the official sale price is higher or lower than the market price ("off-market"), a reduced sale price is treated as a prepayment of rent; a higher sale price is treated as additional financing by the buyer-lessor to the seller-lessee.
In the case of a "failed" transaction (i.e., a transaction that cannot be considered a sale/leaseback), the IASB voted to treat it as a financing transaction. The FASB voted to study the situation further.
Lessor disclosure requirements
A lessor must disclose descriptions of the nature of its leases, assumptions and judgments made in applying the lease accounting standard, and how it manages risks related to residuals.
A lessor must provide a table of lease income, comprising:
- For type A leases: profit or loss recognized at lease inception, and interest income
- For type B leases: lease income from lease payments
- Variable lease payments
Assets used for type B leases should be separated from other assets owned and used by the lessor, with disclosures for the type of asset.
Separate maturity analysis tables are required for Type A and Type B leases, showing the amount of (undiscounted) lease payments by year for the next five years, then all remaining years. Type A leases need a further reconciliation to the receivable balance, as is done in current accounting, as well as an explanation of significant changes in net investment during the reporting period, with the FASB reserving the possibility of adjustments to this requirement based on the concurrently running project on impairments.
Remaining topics to be discussed in upcoming months include lessee disclosure and transition requirements. They also have said they will consider a possible exclusion of "small ticket" items, to make implementation less onerous.
The IASB released on August 7 an update describing major decisions reached, with an accompanying podcast; it doesn't go into detail on the different decisions reached by the FASB. It notes that the boards expect to complete their deliberations in 2015 (no more specific). This raises the question of whether implementation will get pushed off to 2018.
The update restates the boards' insistence that improving disclosure alone is insufficient, that it is vital to have lease contract commitments on the balance sheet. It provides an example of two actual companies, one of which does little leasing while the other gets most of its assets through leasing. With leases off the balance sheet, the heavy lessee looks to be less leveraged; once adjusted for the effect of leasing, the heavy lessee is revealed to be considerably more leveraged. It shows that "rule of thumb" estimates, like multiplying rent expense by 8 to calculate liability, are too inexact. And it emphasizes that even if sophisticated analysts, doing in-depth research on individual companies, can reach reasonable approximations (though lacking all the desirable data), this doesn't serve less sophisticated investors, or those who are looking at large groups of companies, who must rely on the basic financial statements. Thus, while the boards have been willing to consider adjustments to the details, the fundamental concept of putting leases on the balance sheet is fixed.