Project Pages

Lease Accounting—Reexamination of NCGA Statement 5 and GASB Statement 13

Project Description: The objective of this project is to reexamine issues associated with lease accounting, considering improvements to existing guidance. This project will provide a basis for the Board to consider whether operating leases meet the definitions of assets or liabilities. Current guidance is provided by National Council on Governmental Accounting (NCGA) Statement 5, Accounting and Financial Reporting Principles for Lease Agreements of State and Local Governments, GASB Statement No. 13, Accounting for Operating Leases with Scheduled Rent Increases, GASB Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, and GASB Statement No. 65, Items Previously Reported as Assets and Liabilities. Statement 62 incorporates the provisions of FASB Statement No. 13, Accounting for Leases, as amended and interpreted, into the GASB’s authoritative literature.

Status:
Added to Current Agenda: April 2013
Added to Research Agenda: April 2011

Lease Accounting—Project Plan


Background
: Governments routinely enter into leases. Under the current authoritative literature, many of these leases are reported as operating leases. Even though operating leases represent long-term commitments to make payments, no liabilities are reported, although there are disclosures. Likewise, no assets are reported when governments have long-term rights to receive operating lease payments. In Concepts Statement No. 4, Elements of Financial Statements, the Board established definitions of assets and liabilities. This project provides an opportunity for the Board to consider whether operating leases meet the definitions of assets or liabilities.

The FASB and the International Accounting Standards Board (IASB) have current projects that propose to replace private sector guidance. Because of the potentially significant changes of the FASB/IASB project, the staff has received technical inquiries regarding whether there are any plans for the GASB to update its leasing guidance.

This project undertaken by the GASB is being performed in concert with the similar FASB/IASB project to maximize efficiency and timeliness. A simultaneous lease accounting project on the GASB agenda provides the opportunity to follow the progress of the FASB/IASB leasing project to assess any proposed new or amended leasing guidance in the context of the state and local government environment on a contemporaneous basis. This allows the Board to consider and address amendments to FASB Statement 13 (GASB Statement 62) in a timely manner.

Finally, part of the GASB’s strategic plan is to evaluate the effectiveness and impact of existing standards that have been in effect for a sufficient length of time. NCGA Statement 5 was issued in 1982 and GASB Statement 13 in 1990. This project provides an opportunity for a fresh look at the existing guidance for any improvements not contemplated by the FASB/IASB project given the unique nature of governmental entities and the complexities of their leasing transactions.

Accounting and Financial Reporting Issues: The major topic being researched is the forms of financial reporting display and disclosure that would meet essential financial statement user needs. The project is considering the following issues:
  1. What types of leases are entered into by state and local governments?
  2. What specific user needs exist regarding governmental leases and what decision-useful or accountability information is needed to meet those needs?
  3. Are current accounting and financial reporting standards appropriate to meet essential user needs?
  4. Should there be a distinction between types of leases, such as operating and capital?
  5. If current standards are not considered adequate, what additional potential requirements should be considered?
Project History:
  • Pre-agenda research approved: April 2011
  • Added to current technical agenda: April 2013
  • Task force established? Yes
  • Deliberations began: August 2013
Current Developments: At the May 2014 meeting, the Board tentatively decided to propose that the due process document include a proposed requirement for lease assets to be disaggregated by major classes of underlying assets.

The Board also tentatively decided to propose that:
  • The lessor’s right to receive payments would be recognized as an asset—the lease receivable
  • Collectability of the payments and uncertainties surrounding unreimbursable costs to the lessor would not be stated as factors in recognition of the lease receivable
  • A liability would not be recognized for the discount on a long-term lease.
Regarding revenue recognition with respect to lessors and tentatively decided to propose that a lessor would recognize a deferred inflow of resources, measured at the receivable amount plus any cash received up front, at the beginning of the lease and recognize lease revenue over the lease term on a systematic and rational basis. The Board also tentatively decided to propose that the lessor would recognize interest revenue over the term of the lease receivable.

The Board reconsidered the definition of a short-term lease and tentatively decided that the definition of a short-term lease (for both lessees and lessors) would be a lease that, at the beginning of the lease, has a maximum possible term under the contract, including any options to extend, of 12 months or less. The Board also tentatively decided to propose that a required exception to recognition and measurement for lessors would be made for short-term leases. The Board then discussed the lessor accounting treatment for short-term leases and tentatively decided that lessors would recognize lease payments as revenue based on the terms of the lease contract.

The Board then discussed the initial measurement of the lease receivable with respect to the lessor. The Board tentatively decided to propose that the initial measurement of the lease receivable generally would be calculated as the discounted future payments to be received during the lease term, subject to a provision for uncollectible accounts. The Board also discussed the definition of a lease term and tentatively decided to propose that the same tentative definition of lease term previously agreed to by the Board would apply to lessors.

Regarding the types of payments considered as possible components of the lease receivable, the Board tentatively decided to propose that the following types of payments would be included in the initial measurement of the lease receivable:
  • Fixed payments required for the lease term
  • Variable payments that depend on an index or rate and that are measured using the index or rate at the beginning of the lease
  • Variable lease payments that are in-substance fixed
  • Residual value guarantees that are in-substance equivalent to fixed lease payments.
The Board also tentatively decided to propose that the lessor would recognize revenue from variable payments that are based on a lessee’s usage or performance when it is realizable, which may be the period when the performance or usage (on which the payments are based) takes place. Residual value guarantees would be recognized as a receivable only when the amount of the payment has been decided but not yet paid, with revenue recognized (or expense reduced) at that time. Payments for exercised purchase options would be recognized as a receivable and revenue only when the options are exercised but not yet paid. Termination penalties would be recognized as a receivable and revenue only when they are exercised but not yet paid.

The Board then discussed other issues relating to the initial measurement of the lease receivable. The Board tentatively decided to propose that lessors would recognize expense for initial direct costs in the period in which the costs are incurred. The Board also tentatively decided that the discount rate used by the lessor to determine the present value of the lease receivable should be the rate the lessor charges the lessee.

The Board discussed the subsequent measurement of the lease receivable by a lessor and the related issues. The Board tentatively decided to propose that a lessor would:
  • Remeasure a lease receivable by calculating the amortization of the discount on the lease receivable and reducing the lease receivable by the actual lease payment amount less the amortization of the discount
  • Reassess the lease term only when the lessee actually extends or terminates the lease opposite of what was previously expected
  • Remeasure a lease receivable when the result of a change in an index or a rate used to determine lease payments during the reporting period may be significant
The Board tentatively decided that when the lease term is changed, reassessment of the discount rate would be required. The Board also tentatively decided that the discount rate would be reassessed when there is a change in the reference rate included in a variable lease payment. The initial selection of a discount rate by lessors also would be the approach for selection of a discount rate in the event of a reassessment, the rate the lessor charges the lessee.

The Board also discussed the impact of the remeasurement of the lease receivable on other financial elements. The Board tentatively decided that an adjustment to the receivable for a change in lease term would be recognized as an adjustment to the related deferred inflow of resources. The Board also tentatively decided that an adjustment to the receivable for a change in the rate upon which variable payments are based would be recognized as revenue or expense.

At the July 2014 meeting, the Board discussed presentation of the lease receivable by the lessor. The Board tentatively decided that existing guidance on presentation of receivables applies to lease receivables and, therefore, no separate guidance on the presentation of lease receivables is necessary. The Board also tentatively decided that a lessor would not be required to present the underlying assets separately from other capital assets, but would disclose the amounts of those assets held for leases in the notes to the financial statements. The Board also tentatively decided that guidance on the presentation of lease activities in the statement of cash flows in the lessor’s model would be provided through implementation guidance.

The Board tentatively decided to propose that:
  • A depreciable leased asset would be depreciated unless that asset is required to be returned in its original or enhanced condition
  • A leased asset would not be depreciated when the leased asset is required to be returned in its original or enhanced condition
  • The assurance that a leased asset will be returned in its original or an enhanced condition should not be on the basis of an asset management system
  • A lessor’s lease asset that meets the definition of an investment should be reported according to the provisions of the Exposure Draft, Fair Value Measurement and Application; that is, it should be measured at fair value if it meets the definition of an investment.
Regarding disclosures by the lessors, the Board tentatively decided to propose that lessors would be required to disclose:
  • A general description of leasing arrangements, including the basis, and terms and conditions, on which variable lease payments are determined
  • The cost and carrying amount, if different, of property on lease or held for leasing by major classes of property and the amount of accumulated depreciation
  • The total amount of revenue recognized in the reporting period related to leases
  • Revenue relating to the variable lease payments and other payments not included in the measurement of the lease receivable, including revenue related to residual value guarantees and termination penalties
  • A maturity analysis of the lease receivable, showing the undiscounted cash flows to be received on an annual basis for a minimum of each of the first five years and aggregated totals in five-year increments thereafter, reconciled to the lease receivable.
Regarding issues relating to subleases, the Board tentatively decided to propose that subleases would be accounted for as transactions separate from their original leases. The Board also tentatively decided to propose a disclosure of the treatment of subleases and that subleases would be noted as one of the items to be included in the general description of lease arrangements (if applicable). Finally, the Board tentatively decided to propose that lessor transactions related to subleases would be disclosed separately from the original lessee transactions.

The Board then discussed leases with certain counterparties. The Board tentatively decided that:
  • Related party leases would be recognized based on the substance of the transaction, when substance is significantly different from form
  • Existing guidance with respect to leases between governments and public authorities would be retained
  • The current treatment for leases with blended component units—do not report the lease in the financial reporting entity’s financial statements—would be retained
  • Eliminations for internal leasing activity would not take place within the financial statements of the financial reporting entity; rather, the eliminations would take place before the financial statements are aggregated
  • The current treatment for leases with discretely presented component units—no elimination, but separate presentation of the lease receivable and payable—would be retained.
At the August 2014 meeting, the Board discussed lease modifications and terminations, multiple components, leases in governmental funds, and certain other lessee and lessor topics.

Work Plan: In addition to the topics below that will be deliberated by the Board, the project staff will continue to monitor the progress of the FASB and IASB projects on leases.

Work Plan
Board meetings Topics to be considered

Board meetings

Topics to be considered

September 2014:

Review preballot draft of Preliminary Views.

November 2014:

Review ballot draft and issue Preliminary Views.

December 2014–February 2015:

Comment period and field test.

March 2015: Analyze comments.
April 2015: Public hearings.

April–October 2015:

Redeliberate issues based on respondent feedback.

November 2015:

Review draft standards section.

January 2016:

Review preballot draft of an Exposure Draft.

January 2016 (T/C):

Review ballot draft and issue Exposure Draft.

February–May 2016:

Due process and comment analysis.

June–September 2016:

Redeliberate issues based on respondent feedback.

October 2016:

Review preballot draft of final Statement. 

November 2016(T/C):

Review ballot draft and issue final Statement. 


Lease Accounting —Recent Minutes


Minutes of Teleconference, September 8, 2014

The Board began deliberations by discussing the general approach for the accounting and reporting of sale-leaseback transactions. The Board tentatively decided to propose that, as a general principle, a transaction include a qualifying sale (as provided by Codification Section R30, “Real Estate,” if applicable) in order to follow sale-leaseback accounting. The Board also tentatively decided to propose that the presence of an obligation or option for the lessee to repurchase the asset in a sale-leaseback preclude the use of sale-leaseback accounting.

The Board continued deliberations of sale-leaseback transactions by discussing the treatment of gains and losses. The Board tentatively decided to propose that any gain or loss in a sale-leaseback transaction be deferred, regardless of how much use of the asset is retained by the seller-lessee. The Board also tentatively decided to propose that any gain or loss in a sale-leaseback in which the leaseback is a short-term lease be recognized as a gain or loss at the date of the sale, rather than deferred. The Board also tentatively decided to propose that the entire gain in a sale-leaseback transaction be treated as a deferred inflow of resources, rather than a reduction of the lease asset. The Board also tentatively decided to propose that the existing exception in current guidance that recognizes a loss immediately for the difference between the fair value and undepreciated cost of the asset not be retained.

The Board continued its deliberations of sale-leaseback transactions with discussion of off-market terms. The Board tentatively decided to propose that there be an adjustment made for the off-market terms in sale-leaseback transactions. The Board also tentatively decided to propose that a government be allowed to determine whether any off-market terms exist in a sale-leaseback transaction on the basis of the difference between either of the following, whichever is more readily determinable: (1) the sale price and the fair value of the underlying asset or (2) the present value of the contractual lease payments and the present value of the market rate lease payments. The Board also tentatively decided to propose that governments account for the off-market terms in the following manner: (a) treat any deficiency in the same manner as a prepayment of the lease, and (b) treat any excess as additional financing provided by the buyer-lessor to the seller-lessee.

The Board continued sale-leaseback deliberations by discussing the accounting treatment of sale-leasebacks. The Board tentatively decided to propose that the seller-lessee account for the leaseback under the same guidance provided for lessees of leases that are not part of a sale-leaseback. If the transaction does not qualify for sale-leaseback accounting, the Board tentatively decided to propose that the seller-lessee (transferor) and the buyer-lessor (transferee) both account for the transaction as a financing. The Board also tentatively decided to propose that the buyer-lessor follow the applicable guidance for a capital asset purchase and the same guidance provided for lessors of leases that are not part of a sale-leaseback, as if the transactions were separate.

The Board continued deliberations by discussing potential disclosures for sale-leasebacks and failed sale-leaseback transactions. The Board tentatively decided to propose that seller-lessees disclose the terms and conditions of the sale-leaseback transaction. The Board also tentatively decided that seller-lessees should not be required to disclose any gain or loss on the sale portion of the transaction separately from gains or losses on other capital asset disposals. Regarding failed sale-leaseback transactions, the Board tentatively decided to propose not to retain the guidance in paragraph 256 of Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, in which transferors disclose the minimum sublease rentals to be received in the future under noncancelable subleases. The Board tentatively decided not to propose additional disclosures for failed sale-leasebacks.

The Board continued deliberations of sale-leasebacks by discussing transactions involving regulated enterprises. The Board tentatively decided to retain current guidance relating to sale-leasebacks involving regulated enterprises.

The Board then discussed lease-leaseback transactions. The Board tentatively decided to propose special guidance for lease-leasebacks such that each party would recognize a net receivable and deferred inflow of resources or a net payable and lease asset. The Board also tentatively decided to propose that governments disclose the gross components of a net lease receivable or payable when there is a lease-leaseback transaction.

Finally, the Board provided its edits and comments for five draft chapters of the Preliminary Views on Leases.

Minutes of Meetings, August 20-22, 2014

The Board began deliberations by discussing additional potential disclosures. The Board tentatively decided to propose that a lessor government be required to disclose the existence, and terms and conditions, of options by the lessee to terminate a lease if the lessor government has issued debt for which the principal and interest payments are secured by the lease payments. The Board also tentatively decided that lessees and lessors should not be required to disclose the portion of their lease liabilities and lease receivables, respectively, that relates to the noncancellable periods of the lease.

The Board continued deliberations by discussing lease terminations. The Board tentatively decided to propose that for the termination of a lease, other than a transaction associated with the lessee’s purchase of the underlying asset, the lessee remove the lease asset and obligation, and recognize the difference as a gain or loss. The Board also tentatively decided to propose that for a lease termination that is associated with the lessee’s purchase of the underlying asset, the lessee record the difference between the purchase price and carrying amount of the lease liability as an adjustment to the carrying amount of the underlying asset. The Board tentatively decided to propose that for a lease termination, the lessor remove the lease receivable and related deferred inflow of resources, and recognize any difference as a gain or loss.

The Board then continued discussions on lease modifications. The Board tentatively decided to propose a general approach to be used for lease modifications: A change in the lease contract should be considered a modification of the original lease if the lessee keeps the same right of use; a change should be considered a new lease (and the original lease terminated) if the lessee loses part of its right of use. The Board tentatively decided to propose that for a lease modification from a change in consideration, the lessee remeasure the lease liability on the effective date of modification and assess the need for an updated discount rate; the lessee also should adjust the right-of-use asset by the difference between the modified liability and the liability immediately before the modification, recognizing neither a gain nor loss. The Board also tentatively decided to propose that for a lease modification from a change in consideration, the lessor remeasure the lease receivable on the effective date of modification and assess the need for an updated discount rate. The lessor also should adjust the deferred inflow of resources by the difference between the modified receivable and the receivable immediately before the modification, recognizing neither a gain nor loss.

The Board continued deliberations by discussing lease modifications related to an increase in scope. The Board tentatively decided to propose that for a lease modification from an increase in scope, the lessee remeasure the lease liability on the effective date of modification and assess the need for an updated discount rate. The lessee also should adjust the right-of-use asset by the difference between the modified liability and the liability immediately before the modification, recognizing neither a gain nor loss. The Board also tentatively decided to propose that for a lease modification from an increase in scope, the lessor remeasure the lease receivable on the effective date of modification and assess the need for an updated discount rate. The lessor also should adjust the deferred inflow of resources by the difference between the modified receivable and the receivable immediately before the modification, recognizing neither a gain nor loss.

The Board then discussed lease modifications related to a decrease in scope. The Board tentatively decided to propose that for a lease modification from a decrease in scope, the lessee remeasure the lease liability on the effective date of modification and assess the need for an updated discount rate. The lessee also should adjust the right-of-use asset for the portion of the lease that is terminated and recognize a gain or loss for the difference. The Board also tentatively decided to propose that for a lease modification from a decrease in scope, the lessor remeasure the lease receivable on the effective date of modification and assess the need for an updated discount rate. The lessor also should adjust the deferred inflow of resources proportionally with the receivable adjustment and recognize a gain or loss on the difference. The Board tentatively decided to propose that for changes in lease consideration due to a refunding of related debt, existing guidance for tax-exempt debt be carried forward with conforming edits and extended to refunding of taxable debt. That is, lessees should recognize a deferred inflow or outflow of resources rather than adjust the value of the lease asset, and lessors should recognize a gain or loss over the shorter of the remaining life of the old debt or the life of the new debt.

The Board then moved on to deliberations of issues relating to multiple lease components. The Board tentatively decided to propose that in addition to separation of multiple lease components that have different lease terms, lessee governments be required to separate multiple lease components in a contract if the underlying assets belong to different major classes; however, lessor governments would not be required to do so. The Board tentatively decided that lessees should not be permitted to make an accounting policy election not to separate lease and nonlease components or multiple lease components within one contract. The Board also tentatively decided to propose that if observable stand-alone prices for identical or similar assets or services are not available for all components, lessees consider the remaining components to be one unit for measurement purposes.

The Board continued deliberations of multiple components and contract combinations. The Board tentatively decided to propose that lessors be required to separate lease and nonlease components or multiple lease components on the same basis that lessees are required to do so. The Board also tentatively decided that lessor governments should not be permitted to make an accounting policy election not to separate lease and nonlease components or multiple lease components of a contract. The Board tentatively decided to propose that governments presume that contracts entered into at or near the same time with the same counterparty are not part of one arrangement, unless there is evidence to the contrary. The Board also tentatively decided to propose that contract combinations be required if one or both of the following criteria are met: (a) the contracts are negotiated as a package with a single objective and (b) the amount of consideration to be paid in one contract depends on the price or performance of the other contract.

The Board then discussed lessor accounting in governmental funds. The Board tentatively decided to propose to retain existing guidance, with conforming edits, for treatment by a lessor of leases in governmental funds.

The Board then discussed certain scope topics relating to the proposed Leases guidance. The Board tentatively decided to propose that leases that transfer ownership and leases that contain bargain purchase options should remain in scope of the Leases project, but guidance should be provided to report these transactions as a financed sale or purchase. The Board tentatively decided that guidance for leases associated with certificates of participation should be included in implementation guidance.

The Board continued discussions with a reconsideration of certain recognition issues including allowance of a capitalization threshold, a small-item exception, and a portfolio approach for aggregating leases. The Board tentatively decided not to include guidance addressing the use of a capitalization threshold in the Preliminary Views. The Board also tentatively decided not to include an exception for leases of (individually) small items. The Board tentatively decided that guidance related to the application of the Leases guidance at a portfolio or group level for leases with similar characteristics should be included in implementation guidance.

The Board concluded the Leases discussions with a reconsideration of measurement topics including reassessment of the lease term for lessees, reassessment of the lease liability for variable lease payments for lessees, and reassessment of the discount rate for lessees and lessors when the result of a change in an index or a rate used to determine a variable lease payment may be significant. The Board tentatively decided to propose that a lessee reassess the lease term only when the lessee actually extends or terminates the lease opposite of what was previously expected, in a reversal of a previous tentative decision. The Board also tentatively reaffirmed that lessees should reassess the lease liability for variable lease payments when the result of a change in an index or a rate used to determine the variable lease payments during the reporting period may be significant. The Board also tentatively reaffirmed that both lessees and lessors should reassess the discount rate when the result of a change in an index or a rate used to determine a variable lease payment may be significant.

Minutes of Meetings, July 9-10, 2014

The Board began deliberations by discussing presentation of the lease receivable by the lessor. The Board tentatively decided that existing guidance on presentation of receivables applies to lease receivables and, therefore, no separate guidance on the presentation of lease receivables is necessary. The Board also tentatively decided that a lessor should not be required to present the underlying assets separately from other capital assets but to disclose the amounts of those assets held for leases in the notes to the financial statements. The Board also tentatively decided that guidance on the presentation of lease activities in the statement of cash flows in the lessor’s model should be provided through implementation guidance rather than in the proposed Leases standard.

The Board continued deliberations by discussing other lessor issues. The Board tentatively decided to propose that a depreciable leased asset be depreciated, unless that asset is required to be returned in its original or enhanced condition. The Board also tentatively decided to propose that a leased asset not be depreciated when the leased asset is required to be returned in its original or enhanced condition. The Board also tentatively decided that the assurance that a leased asset will be returned in its original or an enhanced condition should not be on the basis of an asset management system. Finally, the Board tentatively decided that a lessor’s lease asset that meets the definition of an investment should be reported according to the provisions of the Fair Value Measurement and Application Exposure Draft; that is, it should be measured at fair value if it meets the definition of an investment.

The Board then discussed disclosures by the lessor. The Board tentatively decided that the Preliminary Views should not explicitly state that disclosures are required only if leasing activity is significant to the entity. The Board also tentatively decided to propose that lessors be required to disclose a general description of leasing arrangements, including the basis, and terms and conditions, on which variable lease payments are determined. The Board tentatively decided that lessors should not be required to disclose (a) the existence, and terms and conditions, of options to extend or terminate the lease; (b) the amount of termination penalties that may be received; (c) the existence, and terms and conditions, of options for a lessee to purchase the underlying asset; or (d) the significant assumptions and judgments made in accounting for leases. However, the Board directed the staff to consider another type of disclosure that would provide information about the risks associated with termination if a lessor’s debt payments rely on cash flows from a lease. The Board tentatively decided that the Preliminary Views should not include a proposal that refers to the related party disclosures in Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements. The Board also tentatively decided that lessors should not be required to disclose a reconciliation of the opening and closing balances of the lease receivable. The Board also tentatively decided that lessors should not be required to disclose the amount of the discount on the lease receivable.

The Board tentatively decided that the general requirement for reporting and disclosure of asset valuation allowances for losses in Statement 62 would apply to the lease receivable, and, therefore, the Preliminary Views should not include a proposal that specifically refers to the disclosure of the allowance for uncollectible lease payments. The Board tentatively decided that lessors should not be required to disclose the total carrying amount of underlying assets covered by residual value guarantees, or the total value of the guarantees. The Board tentatively decided to propose that lessors be required to disclose the cost and carrying amount, if different, of property on lease or held for leasing by major classes of property and the amount of accumulated depreciation. The Board also tentatively decided to propose that lessors be required to disclose the total amount of revenue recognized in the reporting period related to leases. The Board tentatively decided that lessors should not be required to disclose the separate amounts of interest revenue related to leases (or components of the total lease revenue amount) recognized in the period relating to the lease receivable. The Board tentatively decided to propose that lessors be required to disclose the revenue relating to the variable lease payments and other payments not included in the measurement of the lease receivable, including revenue related to residual value guarantees and termination penalties. The Board tentatively decided to propose that lessors be required to disclose a maturity analysis of the lease receivable, showing the undiscounted cash flows to be received on an annual basis for a minimum of each of the first five years and aggregated totals in five-year increments thereafter, reconciled to the lease receivable. The Board also tentatively decided that lessors should not be required to separately present interest and principal components of the lease receivable in the proposed maturity analysis.

Further, the Board tentatively decided that lessors should not be required to disclose the discount rate(s) used in measuring lease assets. The Board also tentatively decided that lessors should not be required to disclose information about lease concentrations or leases not in the normal course of operations. The Board tentatively decided that lessors should not be required to disclose the treatment of short-term leases. The Board also tentatively decided that lessors should not be required to disclose the amount of revenue received for the period related to short-term leases or the amount of future payments to be received under short-term leases. Finally, the Board tentatively decided that lessors should not be required to disclose qualitative information about circumstances when the next period’s short-term lease revenue is expected to be significantly different than the current period’s revenue.

The Board then moved on to deliberations of issues relating to subleases. The Board tentatively decided to propose that subleases be accounted for as transactions separate from their original leases. The Board also tentatively decided to propose a disclosure of the treatment of subleases and that subleases be noted as one of the items to be included in the general description of lease arrangements (if applicable). The Board tentatively decided that separate disclosure should not be required for the amount of payments to be received from subleases by the original lessee. Finally, the Board tentatively decided to propose that lessor transactions related to subleases be disclosed separately from the original lessee transactions.

The Board then discussed leases with certain counterparties. The Board tentatively decided that related party leases should be recognized based on the substance of the transaction, when substance is significantly different from form. The Board also tentatively decided that existing guidance with respect to leases between governments and public authorities should be retained. The Board tentatively decided to propose that the current treatment for leases with blended component units—do not report the lease in the financial reporting entity’s financial statements—be retained. The Board tentatively decided that eliminations for internal leasing activity should not take place within the financial statements of the financial reporting entity; rather, the eliminations should take place before the financial statements are aggregated. Finally, the Board tentatively decided that the current treatment for leases with discretely presented component units—no elimination, but separate presentation of the lease receivable and payable—should be retained.

Minutes of Meetings, May 28-29, 2014

The Board began deliberations by discussing an illustration of the proposed disclosure requirements for lessees based on the Board’s tentative decisions from the previous meeting. In a change of a previous tentative decision, the Board tentatively decided to propose that the due process document include a proposed requirement for lease assets to be disaggregated by major classes of underlying assets.

The Board then moved on to deliberations of the lessor model, discussing lessors’ recognition in various existing and proposed models. The Board tentatively decided to propose that the lessor’s right to receive payments be recognized as an asset—the lease receivable. The Board also tentatively decided that collectability of the payments and uncertainties surrounding unreimbursable costs to the lessor should not be stated as factors in recognition of the lease receivable. The Board tentatively decided to propose that a liability not be recognized for the discount on a long-term lease.

The Board then discussed the rights retained in the underlying asset, specifically addressing how the lessor treats the underlying asset and whether the lessor recognizes a residual asset. The Board tentatively decided to propose that a governmental lessor not derecognize the underlying asset and not recognize a residual asset for all leases. The Board also tentatively decided to propose that the lessor not recognize a liability for a continuing performance obligation associated with the lessee’s right to use the asset. The Board then discussed revenue recognition with respect to lessors and tentatively decided to propose that a lessor recognize a deferred inflow of resources, measured at the receivable amount plus any cash received up front, at the beginning of the lease and recognize lease revenue over the lease term on a systematic and rational basis. The Board also tentatively decided to propose that the lessor recognize interest revenue over the term of the lease receivable.

The Board continued deliberations by discussing a possible exception for short-term leases with respect to lessors. The Board reconsidered the definition of a short-term lease and tentatively decided that the definition of a short-term lease (for both lessees and lessors) would be a lease that, at the beginning of the lease, has a maximum possible term under the contract, including any options to extend, of 12 months or less. The Board also tentatively decided to propose that a required exception to recognition and measurement for lessors be made for short-term leases. The Board then discussed the lessor accounting treatment for short-term leases and tentatively decided that lessors would recognize lease payments as revenue based on the terms of the lease contract.

The Board then discussed the initial measurement of the lease receivable with respect to the lessor. The Board tentatively decided to propose that the initial measurement of the lease receivable generally be calculated as the discounted future payments to be received during the lease term, subject to a provision for uncollectible accounts. The Board also discussed the definition of a lease term and tentatively decided to propose that lessors use the same definition of lease term as previously decided by the Board.

The Board then discussed the types of payments considered as possible components of the lease receivable. The Board tentatively decided to propose that the following types of payments be included in the initial measurement of the lease receivable:
  • Fixed payments required for the lease term
  • Variable payments that depend on an index or rate and that are measured using the index or rate at the beginning of the lease
  • Variable lease payments that are in-substance fixed
  • Residual value guarantees that are in-substance equivalent to fixed lease payments.
The Board also tentatively decided to propose that the lessor recognize revenue from variable payments that are based on a lessee’s usage or performance when it is realizable, which may be the period when the performance or usage (on which the payments are based) takes place. Residual value guarantees should be recognized as a receivable only when the amount of the payment has been decided but not yet paid, with revenue recognized (or expense reduced) at that time. Payments for exercised purchase options should be recognized as a receivable and revenue only when the options are exercised but not yet paid. Termination penalties should be recognized as a receivable and revenue only when they are exercised but not yet paid.

The Board then discussed other issues relating to the initial measurement of the lease receivable. The Board tentatively decided to propose that lessors recognize expense for initial direct costs in the period in which the costs are incurred. The Board also tentatively decided that the discount rate used by the lessor to determine the present value of the lease receivable should be the rate the lessor charges the lessee.

The Board continued deliberations by discussing the subsequent measurement of the lease receivable by a lessor and the related issues. The Board tentatively decided that a lessor should remeasure a lease receivable by calculating the amortization of the discount on the lease receivable and reducing the lease receivable by the actual lease payment amount less the amortization of the discount. The Board also tentatively decided that the lessor should reassess the lease term only when the lessee actually extends or terminates the lease opposite of what was previously expected. The Board tentatively decided that there should be a remeasurement of a lease receivable when the result of a change in an index or a rate used to determine lease payments during the reporting period may be significant. The Board then discussed the reassessment of the discount rate. The Board tentatively decided that when the lease term is changed, reassessment of the discount rate should be required. The Board also tentatively decided that the discount rate should be reassessed when there is a change in the reference rate included in a variable lease payment. The initial selection of a discount rate by lessors also should be the approach for selection of a discount rate in the event of a reassessment, the rate the lessor charges the lessee.

The Board then discussed impairment of the lease receivable and tentatively decided that the due process document should not include an explicit statement that the receivable should be evaluated for collectability (current authoritative literature would apply). The Board also discussed the impact of the remeasurement of the receivable on other financial elements. The Board tentatively decided that an adjustment to the receivable for a change in lease term should be recognized as an adjustment to the related deferred inflow of resources. The Board also tentatively decided that an adjustment to the receivable for a change in the rate upon which variable payments are based should be recognized as revenue or expense.

Minutes of Meetings, April 8-10, 2014

The Board began deliberations by discussing potential note disclosure requirements for lessees in relation to the general description of leasing arrangements. The Board tentatively agreed to propose a requirement for lessees to disclose a general description of the lessee’s leasing arrangements, including the basis, and terms and conditions, on which variable lease payments are determined and the existence, and terms and conditions, of residual value guarantees provided by the lessee. The Board also tentatively decided not to propose a requirement for lessees to disclose the existence and terms of purchase options; the existence, and terms and conditions, of renewal and termination options; the restrictions or covenants imposed by leases; or information about significant assumptions and judgments made in accounting for leases.

The Board continued deliberations by discussing potential disclosure requirements for lessees related to assets and liabilities. The Board tentatively agreed to propose that lessees be required to disclose only the general reconciliations of the changes in the lease liability and of the changes in capital assets currently required by Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, and not to include a requirement for a more detailed reconciliation. Furthermore, the Board tentatively agreed to propose a requirement for the total amount of assets recorded under leases, and the related accumulated amortization, to be disclosed separately from owned assets. The Board also tentatively decided not to propose a requirement for lease assets to be disaggregated by major classes of underlying assets.

The Board then discussed potential disclosure requirements for lessees involving expenses related to leases. The Board tentatively decided not to propose that lessees separately disclose the amount of amortization expense recognized for lease assets. The Board also tentatively decided to propose a requirement for lessees to disclose the total variable lease payments actually incurred. Furthermore, the Board tentatively decided to propose that the due process document supersede any existing disclosures related to operating leases.

The Board continued deliberations by discussing potential disclosure requirements for lessees in relation to future lease obligations. The Board tentatively agreed to propose a requirement for lessees to disclose a maturity analysis of future minimum lease payments that shows the payments for each of the first five years and five-year increments thereafter, with the payments shown undiscounted and total interest summed for all years. The Board also tentatively decided not to propose that the lessee disclosure requirements include amounts of sublease rentals to be received. The Board agreed that this topic would be addressed in the lessor disclosure deliberations.

Furthermore, the Board tentatively decided to propose a requirement for lessees to disclose commitments relating to leases, other than short-term leases, for which the lease term has not begun with a conforming edit to NCGA Statement 1, Governmental Accounting and Financial Reporting Principles. The Board also tentatively decided not to propose a requirement for lessees to disclose a maturity analysis of the nonlease components of a contract.

The Board then discussed other considerations regarding lessee disclosures. The Board tentatively decided not to propose that the due process document refer to the noncash transaction disclosure requirement in Statement No. 9, Reporting Cash Flows of Proprietary and Nonexpendable Trust Funds and Governmental Entities That Use Proprietary Fund Accounting. The Board also tentatively agreed to replace the example in Statement 9 of “obtaining an asset by entering into a capital lease” with “obtaining a right-of-use asset by entering into a lease.” Furthermore, the Board tentatively decided not to propose that the due process document refer to the related party disclosures in Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in pre-November 30, 1989 FASB and AICPA Pronouncements.

The Board continued deliberations by discussing other potential disclosure requirements. The Board tentatively decided not to propose a requirement for disclosure of the discount rate(s) used in measuring lease liabilities. The Board also tentatively decided to propose an amendment to Statement 62 to exempt lease liabilities from imputed interest guidance. Furthermore, the Board tentatively decided not to propose a requirement for lessees to disclose the fair value of the lease liability, the amount of initial direct costs capitalized as part of lease assets during the reporting period, and information about arrangements that upon transition no longer meet the definition of a lease. The Board also tentatively decided not to propose a requirement for lessees to disclose the amount of interest expense related to leases or a requirement for lessees to disclose together all lease-related expenses. In addition, the Board tentatively decided not to propose a requirement for lessees to disclose cash paid for principal and interest on leases.

The Board tentatively agreed to propose a requirement for disclosure of payments made in excess of contractual requirements, such as residual value guarantees or penalties. The Board also tentatively decided not to propose a requirement for lessees to disclose the actual lease terms for significant leases and the weighted-average lease term of all leases, as well as the categorization of renewal options by likelihood.

The Board tentatively agreed to propose that lessee disclosure requirements not include information about below-market leases. The Board tentatively decided not to propose a requirement for lessees to disclose information about a government’s decision-making. Furthermore, the Board tentatively agreed to propose an amendment to Statement 62 to exempt disclosure of the underlying asset as collateral. The Board also tentatively agreed to propose that lessee disclosure requirements include the components of a net impairment loss (that is, gross impairment loss and adjustment to the lease liability).

The Board continued deliberations by discussing short-term lease disclosures for lessees. The Board tentatively decided that the existing disclosure requirements for accounting policies are sufficient to cover disclosure of accounting treatment for short-term leases and that no additional guidance is necessary in the due process document. The Board also tentatively agreed to propose a requirement for lessees to disclose the amount of expense and expenditure recognized for the period related to short-term leases. The Board also tentatively decided not to propose a requirement for lessees to disclose commitments under short-term leases or qualitative information about circumstances when the next period’s short-term lease expense is expected to be significantly different than the current period’s expense.

Minutes of Meetings, March 3-5, 2014

The Board met in a joint session with the Federal Accounting Standards Advisory Board (FASAB). The Board and FASAB began by discussing the foundation of a new accounting model for lessors. The Board tentatively decided that a new accounting model for lessors should be considered and that symmetry between the lessee and lessor accounting models should be a key factor in development of the lessor model.

The Board and FASAB then discussed the tentative decisions the Board has made to date. No further tentative decisions were made by the Board.

Minutes of Meetings, February 13, 2014

The Board discussed topics related to impairment of a lease asset. The Board tentatively decided to propose that in circumstances in which an asset underlying a lease is damaged and requires restoration or replacement, the time period during which the underlying asset is not usable generally is the relevant factor in assessing whether the impairment test has been met. This amended the Board’s previous tentative decision that a lessor’s responsibility to repair or replace an impaired underlying asset may indicate that impairment of the lease asset (right to use) will be temporary.

The Board continued deliberations by discussing impairment indicators. The Board tentatively decided to propose that the following be included in the text of a proposed Leases standard:

a) Impairment indicators present with respect to the underlying asset may result in a change in the manner or duration of use of the lease asset
b) A change in the manner or duration of use of the lease asset may indicate impairment of that asset.

The Board then discussed whether a lessor’s responsibility to restore or replace the underlying asset may indicate that the magnitude of the decline in service utility of the lease asset is not significant. The Board tentatively decided not to include that statement in a potential Leases standard.

The Board continued deliberations by discussing how to measure and recognize the impairment of a lease asset. The Board tentatively decided to propose that the lease asset should be adjusted first by the same amount as any change in the related lease liability. If the carrying value of the lease asset is reduced to zero, any further adjustments should be recognized in the flows statement. The Board also tentatively decided to propose that an impaired lease asset first be adjusted by any change in the corresponding lease liability, with any remaining adjustment recognized as the impairment loss.

The Board continued its discussions by reviewing examples of different impairment scenarios presented by the project staff. The Board provided suggestions to staff for changes to the examples if they are to be included in a due process document or future implementation guidance.

Minutes of Meetings, January 27-29, 2014

The Board began deliberations by discussing a possible exception to the overall lease accounting model for noncore assets, which could be defined as assets that are not essential to a government’s operations. The Board tentatively decided to propose that there not be an exception made to the overall leases model for leases of noncore assets.

The Board continued deliberations by discussing topics on lease-related expenses. The Board tentatively decided to propose that the existing guidance related to the accounting treatment for operating leases with scheduled rent increases be superseded. The Board also tentatively decided to propose that lease payments for short-term leases that have a rent holiday or rent reduction provisions be recognized as expenses based on the terms of the contract. Furthermore, the Board tentatively decided to propose that lease payments not included in the liability measurement be recognized as expense in the accrual accounting-based flows statement in the period in which the obligation for those payments is incurred.

The Board then discussed recognition in governmental funds. The Board tentatively decided to propose conforming edits to the existing guidance on accounting for leases in governmental funds. Furthermore, the Board tentatively decided to propose that the general guidance for recognition of liabilities in governmental funds adequately addresses short-term leases, and only limited amendments to existing provisions are needed.

The Board then discussed issues relating to the lease asset. The Board tentatively decided to propose that the right-of-use asset in a lease is an intangible asset that should be accounted for in accordance with existing authoritative guidance for capital assets. The Board also tentatively decided to propose that the relationship between the underlying asset and the lease asset could mean that the lease asset is impaired if indicators of impairment are present with respect to the underlying asset. Furthermore, the Board tentatively decided to propose that a lessor’s responsibility to repair or replace an impaired underlying asset may indicate that an impairment of the lease asset (right to use) will be temporary. The Board discussed how a lessee would measure an impairment of the lease asset and requested that the staff develop example calculations.

The Board continued deliberations by discussing guidance on presentation of lease assets and liabilities. The Board tentatively decided to propose that existing guidance on presentation of capital assets would apply to the lease asset. The Board also tentatively decided to propose that existing guidance on presentation of general long-term liabilities apply to the lease liability and that it be referred to as a long-term liability in a proposed Statement. Additionally, the Board tentatively decided to propose that specific guidance on the presentation of lease activities in the statement of cash flows be provided through implementation guidance rather than in the proposed Leases standard as existing standards related to the statement of cash flows are sufficient.

Minutes of Meetings, December 10-12, 2013

The Board continued its discussion on the measurement of lease liabilities by a lessee and the types of payments that should be included. The Board tentatively decided to propose that the following types of lease payments be included in the measurement of the initial lease liability:
  • The best estimate or minimum of range of residual value guarantees probable of being paid based on an assessment of qualitative factors
  • Purchase options probable of being exercised based on an assessment of qualitative factors
  • Termination penalties, if based on the determination of the lease term, the termination option is probable of being exercised.
The Board then discussed several alternatives with respect to the determination of the discount rate. The Board tentatively decided to propose that lease liability payments be discounted using the rate the lessor charges the lessee. However, if that rate cannot be readily determined, the lessee’s incremental borrowing rate should be used. The Board tentatively decided not to propose an exception to use a risk-free interest rate in certain situations. The Board also continued its discussion of the initial measurement of lease assets and tentatively decided to propose that the first component of the lease asset be the initial measurement of the lease liability.

The Board continued deliberations by discussing subsequent measurement of the lease asset and lease liability by a lessee during the term of the lease. The Board tentatively decided to propose that a lessee remeasure a lease liability by calculating the amortization of the discount on the lease liability and reducing the lease liability by the actual lease payment amount less the amortization of the discount. The Board tentatively decided to propose that lease assets be amortized using a systematic and rational basis. The Board also tentatively decided to propose that lease assets be amortized over the shorter of the useful life of the underlying asset or the lease term. However, the Board also tentatively decided to propose that the lessee amortize the right-of-use asset as if the lessee owns the underlying asset, using the lessee’s depreciation policy, if the lease transfers ownership or if by assessing qualitative factors, it is probable that a purchase option will be exercised. In those situations, if the underlying asset is a non-depreciable asset such as land, the lessee should not amortize the right-of-use asset. Furthermore, the Board tentatively decided that the proposed guidance on leases that transfer ownership be included in the text of a standard.

The Board then discussed classification in the accrual-basis flows statement and the Board tentatively decided to propose that the lessee report the amortization of the lease asset as amortization expense and the amortization of the discount on the lease liability as interest expense.

The Board then discussed the reassessment of lease liabilities for lessees. The Board tentatively decided to propose that there be a reassessment of a lease liability when there is a change in the likelihood (probable to not probable or vice versa) of a purchase option being exercised based on an assessment of qualitative factors. The Board also tentatively decided to propose that, based on an assessment of qualitative factors, there be a reassessment of the residual value guarantee component of a lease liability when there is either a change in the amounts expected to be payable or when there is a change in the likelihood (probable to not probable or vice versa) that a payment will be required. Furthermore, the Board tentatively decided to propose that there be a reassessment of a lease liability when the result of a change in an index or a rate used to determine lease payments during the reporting period may be significant.

The Board tentatively decided to propose that a reassessment of the discount rate be required in any of the following situations:
  • The lease term is changed
  • There is a change in the likelihood (probable to not probable or vice versa) that a purchase option will be exercised
  • The result of a change in the reference rate used to determine a variable lease payment may be significant.
The Board also tentatively decided to propose that in the event of a reassessment the Board’s tentative decision regarding the initial selection of a discount rate also be the approach for selection of a discount rate.

The Board continued deliberations by discussing the recalculation of the lease liability and asset. The Board tentatively decided to propose that adjustments arising from remeasurements of lease liabilities also adjust the right-of-use asset. The exception is adjustments due to a change in the rate upon which a variable lease payment is based, which should be recognized as revenue or expense in the current period.

The Board then discussed whether a lease asset should be subject to existing guidance on impairment. The Board requested to defer a tentative decision on this question until it discusses classification of the lease asset. The Board then considered a situation in which a lease asset also meets the proposed definition of an investment. The Board tentatively decided to propose that the asset be measured in accordance with guidance for investments rather than leases.

The Board then continued discussions on short-term leases. The Board tentatively decided to propose that a short-term exception be an accounting requirement, rather than a policy election, for all leases that qualify. The Board also tentatively decided to propose that lessees not be required to recognize assets or liabilities associated with the right to use the underlying asset for short-term leases. Furthermore, the Board tentatively decided to propose that lease payments for short-term leases be recognized as expenses/expenditures based on the terms of the contract.

The Board also discussed cancellable leases and tentatively decided to propose that cancellable periods (those periods for which a lessee and lessor each have the right to cancel the lease) be excluded from the lease term. The Board also tentatively decided to propose that the maximum possible term for a cancellable lease be defined as any noncancellable period, including any notice periods.

The Board then discussed whether contracts with multiple components (lease and nonlease, or multiple leases) should be bifurcated for accounting purposes and, if so, how the consideration should be allocated to the different components. The Board tentatively decided to propose that governments separate contracts into lease and nonlease components, subject to a practicality exception related to measurement. The Board also tentatively decided to propose that governments separate lease contracts involving multiple assets into multiple lease components only if there are different lease terms, subject to a practicality exception related to measurement.

For allocation of consideration between multiple components, the Board tentatively decided to propose that lessees first use prices in the contract for individual components, if available, if those prices are reasonable based on other observable stand-alone prices. If individual prices are not included in the contract, or the prices are not reasonable, the Board also tentatively decided to propose that lessees allocate consideration based on relative observable stand-alone prices, if those prices are available for all components of the contract. If observable stand-alone prices are not available for all components, the Board tentatively decided to propose that lessees (1) allocate the stand-alone price to any components for which there are such prices and then (2) consider any remaining components to be a single unit of account and assign the remaining consideration to that unit.

The Board continued deliberations by discussing how to account for a contract if components are not separated and the idea of providing guidance for concurrent contracts. The Board tentatively decided to propose that guidance be provided when multiple lease components are considered one unit for accounting purposes. The Board also tentatively decided to propose that accounting for multiple lease components that are considered as one unit for accounting purposes be based on the primary component. Furthermore, the Board tentatively decided to propose that guidance be provided for treating separate contracts that were signed concurrently. The Board will consider issues associated with concurrently signed contracts at a later meeting.

Minutes of Meetings, October 29-31, 2013

The Board discussed lessee recognition and measurement, including the foundation for recognition and measurement, and lessee recognition of assets and liabilities. The Board also began discussions on the lessee initial measurement of liabilities. The Board tentatively agreed that the major criticisms of current lease accounting, opportunities for structuring around a bright-line classification test and omission of a perceived liability, are items that the Leases project should attempt to address. The Board also recognized that the proposed accounting model for leases may have differences from the private sector as a result of factors found in the state and local government environment. The Board tentatively decided that the model should attempt to measure resources available to provide services, and obligations to sacrifice such resources, with consideration given to the characterization of expenses. The Board also discussed whether leases are executory contracts but did not reach a tentative decision. The Board tentatively decided to propose that the notion of leases as financings be the foundation for the governmental leasing model.

The Board continued deliberations by discussing the recognition of assets and liabilities for lessees. The Board tentatively agreed to propose that the right to use the underlying asset be recognized as an asset by the lessee and that the obligation to make lease payments be recognized as a liability by the lessee. Furthermore, the Board tentatively decided to propose that the obligation to return the underlying asset at the end of the lease not be recognized as a liability by the lessees; it also should not be recognized as a deferred inflow of resources or an outflow of resources. The Board then discussed other rights and obligations that may arise from a lease. The Board tentatively agreed to propose that other rights be considered part of the overall lease asset and that other obligations be evaluated on a case-by-case basis.

The Board then discussed potential exceptions to the overall lease model. The Board tentatively decided to propose that exceptions be made for short-term leases, under which the lessee government is not required to recognize assets or liabilities. The Board tentatively decided to propose that a short-term lease be defined as a lease that, at the beginning of the lease, has a maximum possible term under the contract, including any options to extend, of 12 months or less. The Board tentatively agreed to propose that the presence of a purchase option not affect the definition of a short-term lease. However, the Board also tentatively decided to propose that leases that transfer ownership not qualify for the short-term lease exception, even if those leases meet the other criteria. Furthermore, the Board tentatively decided to propose that it not be necessary to make an exception for leases that transfer ownership of underlying assets.

The Board then discussed the overall approach to the measurement of lease assets and liabilities for lessees. The Board tentatively decided to propose that the general approach to measuring lease assets and liabilities be to measure the liabilities first and base the assets on that amount. The Board also tentatively decided to propose that the general measurement approach for a lease liability be based on the present value of future payments.

The Board discussed the lessee measurement of lease liabilities and the types of payments that should be included. The Board tentatively decided to propose that the following types of lease payments be included in the measurement of the initial lease liability:
  • Fixed payments for the lease term
  • Variable payments based on an index or rate, using the rate in effect at that date
  • Variable payments that are in-substance fixed.
The Board tentatively decided to propose that lease payments that depend on a lessee’s performance or usage of an underlying asset not be a component of the initial lease liability. The Board also discussed residual value guarantees as a potential component of the lease liability as well, and requested additional staff research before making a tentative decision.

Minutes of Meetings, September 17-19, 2013

The Board discussed issues associated with lease classifications and lease terms that drive the accounting treatment of leases. After discussing characteristics of various types of leases, the Board considered alternate methods to classify leases for accounting purposes. The Board tentatively agreed that while there might be inherent differences in leases, a single accounting model could be developed in the interest of not creating unnecessary complexity, with potential exceptions for certain circumstances.

The Board then discussed elements relevant to the duration of a lease, including the definition of a lease term, how to account for fiscal funding clauses, and the reassessment of a lease’s term. The Board tentatively decided that the lease term should start with the noncancellable period. The Board also tentatively decided that the lease term should include the periods covered by renewal options (or exclude periods covered by termination options) that are probable of being exercised based on an assessment of qualitative factors. The Board tentatively agreed to include in the noncancellable period of the lease term periods covered by fiscal funding and cancellation clauses with a remote possibility of cancellation. Leases that contain a fiscal funding or cancellation clause with a more than remote possibility of cancellation should be treated as having a termination option. The Board also tentatively agreed the lease term should be reevaluated when there is a change in relevant factors that would result in a change in judgment as to the lessee’s likelihood to exercise or terminate the lease, or when the lessee actually exercises or terminates the lease opposite of what was previously expected. The Board tentatively decided the relevant factors used in the initial assessment also should be the factors that trigger a reassessment.

Minutes Archive

Lease Accounting—Tentative Board Decisions to Date


The Board tentatively agreed to propose that:
  • The definition of a lease be revised to be “a contract that conveys the right to use an asset (the underlying asset) for a period of time in an exchange or exchange-like transaction”
  • The scope of the Leases guidance includes contracts not identified as leases but that meet the definition of a lease
  • The scope of the Leases guidance continue to exclude:
    • Contracts for services that do not transfer the right to use assets from one contracting party to the other
    • Leases to explore for or use of minerals, oil, natural gas, and similar nonregenerative resources
    • Licensing agreements for such items as motion picture films, video recordings, plays, manuscripts, patents, and copyrights
    • Service concession arrangements
  • The scope of the Leases guidance also exclude biological assets, including timber
  • Leases that transfers ownership or contain a bargain purchase option be included in the Leases guidance but be reported as a financed sale or purchase of the capital asset
  • A single accounting model be developed, potentially with exceptions for certain circumstances
  • The lease term include:
    • The noncancellable period
    • Periods covered by renewal options (or exclude periods covered by termination options) that are probable of being exercised based on an assessment of qualitative factors
    • Periods covered by fiscal funding and cancellation clauses if the possibility of cancellation is remote (If the possibility of cancellation is more than remote, the period should be treated as any other termination option when determining the lease term.)
  • Cancellable periods be excluded from the lease term
  • The lease term be reevaluated by lessees and lessors when the lessee actually extends or terminates the lease opposite of what was previously expected
  • The relevant factors used in the initial assessment of the lease term also be the factors that result in a reassessment
  • The underlying assumption that leases are financings be the foundation for the governmental leasing model
  • The right to use the underlying asset be recognized as an asset by the lessee
  • The general approach to measuring lease assets and liabilities be to measure the liabilities first and base the assets on that amount
  • The general measurement approach for a lease liability be based on the present value of future payments
  • The obligation to make lease payments be recognized as a liability by the lessee
    • The obligation to return the underlying asset at the end of the lease not be recognized as a liability by the lessee
  • A practicality exception be made for short-term leases
    • A short-term lease be defined as a lease that, at the beginning of the lease, has maximum possible term under the contract, including any options to extend, of 12 months or less
    • The maximum possible term for a cancellable lease be defined as any noncancellable period, including any notice periods
    • The definition of a short-term lease not depend on the presence of a purchase option
    • A short-term exception be an accounting requirement for all leases that qualify
    • Lessees not be required to recognize assets or liabilities associated with the right to use the underlying asset for short-term leases
    • Lease payments be recognized as expenses/expenditures based on the terms of the contract
    • Lessors not be required to recognize assets or deferred inflows of resources associated with a short-term lease
    • Lessors recognize lease payments as revenue based on the terms of the lease contract
    • Lease payments for short-term leases rent holiday or rent reduction provisions be recognized as expenses in accrual accounting financial statements based on the terms of the contract
    • There not be a practicality exception made for leases of noncore assets
  • The initial measurement of a lease liability for a lessee include:
    • Fixed payments to be made over the lease term
    • Variable payments based on an index or rate, using the rate in effect at that date
    • Variable payments that are in-substance fixed
    • Residual value guarantees probable of being required based on an assessment of qualitative factors
    • Purchase options probable of being exercised based on an assessment of qualitative factors
    • Termination penalties if based on the determination of the lease term, the termination option is probable of being exercised
  • Lease payments that are dependent on a lessee’s performance or usage of an underlying asset not be included in the measurement of the lease liability
  • Payments not included in the liability measurement be recognized as expense in the accrual accounting-based flows statement in the period in which the obligation for those payments is incurred
  • Lease liability payments be discounted using the rate the lessor charges the lessee and if that rate cannot be readily determined, the lessee’s incremental borrowing rate should be used
  • The initial measurement of a lease asset for a lessee include:
    • The value of the initial lease liability
    • Any prepayments (amounts paid for the lease prior to measuring the lease liability)
    • Initial direct costs if they are ancillary charges to place the leased asset into use
  • Lease incentives received be reductions in the cost of lease assets
  • Initial direct costs be expensed if they are costs other than ancillary charges to place the leased asset into use
  • A lessee remeasure a lease liability by calculating the amortization of the discount on the lease liability and reducing the lease liability by the actual lease payment amount less the amortization of the discount
  • Lease assets be amortized using a systematic and rational basis over the shorter of the useful life of the underlying asset or the lease term
  • The lessee amortize the right-of-use asset as if the lessee owns the underlying asset, using the lessee’s depreciation policy, if the lease transfers ownership or if by assessing qualitative factors a purchase option is determined to be probable of being exercised. In those situations, if the underlying asset is a non-depreciable asset such as land, the lessee should not amortize the right-of-use asset
  • The lessee classify the amortization of the lease asset as amortization expense and the amortization of the discount on the lease liability as interest expense in the flows statement
  • The right-of-use asset in a lease is an intangible asset that should be accounted for in accordance with existing authoritative guidance for capital assets
    • The relationship between the underlying asset and the lease asset could mean that indicators of impairment present with respect to the underlying asset may result in a change in the manner or duration of use of the lease asset
    • A change in the manner or duration of use of the lease asset may indicate impairment of that asset
    • In circumstances in which an asset underlying a lease is damaged and requires restoration or replacement, the time period during which the underlying asset is not usable generally is the relevant factor in assessing whether the impairment test has been met.
    • An impaired lease asset first would be adjusted by any change in the corresponding lease liability, with any remaining adjustment recognized as the impairment loss 
  • A reassessment of a lease liability be required in any of the following situations:
    • When there is a change in the likelihood (probable to not probable or vice versa) of a purchase option being exercised based on an assessment of qualitative factors
    • A change in the amounts expected to be payable under a residual value guarantee or when there is a change in the likelihood (probable to not probable or vice versa) that a payment will be required based on an assessment of qualitative factors
    • Result of a change in an index or a rate used to determine lease payments during the reporting period may be significant
  • A reassessment of the discount rate for lessees be required in any of the following situations:
    • Lease term is changed
    • A change in the likelihood (probable to not probable or vice versa) that a purchase option will be exercised based on an assessment of qualitative factors
    • Result of a change in the reference rate used to determine a variable lease payment may be significant
  • Initial selection of a discount rate by lessees also be the approach for selection of a discount rate in the event of a reassessment
  • Adjustments arising from remeasurements of lease liabilities also adjust the right-of-use asset by the same amount. The exception is adjustments due to a change in the rate upon which a variable lease payment is based, which are recognized as revenue or expense in the current period.
  • If the adjustment to the lease liability is greater than the carrying value of the lease asset, the difference be recognized in the flows statement
  • Contracts be separated into lease and nonlease components or multiple lease components bt lessees and lessors, subject to a practicality exception related to measurement
  • Allocate consideration to multiple components, lessees:
    • First use prices in the contract for individual components, if available, and if those prices are reasonable based on other observable standalone prices
    • If individual prices are not available or not reasonable, allocate consideration based on relative observable standalone prices, if those prices are available for all components of the contract
    • If observable standalone prices for identical or similar assets or services are not available for all components,
      • Allocate the standalone price to any components for which there are such prices and then
      • Consider any remaining components to be a single unit of account and assign the remaining consideration to that unit
  • Accounting for multiple lease components that are considered as one unit for accounting purposes be based on the primary component.
  • Contracts entered into at or near at the same time with the same counteraparty not be presumed to be part of one arrangement, unless there is evidence to the contrary
    • Contract combination be required if one or both of the following criteria are met:
      • The amount of consideration to be paid in one contract depends on the price or performance of the other contract:
  • For lease terminations (other than from the lessee’s purchase of the underlying asset), lessees remove the lease asset and obligation, and recognize the difference as a gain or loss to account for the termination of a lease.
  • Lessees record the difference between the purchase price and the carrying amount of the lease liability as an adjustment to the carrying amount of the asset to account for a lease termination if the transaction is associated with the lessee’s purchase of the underlying asset
  • The general approach to account for lease modifications be the following:
    • A change in the lease contract be considered a modification of the original lease if the lessee keeps the same right of use
    • A change in the lease contract be considered a new lease (and the original lease terminated) if the lessee loses part of its right of use
  • Lessees account for a lease modification by the following:
    • Remeasure the lease liability on the effective date of modification and assess the need for an updated discount rate
    • Adjust the right-of-use asset by the difference between the modified liability and the liability immediately before the modification
  • The guidance in Statement 13 relating to the accounting treatment for operating leases with scheduled rent increases be superseded
  • Lessees be required to disclose the following:
    • A general description of leasing arrangements, including the basis, and terms and conditions, on which variable lease payments are determined and the existence, and terms and conditions, of residual value guarantees provided by the lessee
    • Total amount of assets recorded under leases, and the related accumulated amortization, disclosed separately from owned assets
    • The total variable lease payments actually incurred during the reporting period
    • Lease assets disaggregate by major classes of underlying assets
    • A maturity analysis of future minimum lease payments that shows payments for each of the first five years and five-year increments thereafter, with the payments shown undiscounted and total interest summed for all years
    • Lease commitments, other than short-term leases, for which the lease term has not begun
    • Payments made in excess of contractual requirements, such as residual value guarantees or penalties
    • Components of a net impairment loss
    • Amount of expense and expenditure recognized for the period related to short-term leases
  • A new lessor accounting model be considered with symmetry between lessee and lessor accounting as a key factor in its development.
  • The lessor’s right to receive payments be recognized as an asset–the lease receivable
  • A governmental lessor not derecognize the underlying asset and not recognize a residual asset for all leases
  • The leased asset be depreciated, unless a depreciable leased asset is required to be returned in its original or enhanced condition or the leased asset has an indefinite useful life
  • The lessor’s leased asset that meets the definition of an investment be reported according to the provisions of the Fair Value Measurement and Application Exposure Draft
  • The lessor not recognize a liability for a continuing performance obligation associated with the lessee’s right to use the asset
  • The lessor recognize a deferred inflow of resources, measured at the receivable amount plus any cash received up front, at the beginning of the lease and recognize lease revenue over the lease term on a systematic and rational basis
  • The lessor recognize interest revenue over the term of the lease receivable
  • The initial measurement of the lease receivable generally be calculated as the discounted future payments to be received during the lease term, subject to a provision for uncollectible accounts
  • The initial measurement of a lease receivable for a lessor include:
    • Fixed payments required for the lease term
    • Variable payments that depend on an index or rate and measured using the index or rate at the beginning of the lease
    • Variable lease payments that are in-substance fixed
    • Residual value guarantees that are in-substance equivalent to fixed lease payments
  • The lessor recognize revenue from variable payments that are based on a lessee’s usage or performance when it is realizable
  • Residual value guarantees be recognized as a receivable only when the amount of the payment has been decided but not yet paid, with revenue recognized (or expense reduced) at that time
  • Payments for exercised purchase options be recognized as a receivable and revenue be recognized only when the options are exercised but not yet paid
  • Termination penalties be recognized as a receivable and revenue be recognized only when they are exercised but not yet paid
  • Lessors recognize expense (and expenditure) for initial direct costs in the period in which the costs are incurred
  • The discount rate used by the lessor to determine the present value of the lease receivable be the rate the lessor charges the lessee
  • A lessor remeasure a lease receivable by calculating the amortization of the discount on the lease receivable and reducing the lease receivable by the actual lease payment amount less the amortization of the discount
  • There be a remeasurement of a lease receivable when the result of a change in an index or a rate used to determine lease payments during the reporting period may be significant
  • A reassessment of the discount rate for lessors be required in either of the following situations:
    • Lease term is changed
    • Result of a change in the reference rate used to determine a variable lease payment may be significant
  • Initial selection of a discount rate by lessors also be the approach for selection of a discount rate in the event of a reassessment
  • An adjustment to the receivable for a change in lease term be recognized as an adjustment to the related deferred inflow of resources
  • Lessors remove the lease receivable and related deferred inflow of resources, and recognize any difference as a gain or loss to account for a termination of a lease
  • Lessors account for a lease modification by the following:
    • Remeasure the lease receivable on the effective date of modification and assess the need for an updated discount rate
    • Adjust the deferred inflow of resources by the difference between the modified receivable and the receivable immediately before the modification
  • An adjustment to the receivable for a change in the rate upon which variable payments are based be recognized as revenue or expense
  • Lessors be required to disclose:
    • A general description of leasing arrangements
    • The basis, and terms and conditions, on which variable lease payments are determined
    • The cost and carrying amount, if different, of property on lease or held for leasing by major classes of property and the amount of accumulated depreciation
    • The total amount of revenue recognized in the reporting period related to leases
    • The lease revenue related to variable lease payments and other payments not included in the measurement of the lease receivable, including revenue related to residual guarantees and termination penalties
    • A maturity analysis of the lease receivable, presenting the undiscounted cash flows to be received on the annual basis for a minimum of each of the first five years and aggregated totals in five-year increments thereafter, reconciled to the lease receivable
    • The existence, and terms and conditions, of options by the lesee to terminate a lease if the lessor or government has issued debt for which the principal and interest payments are secured by lease payments
  • Subleases be accounted for as transactions separate from the original lease
    • Information about subleases be one of the items to be included in the general description of lease arrangements
      • Lessor transactions related to subleases should be disclosed separately from the original lessee transactions
  • Related party leases be recognized based on the substance of the transaction, when substance is significantly different from
  • Eliminations for internal leasing activity take place before the final statements are aggregated
  • A sale-leaseback transaction include a qualifying sale in order to be eligible for sale-leaseback accounting
  • The presence of an obligation or option for the lessee to repurchase the asset in a sale-leaseback transaction preclude the use of sale-leaseback accounting
  • Any gain or loss in a sale-leaseback transaction be deferred, regardless of how much use of the asset is retained by the seller-lessee
  • Any gain or loss in a sale-leaseback transaction in which the leaseback is a short-term lease be recognized as a gain or loss at the date of sale Any “off-market” terms exist in a sale-leaseback transaction on the basis of the difference between either of the following two approaches, whichever is more readily determinable:
    • The sale price and the fair value of the underlying asset
    • The present value of the contractual lease payments and the present value of the market rate lease payments
  • An adjustment be made for the off-market terms in a sale-leaseback transaction in the following manner:
    • Treat any deficiency in the same manner as a prepayment of the lease and
    • Treat any excess as additional financing provided by the buyer-lessor to the seller-lessee
  • The seller-lessee account for the lease portion of a sale-leaseback under the same guidance provided for leases that are not part of a sale-leaseback
  • The buyer-lessor in a sale-leaseback follow the applicable guidance for a capital asset purchase and the same guidance provided for lessors of leases that are not part of a sale-leaseback, as if the transactions were separate
  • The transferor (seller-lessee if sale-leaseback criteria were met) and the transferee (buyer-lessor if sale-leaseback criteria were met) account for a sale-leaseback that does not qualify for sale-leaseback accounting as a financing
  • The seller-lessee disclose the terms and conditions of sale-leaseback transactions
  • Each party in a lease-leaseback transaction recognize a net receivable and deferred inflow of resources or a net payable and a lease asset
  • Gross components of a net receivable or payable be disclosed when there is a lease-leaseback transaction
  • The Board issue a Preliminary Views document for the Leases project.