Project Pages

Leases—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. 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 incorporated the provisions of FASB Statement No. 13, Accounting for Leases, as amended and interpreted, into the GASB’s authoritative literature.

Status:
Preliminary Views approved on November 2014
Added to Current Agenda: April 2013
Added to Research Agenda: April 2011

Leases—Reexamination of NCGA Statement 5 and GASB Statement 13—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 existing similarities between private-sector and public-sector leasing guidance and 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 undertaken during the final stages of the similar FASB and IASB projects to maximize efficiency and timeliness. A simultaneous lease accounting project on the GASB agenda provides the opportunity to follow the progress of the FASB and IASB projects to assess on a contemporaneous basis any proposed new or amended leasing guidance in the context of the state and local government environment. The GASB project provides an opportunity to reassess the existing GASB guidance, as well as consider improvements contemplated by the FASB and IASB projects in the context of the unique nature of governmental entities and the complexities of their leasing transactions.

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.

Accounting and Financial Reporting Issues: The major topic being considered 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. Are current accounting and financial reporting standards, including the distinction between types of leases, appropriate to meet essential user needs?
  2. If current standards are not considered adequate, what other 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
  • Preliminary Views approved: November 2014
  • Comment period: November 2014–March 2015
  • Field test completed: March 2015
  • Public hearings held: April 2015
  • Redeliberations began: April 2015
Current Developments: The Board concluded redeliberations of major issues at the October 2015 meeting and reviewed a draft of a standards section of an Exposure Draft at the November 2015 meeting.

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.

Board meetings

Topics to be considered

January 2016 (T/C):

Review ballot draft and issue Exposure Draft.

February–May 2016:

Comment period and comment analysis.

June 2016: Hold public hearing.

June–October 2016:

Redeliberate issues based on respondent feedback.

November 2016:

Review preballot draft of a final Statement. 

December 2016:

Review ballot draft and issue final Statement. 


Leases—Reexamination of NCGA Statement 5 and GASB Statement 13—Recent Minutes—Recent Minutes


Minutes of Meetings, January 5-6, 2016

The Board reviewed a preballot draft of the proposed Exposure Draft, Leases, and provided clarifying edits on the draft document. The Board tentatively decided that the Exposure Draft should propose that only governments whose principal ongoing operations consist of leasing assets to other entities be required to disclose future lease payments that are included in the lease receivable, showing principal and interest separately.

Minutes of Meetings, November 18-20, 2015.

The Board reviewed a draft Standards section of a proposed Exposure Draft. The Board provided clarifying edits on the proposed guidance.

The Board tentatively decided that the Exposure Draft should incorporate the guidance in National Council on Governmental Accounting (NCGA) Statement 5, Accounting and Financial Reporting Principles for Lease Agreements of State and Local Governments, for accounting and reporting lease transactions in governmental funds. The Board tentatively agreed to propose that the leases standard supersede NCGA Statement 5 and GASB Statement No. 13, Accounting for Operating Leases with Scheduled Rent Increases.

The Board also tentatively agreed that the Exposure Draft should propose that the lessee and lessor disclosure of future lease payments present principal and interest requirements separately. This proposed requirement mirrors the schedule of principal and interest payments required for long-term debt under Statement No. 38, Certain Financial Statement Note Disclosures.

The Board tentatively decided that the Exposure Draft should propose that certain leases, such as airport-airline agreements, recognize revenue based on the terms of the lease contract.

Minutes of Task Force Meeting, October 6, 2015

GASB Chairman Dave Vaudt opened the meeting at 1:00 p.m. by welcoming the task force members and providing introductory remarks. The task force members at the table and on the phone and others at the table introduced themselves to the group. Mr. Vaudt then turned the meeting over to Wesley Galloway.

The task force discussed the Board’s tentative decisions to date regarding the foundational principle that all leases are financings of the right to use an asset. Mr. Galloway explained that this foundational principle underlies many of the decisions made in the proposed accounting for lessees and lessors in the Preliminary Views and during the Board’s redeliberations. Task force members did not express specific objections to the foundational principle. Some task force members noted that the legal treatment of a lease arrangement should not dictate the accounting treatment.

Mr. Galloway then presented the Board’s tentative decisions regarding the scope of the proposed Leases guidance, specifically noting the Board’s tentative decisions to (1) limit the definition of a lease to exchange or exchange-like transactions, (2) narrow the scope of the Preliminary Views to exclude all leases of intangible assets, (3) treat a lease as a financed purchase if it a contains a provision to transfer ownership of the underlying asset to the lessee, and (4) treat bargain purchase options in the same manner as any other purchase options included in the lease. Mr. Galloway explained that the narrowing of the scope was a response to stakeholder feedback requesting clarification about whether certain types of technology leases would be in the scope of the proposed guidance. The tentative decision regarding bargain purchase options was made in response to stakeholder concerns about the presumption that all bargain purchase options will be exercised. Task force members generally did not express specific objections to these scope issues, particularly the exclusion of intangible assets and the treatment of bargain purchase options. A task force member, however, expressed concern with the scope exclusion of intangible assets.

The next topic discussed was the proposed guidance regarding the lease term. Ms. Beams presented the Board’s tentative decisions on the lease term, including the replacement of the threshold of probable for assessing renewal and termination options with the term reasonably certain. Some task force members provided feedback on this issue, expressing their concern regarding the subjectivity in determining when the threshold is met. Some task force members also discussed the difficulty involved in assessing renewal and termination options at the beginning of the lease term and in evaluating governments when some leases have options and others do not.

Ms. Beams then explained the Board’s tentative decisions regarding lessee accounting. The Preliminary Views proposed an approach that would require lessee governments to recognize a lease asset and liability for all leases other than those meeting the definition of a short-term lease. A lessee government would recognize interest expense on the lease liability and amortization expense on the lease asset. Ms. Beams noted that, in redeliberations, the Board tentatively reaffirmed many of the proposals from the Preliminary Views, with the exception of a change in the threshold for including certain potential lease payments in the lease liability from probable to reasonably certain. Ms. Beams also explained the proposed guidance regarding remeasurement of the lease liability and reassessment of the discount rate as part of that remeasurement. Ms. Beams presented the tentative Board decisions regarding remeasurement and then solicited task force feedback on all tentative Board decisions regarding the lessee accounting approach. Some task force members asked for clarification regarding the impact of reassessment on reported assets and liabilities and future amortization, and expressed concern that the changes to the lease liability due to reassessment would not be observable in the notes to the financial statements. Task force members did not express specific objections to the Board’s tentative decisions to make the proposed lessee model related to remeasurement less complex.

Mr. Galloway then presented the Board’s tentative decisions regarding lessor accounting, including the Board’s tentative reaffirmation of the provision that lessors not derecognize the underlying asset in a lease. In addition, Mr. Galloway discussed proposed exceptions to lessor recognition and measurement in which certain lessors would not record a lease receivable (and related deferred inflow of resources). Those exceptions include (1) leases of assets that meet the definition of an investment, (2) leases involving assets financed with outstanding conduit debt, and (3) leases with characteristics of airport/airline agreements and similar leases. Task force members generally expressed no specific objections to the proposed exclusions, including the exception for airport leases and other leases with similar regulatory involvement.

The task force then discussed the Board’s tentative decisions regarding contracts with multiple components, including lease contracts that contain service components or multiple lease components. Ms. Beams presented the Board’s tentative decision to carry forward the proposal that governments generally separate contracts into lease and nonlease components, as well as the proposed three-step approach for allocation of consideration in a multiple component lease contract. Some task force members expressed specific concern as to whether the benefits provided to users would outweigh the costs incurred by preparers in order to separate multiple components. Other task force members noted the potential subjectivity of the proposed allocation guidance and indicated that presentation as a single lease unit may be preferable when, for example, the service component is needed to keep the underlying asset in working condition.

The task force also discussed the Board’s tentative decisions regarding a short-term lease exception. The Preliminary Views defined a short-term lease as “a lease that, at the beginning of the lease, has a maximum possible term under the contract of 12 months or less, including any options to extend.” Mr. Galloway explained the Board’s tentative affirmation of that 12-month provision as well as the Board’s tentative decision to not require lessees to disclose the amount of short-term lease expenses or expenditures in the interest of cost-benefit. Many task force members did not express specific objections to the provision, although some task force members indicated that the proposed length of short-term leases could be extended beyond one year. Those task force members felt that a short-term lease definition of one year would not provide substantial cost relief to preparers.

The task force then discussed effective date and transition provisions, which had not been deliberated yet by the Board. Mr. Galloway presented the project staff’s recommended approach, including (1) a proposed effective date for periods beginning after December 15, 2018, and (2) transition provisions that include recognition and measurement using the facts and circumstances that exist at the beginning of the period of implementation. Task force members generally did not express specific objections to the recommended effective date and transition guidance. Some task force members asked clarifying questions regarding the application of guidance to existing leases, while another task force member advocated for prospective implementation.

Finally, the task force discussed other tentative decisions made throughout the Board’s redeliberations of the Leases project. Ms. Beams noted issues such as note disclosures, lease terminations/modifications, subleases, sale-leaseback transactions, lease-leaseback transactions, and intra-entity leases as potential topics of discussion. Task force members voiced no specific objections to the Board’s tentative decisions on those topics but briefly discussed the applicability of a capitalization threshold to the proposed Leases guidance.

Mr. Vaudt thanked all task force members for their participation and concluded the meeting at 4:15 p.m.

Minutes of Meetings, October 6-8, 2015

The Board concluded redeliberations of major issues for the Leases project.

The Board first discussed the characteristics for exclusion of certain airport leases and similar leases. (The Board tentatively decided at the September 2015 meeting to further consider an exception to the leases recognition and measurement guidance for leases with characteristics of airport/airline agreements and similar leases.) The Board tentatively decided to propose excluding from lessor recognition and measurement those leases in which external laws, regulations, or legal rulings significantly limit the ability of the lessor to set rates in excess of costs, such as airport/airline agreements. The Board tentatively decided that those leases excluded from lessor recognition and measurement should continue to be accounted for based on the current guidance for operating leases and be required to provide the following disclosures, which mirror the disclosures proposed for lessors generally: 1) A general description of the agreement; 2) The carrying amount of assets subject to exclusive use by one counterparty under the agreement, by major class of assets, and the amount of accumulated depreciation; 3) The total amount of revenue recognized in the reporting period from the agreement, if the total for all similar agreements is not displayed on the face of the financial statements; 4) A schedule of future minimum payments under the agreement for each of the subsequent five years and in five-year increments thereafter; 5) The amount of revenue recognized in the reporting period for variable payments not included in the future minimum payments; and 6) If the government has issued debt for which the principal and interest payments are secured by payments under the agreement, the existence, terms, and conditions of options by the counterparty to terminate the agreement.

The Board then considered the remaining areas of existing leases guidance that had not yet been discussed in redeliberations. The Board tentatively decided that the Exposure Draft should not propose guidance on participation by third parties in leases. The Board tentatively agreed that the Exposure Draft should not propose guidance on leveraged leases. The Board also tentatively decided that the guidance on participation by third parties in leases and leveraged leases in Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, should be eliminated.

The Board then discussed lessor disclosures of investment property, a topic that arose in response to the Board’s July 2015 decision that lessors would not recognize a receivable (and related deferred inflow of resources) when they lease out a tangible asset that meets the definition of an investment in Statement No. 72, Fair Value Measurement and Application. The Board tentatively decided that the Exposure Draft should not propose lessor disclosures for leases in which the underlying asset meets the definition of an investment except for the following, in addition to other currently required investment disclosures: If the government has issued debt for which principal and interest payments are secured by the lease payments, the existence, terms, and conditions of options by the lessee to terminate the lease.

The Board then reviewed all previous tentative decisions taking into consideration their effect on symmetrical recognition and measurement by lessees and lessors. The Board tentatively agreed that symmetry has been achieved to an appropriate extent and that the remaining differences between lessee and lessor accounting are justified, based on the Board’s previous tentative decisions.

The Board then reviewed differences between its proposed Leases guidance and the FASB’s proposed guidance (based on FASB’s 2013 revised Exposure Draft, Leases, and subsequent redeliberations), focusing on differences that had not yet been discussed during redeliberations. No modifications were made to the proposals based on this discussion.

The Board then discussed the transition and effective date of the proposed Leases guidance and the comment period for the Exposure Draft and tentatively decided that the Exposure Draft should propose an effective date for periods beginning after December 15, 2018, which is expected to be two years after issuance of the final standard. The Board tentatively decided that the proposed effective date provisions should allow rather than encourage early implementation. The Board also tentatively decided that the Exposure Draft should propose the following transition provisions:

Leases should be recognized and measured using the facts and circumstances that exist at the beginning of the period of implementation. However, lessors should not restate the assets underlying their existing sales-type or direct financing leases. Any residual assets for those leases would become the carrying values of the underlying assets. Changes, if any, made to comply with this Statement should be reported as a restatement of beginning net position (or fund balance or fund net position, as applicable). In the first period that this Statement is applied, the notes to the financial statements should disclose the nature of the restatement and its effects.
 
In addition, the Board tentatively agreed to provide a 120-day comment period for the Exposure Draft.

The Board then discussed whether illustrations should be provided in the Exposure Draft and tentatively agreed that they are not needed.

The Board then discussed whether the expected benefits of information to users and other stakeholders from the Exposure Draft exceed the anticipated costs to preparers and other stakeholders. The Board tentatively agreed that the expected benefits associated with the requirements to be proposed in the Exposure Draft outweigh the perceived implementation and ongoing costs.

The Board then discussed the characteristics of the financial information that would be provided as a result of the proposed standard. The Board tentatively agreed that the accounting and financial reporting requirements to be proposed in the Exposure Draft would produce financial information that meets the needs of users, results from economic or financial events affecting the assessment of the governmental reporting entity, is relevant to reporting objectives, and falls within an appropriate information category in general purpose external financial reports.

Minutes of Meetings, September 1-3, 2015

The Board continued redeliberations of the Leases project taking into consideration public hearing testimonies, comment letters, and field test responses received during due process.

The Board first discussed airport leases and related issues. The Board tentatively decided to pursue an exception to the leases recognition and measurement guidance for leases with characteristics of airport/airline agreements and similar leases, with those characteristics to be identified.

The Board next discussed leases involving assets financed with outstanding conduit debt. The Board tentatively decided that the Exposure Draft should propose explicitly excluding such leases from its scope for lessor recognition and measurement unless both the asset and the conduit debt are reported by the lessor.

The Board then discussed issues related to lessee disclosures. The Board tentatively decided that the Exposure Draft should not propose clarifying guidance regarding the presentation of lessee disclosures. The Board also tentatively decided that the Exposure Draft should propose the disclosures for lessees as set forth in the Preliminary Views. In addition, the Board tentatively decided that the Exposure Draft should not propose any additional lessee disclosures not included in the Preliminary Views.

The Board then discussed issues related to lessor disclosures. The Board tentatively decided that the Exposure Draft should not propose clarifying guidance regarding the disclosure of the cost of assets on lease or held for lease. The Board tentatively agreed that the Exposure Draft should propose the lessor disclosures as set forth in the Preliminary Views. The Board also tentatively decided that the Exposure Draft should propose that leases may be grouped for disclosure purposes. The Board tentatively agreed that the Exposure Draft should not propose any additional lessor disclosures not included in the Preliminary Views.

The Board then discussed issues related to the short-term lease exception. The Board tentatively decided that the length of “short-term” should not be extended to longer than 12 months in the proposed definition of a short-term lease in the Exposure Draft. The Board tentatively agreed that the Preliminary Views’ proposal to use “a maximum possible term, including any options to extend” should not be replaced by “the lease term” in the proposed definition of a short-term lease in the Exposure Draft. The Board also tentatively agreed that the Exposure Draft should not propose edits or clarifications to the definition of a short-term lease. For short-term leases that include rent holidays (for example, one month free), the Board tentatively decided that the Exposure Draft should, consistent with the Preliminary Views, propose requiring recognition of lease payments based on the contract terms rather than allocating lease expense or expenditures over the rent holiday period. The Board tentatively agreed the Exposure Draft should not propose the requirement for lessees to disclose the amount of short-term lease expenses or expenditures.

The Board then discussed issues related to lease terminations and modifications. The Board tentatively decided that specific illustrations of accounting for lease terminations and modifications should not be included in the Exposure Draft. The Board tentatively agreed that the Exposure Draft should not include the statement that a lease modification is in essence a change in accounting estimate. The Board also tentatively decided that the Exposure Draft should propose the following exception to the accounting for lease modifications: if a lease modification gives the lessee an additional right-of-use not included in the original lease that is reasonably priced compared to its stand-alone price (in the context of a particular contract), then both the lessee and lessor should account for that additional portion of the modified lease as a new lease, separate from the original portion of the lease.

The Board then discussed issues related to subleases and leaseback transactions. The Board tentatively decided that the Exposure Draft should propose guidance on subleases. The Board tentatively agreed that the Exposure Draft should propose that subleases be accounted for separate from the original lease as set forth in the Preliminary Views. The Board also tentatively decided that the Exposure Draft should propose that any gain or loss on sale in a sale-leaseback transaction should be deferred over the term of the lease as set forth in the Preliminary Views. The Board tentatively decided that the Exposure Draft should not specifically address the treatment in governmental funds of the inflow of resources resulting from the sale in a sale-leaseback transaction. The Board tentatively agreed not to provide specific guidance on the determination of the fair value of the asset as provided in the determination of off-market terms in a sale-leaseback transaction. The Board also tentatively agreed to propose clarifying guidance on, but make no change to the substance of, the calculation of the present value of the lease payments at a market rate as provided in the determination of off-market terms in a sale-leaseback transaction. The Board also tentatively agreed that the Exposure Draft should propose guidance on the treatment of lease-leaseback transactions as set forth in the Preliminary Views.

The Board then discussed issues related to intra-entity leases (leases between a primary government and discretely presented component units or joint ventures) and agreed that no changes to the requirements in Statement No. 14, The Financial Reporting Entity, were necessary. Consistent with that, the Board tentatively decided that the Exposure Draft should not propose specific guidance on the elimination of lease transaction components of the primary government and a blended component unit, or lease transaction elements between a joint venture and a joint venture participant prior to the calculation of the equity interest.

Minutes of Meetings, July 21-23, 2015

The Board continued redeliberations of the Leases project taking into consideration public hearing testimonies, comment letters, and field test responses received during due process.

The Board first discussed whether and how the effects of adjustments to lease liabilities should affect the measurement of the corresponding lease asset under lessee accounting (an issue raised by a Board member at the June 2015 meeting). The Board tentatively decided to propose that when a lease liability is remeasured, the lease asset should be adjusted by the same amount as the lease liability. The Board tentatively decided that the Exposure Draft should not carry forward the provision from the Preliminary Views that the effects of a lease liability remeasurement due to a change in an index or rate used to determine variable lease payments that relates to the current period be recognized in the flows statement and instead proposed to recognize such changes as an adjustment to the lease asset.

The Board then discussed issues related to lessor recognition. The Board tentatively agreed that the Exposure Draft should carry forward a single lessor model for all leases based on the notion that all leases are financings. The Board also tentatively decided that the Exposure Draft should carry forward the requirement for lessors to recognize a lease receivable and a deferred inflow of resources for the lease. The Board tentatively agreed to carry forward to the Exposure Draft the Preliminary Views provision that the lessor not derecognize the underlying asset in the lease. The Board tentatively decided that the lessor accounting provision for leases in which an underlying asset meets the definition of an investment in the Exposure Draft should be revised so that the lessor in that case does not recognize a receivable and a deferred inflow of resources.

The Board then discussed issues related to lessor measurement and remeasurement. The Board tentatively agreed that the Exposure Draft should explicitly state that the reduction of the lease receivable due to uncollectible amounts should be balanced with a reduction in the deferred inflow of resources. The Board then discussed the rate on which variable lease payments are based. The Board tentatively decided that the Exposure Draft should carry forward the Preliminary Views provision that measurement of the lease receivable include variable lease payments that depend on an index or rate (such as the Consumer Price Index or a market interest rate). The Board also tentatively agreed that the Exposure Draft should carry forward the thresholds for contingent payments included in the measurement of the lease receivable, therefore, maintaining alignment with gain contingency guidance in GASB Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements. The Board tentatively agreed that the Exposure Draft also should carry forward the provision that the lessor discount the future lease payments using the rate the lessor charges the lessee, which may be implicit in the lease.

The Board tentatively decided that the Exposure Draft should include an explicit reference to existing GASB guidance on interest rate imputation as a potential means of determining the rate implicit in the lease. The Board also tentatively agreed that the Exposure Draft should carry forward the provision to allocate payments received first to accrued interest revenue and then to the lease receivable.

The Board tentatively agreed to clarify that the proposed receivable measurement guidance and proposed discount rate reassessment guidance for lessors would be required to be applied rather than considered. The Board also tentatively decided that the Exposure Draft should carry forward the receivable measurement criterion of “Change in lease term.” The Board tentatively agreed that a “Change in the index or rate used to determine variable lease payments” should not be a triggering event and should affect remeasurement only if the receivable is already being remeasured for another reason. The Board tentatively agreed that the Exposure Draft should carry forward the receivable remeasurement criterion of “Change in the rate the lessor charges the lessee.” The Board tentatively decided that the Exposure Draft should carry forward the discount rate reassessment criterion of “There is a change in the lease term.” The Board tentatively agreed that the proposed criterion of “The result of a change in the index or rate used to determine variable lease payments is expected to be significant” should not be carried forward in the discount rate reassessment guidance in the Exposure Draft. The Board tentatively agreed that the Exposure Draft should carry forward the discount rate reassessment criterion of “There is a change in the rate the lessor charges the lessee.”

The Board then tentatively agreed to not carry forward the provision that the effects of a lease receivable remeasurement due to a change in an index or rate used to determine variable lease payments that relates to the current period be recognized in the resource flows statement, separately from the effects of remeasurement for other reasons. Instead, such changes in the remeasurement of a lease receivable should be recognized with all other changes by adjusting the deferred inflow of resources.

The Board then discussed issues related to contracts with multiple components and contract combinations. The Board tentatively agreed that the Exposure Draft should carry forward the proposal that governments generally should separate contracts into lease and nonlease components. The Board tentatively decided that the Exposure Draft should carry forward the proposal that lessee governments separate lease contracts involving multiple underlying assets into multiple lease components if there are different lease terms or different underlying asset classifications. The Board tentatively agreed that the Exposure Draft should carry forward the proposal that lessor governments separate lease contracts involving multiple underlying assets into multiple lease components only if they have different lease terms. The Board also tentatively agreed that the Exposure Draft should not permit a lessee the use of a policy election to not separate lease components from nonlease components and account for the lease and nonlease components as a single lease unit. The Board tentatively decided that the Exposure Draft should not provide specific criteria for the types of contracts that could be reported as a single lease unit.

The Board tentatively decided that the Exposure Draft should propose that the allocation of consideration in a multiple component lease contract follow a three-step approach: (1) use any separate contract prices if reasonable, (2) use observable stand-alone prices if readily available, and (3) choose either to develop reasonable estimates to allocate consideration to remaining components or to treat remaining consideration as a single lease unit.

The Board tentatively decided that the Exposure Draft should not provide a de minimis exemption in the multiple components guidance. The Board tentatively agreed that additional disclosures should not be required for multiple component contracts that are reported as a single lease unit. The Board also tentatively decided that the Exposure Draft should not state the presumption that multiple contracts entered into at or near the same time with the same counterparty are not part of the same lease agreement. The Board tentatively agreed that no changes should be made to the proposed criteria for combining contracts in order to address master vendor agreements.

Minutes of Meetings, June 2-4, 2015

The Board continued redeliberations of the Leases project in response to public hearing testimonies and comment letters received during due process.

The Board began by completing its discussion of issues related to the scope of the Leases project that commenced at the April 2015 Board meeting. The Board tentatively decided to propose that contracts that transfer ownership of the underlying asset and do not contain termination options be reported as financed purchases of that asset, as noted in the Preliminary Views. The Board also tentatively agreed not to provide guidance on how to account for financed purchases of assets in the proposed Leases standard. However, the Board tentatively decided that the proposed Leases guidance should not exclude leases that contain a bargain purchase option or require them to be reported as financed purchases. Instead, bargain purchase options should be proposed to be treated as any other purchase options included in a lease.

The Board then redeliberated the foundational principle underlying the proposed Leases guidance. The Board tentatively agreed to carry forward the foundational principle stated in the Preliminary Views that all leases are financings of the right to use an underlying asset.

Next, the Board discussed issues relating to the lease term. The Board tentatively agreed to propose that the defined lease term continue to include evaluation of the lessee’s option to extend or terminate the lease. The Board also tentatively agreed that further guidance on month-to-month holdover periods is not necessary in the text of the standard of the proposed Leases guidance.

The Board tentatively decided to propose that the term probable be replaced with reasonably certain in determining the threshold that should be used to evaluate the likelihood of an option being exercised. The Board also tentatively decided to propose that the term all relevant factors be used in the assessment of options and that significant economic incentives continue to be listed as an example of those factors. The Board tentatively agreed to propose that substantial penalty be added to a list of examples of significant economic disincentives. Next, the Board tentatively decided that the proposed Leases guidance should continue to exclude any lessor-only cancellation option periods from the lease term. The Board tentatively decided not to provide further guidance for how cancellation options affect the value of the lease in the proposed standard.

The next portion of the Board’s discussion of lease term focused on reassessment. The Board tentatively agreed to propose that, for both the lessee and lessor, the lease term be reassessed only when a renewal option is elected contrary to the original lease term determination. The Board also tentatively agreed that further guidance on the term election is not necessary in the text of the standard. The Board tentatively decided that fiscal funding clauses should be mentioned as a type of termination option in the proposed Leases guidance and therefore should be considered in the same manner as any other termination option for the purposes of determining the lease term.

The Board then started redeliberations of the lessee model by discussing recognition issues. The Board tentatively decided that the Exposure Draft should carry forward the Preliminary Views guidance that a lessee should recognize a lease liability and a right-to-use intangible asset for all leases other than short-term leases. The Board tentatively decided that the Exposure Draft should not provide an example of instances in which a lessee may enter into a lease agreement in which the lease asset meets the definition of an investment. The Board also tentatively agreed that the Exposure Draft should not directly incorporate the existing guidance for lessees regarding accounting for leases in governmental funds from National Council on Governmental Accounting (NCGA) Statement 5, Accounting and Financial Reporting Principles for Lease Agreements of State and Local Governments.

The Board continued deliberations of the lessee model by discussing measurement issues. The Board tentatively decided that the Exposure Draft should not include examples of “other payments that are probable of being required based on an assessment of qualitative factors” as stated in paragraph 7g, Chapter 4, of the Preliminary Views. The Board then tentatively decided that the Exposure Draft should replace the term probable with reasonably certain with respect to when certain lease payments should be included in the measurement of the lease liability. The Board tentatively decided that the Exposure Draft also should not modify the liability measurement components guidance for renewal options.

The Board tentatively decided that the Exposure Draft should carry forward provisions that the lease liability should be discounted. The Board then tentatively agreed that the liability would not be measured based on the fair value of the underlying asset. Rather, the Exposure Draft should carry forward, without any additional modification, the provision to measure the lease liability as the discounted amount of future lease payments using the rate the lessor charges the lessee, or in situations where the lessor’s rate is not readily determinable, using the lessee’s incremental borrowing rate. The Board also tentatively decided to propose carrying forward the provisions that the measurement of the lease asset be based on the lease liability, not fair value of either the underlying asset or the intangible lease asset itself.

The Board tentatively decided that the Exposure Draft should not include an example of a situation in which a government would enter into a lease for a period longer than the useful life of the underlying asset. The Board also tentatively agreed that the Exposure Draft should not include clarifying guidance regarding treatment of a land lease that has been previously amortized and subsequently purchased.

The Board then continued redeliberations of the lessee model with discussion of guidance on the remeasurement of lease liability and the reassessment of the discount rate. The Board tentatively agreed that the proposed liability remeasurement guidance and proposed discount rate reassessment guidance should be clarified. The Board discussed certain triggering events for when the lessee might remeasure the lease liability. The Board tentatively decided that the triggering event of “a change in the index or rate used to determine variable lease payments” should be changed in the Exposure Draft so that a lessee will remeasure the variable lease payments only if the liability is already being remeasured for another reason. The Board tentatively decided that the Exposure Draft should carry forward, with clarifying language, the following triggering events: (1) There is a change in the rate the lessor charges the lessee, if that rate is used as the initial discount rate; (2) An assessment of qualitative factors indicates that the likelihood of a residual value guarantee being paid has changed from reasonably certain to not reasonably certain, or vice versa; and (3) There is a change in the amounts that are reasonably certain of being paid. The Board also tentatively decided that if the lessee’s incremental borrowing rate is used as the initial discount rate to measure the lease liability, when there is a change in the lessee’s incremental borrowing rate, the lessee should not be required to remeasure the lease liability. The Board then tentatively decided that the Exposure Draft should not carry forward the discount rate reassessment criterion of “The result of a change in the index or rate used to determine variable lease payments is expected to be significant.”

The Board continued redeliberations of the lessee model by discussing expense recognition. The Board tentatively decided that the Exposure Draft should carry forward the requirement to amortize the discount on the liability as interest expense/expenditure and to amortize the lease asset as a separate amortization expense. The Board then deliberated presentation issues related to the lessee model. The Board tentatively decided that the existing guidance on presentation of capital assets apply to the lease asset, and therefore, no separate guidance on the presentation of the lease asset is necessary. The Board also tentatively decided that the existing guidance on presentation of general long-term liabilities applies to the lease liability, and therefore, no separate guidance on the presentation of the lease liability is necessary. The Board finished its deliberations of the lessee model by tentatively agreeing that the expected benefits provided by the proposed lessee model outweigh the anticipated costs of implementation and application.

Finally, the Board addressed cost relief issues related to the lessee model. The Board tentatively agreed that the Basis for Conclusions of the Leases Exposure Draft should clarify that a government’s use of capitalization policies to operationalize the materiality box should not result in failure to report lease assets or liabilities that are material collectively. The Board also tentatively agreed that an exception for leases of (individually) small items should not be provided in the proposed Leases guidance. Lastly, the Board tentatively decided that grouping similar leases together for the purpose of financial reporting (known as the portfolio approach) should be addressed in the Basis for Conclusions.

Minutes of Meetings, April 21-23, 2015

The Board began its discussion of the Leases project by reviewing the results of the leases field test. The Board then began redeliberations of the Leases project in light of comment letters, field test feedback, and public hearing testimonies received during due process. The Board discussed the general comments received regarding differences between the FASB and GASB leases proposals and tentatively decided that the Basis for Conclusions should explain why the Board chose certain alternatives over others.

The Board then discussed issues related to the definition of a lease. The Board tentatively agreed that the Exposure Draft should carry forward the term contract, rather than the term agreement, within the definition of a lease. With regard to the term nonfinancial asset, the Board tentatively decided that the Exposure Draft should clarify the meaning of this term. Furthermore, the Board tentatively agreed that the Exposure Draft should define the term nonfinancial asset as follows:

An asset that is not a financial asset, as that term is defined in Statement No. 72, Fair Value Measurement and Application. Nonfinancial assets include land, buildings, use of facilities or utilities, materials and supplies, intangible assets, or services.
 
The Board also tentatively decided that the definition of a nonfinancial asset should include intangible assets as an example of a nonfinancial asset. The Board then discussed nonexchange leases and tentatively agreed that the Exposure Draft should carry forward the phrase “in an exchange or exchange-like transaction” as part of the definition of a lease, thus excluding nonexchange arrangements from the Leases guidance. The Board also tentatively agreed to carry forward the footnote discussion of exchange-like transactions without additional guidance on what does or does not qualify as exchange-like. The Board then discussed the role of control in determining the existence of a lease and tentatively agreed that the Exposure Draft should not include additional explanatory guidance regarding the issue of control.

Next, the Board redeliberated issues related to the scope of the leases project. First, the Board tentatively agreed that the scope exclusions in the Preliminary Views should continue in the proposed Leases guidance. The Board then discussed leases involving intangible underlying assets and tentatively agreed that the scope exclusions should be expanded to include leases of all intangible assets. The Board then redeliberated certain scope-related issues that, based on constituent feedback, might require additional clarification. The Board tentatively decided that licensing contracts for computer software should be separately mentioned under the scope exclusion in the proposed Leases guidance. The Board also tentatively agreed that contracts for cloud services and hosting services do not need to be addressed in the proposed Leases guidance but may be suitable for implementation guidance.

The Board then discussed lease arrangements involving transfers of operations and tentatively decided that no specific guidance should be provided on whether transfers of operations or government acquisitions would be included or excluded from the scope of the proposed Leases guidance. The Board also discussed respondent requests for further clarification regarding leases of investment real estate property. The Board tentatively agreed that further guidance should not be provided in the proposed Leases standard to clarify the treatment of real property subject to a lease. Finally, the Board discussed a respondent’s request to exclude leases for placement of scientific equipment from the scope of the proposed leases project and tentatively agreed that such leases should not be excluded from the scope of the project.

Minutes Archive

Leases—Reexamination of NCGA Statement 5 and GASB Statement 13—Tentative Board Decisions to Date


The Preliminary Views, Leases, was approved in November 2014.

These tentative decisions have been made since the issuance of the Preliminary Views and in anticipation of an Exposure Draft. The Board tentatively agreed to propose the following:
  • Carry forward the term contract, rather than the term agreement, within the definition of a lease.
  • Include the following definition of nonfinancial asset:
An asset that is not a financial asset, as that term is defined in Statement No. 72, Fair Value Measurement and Application. Nonfinancial assets include land, buildings, vehicles, use of facilities or utilities, materials and supplies, intangible assets, or services.
  • Carry forward the phrase “in an exchange or exchange-like transaction” as part of the definition of a lease, thus excluding nonexchange arrangements from the Leases guidance.
  • Carry forward the scope exclusions in the Preliminary Views.
  • The scope exclusions should be expanded to include leases of all intangible assets.
  • An exception for leases of (individually) small items should not be included in the Leases guidance.
  • Carry forward the provision that contracts that transfer ownership of the underlying asset and do not contain termination options be reported as financed purchases of that asset.
  • Leases that contain a bargain purchase option or require them to be reported as financed purchases should not be excluded from the scope. Instead, bargain purchase options should be treated as any other purchase options embedded in a lease.
  • Carry forward the foundational principle found in the Preliminary Views—all leases are financings of the right to use an underlying asset and, therefore, a single approach should be applied to accounting for leases.
  • Carry forward the definition of lease term that includes evaluation of the lessee’s option to extend and terminate the lease but excludes cancellation options that are exercisable by both the lessee and the lessor or by only the lessor.
  • For assessing the likelihood that an option affecting the lease term will be exercised, replace the term probable with reasonably certain.
  • Carry forward the use of all relevant factors in the assessment of options, and significant economic incentives as an example.
  • Carry forward the provision that the lease term should be reassessed by either a lessee or lessor only when a renewal or termination option is elected contrary to the original lease term determination.
  • Note that fiscal funding clauses are a type of termination option and therefore would be considered in the same manner as any other termination option for the purposes of determining the lease term.
  • Carry forward the provision that a lessee should recognize a lease liability and a right-to-use intangible asset for all leases other than short-term leases.
    • Carry forward discounting provisions for the lease liability, including using the rate the lessor charges the lessee, or in situations in which the lessor’s rate is not readily determinable, the lessee’s own incremental borrowing rate.
    • Carry forward the provision that measurement of the right-to-use asset be based on the lease liability.
  • With respect to determining when certain lease payments should be included in the measurement of the lease liability, replace the term probable with reasonably certain.
  • With respect to remeasurement of a lessee’s lease liability:
    • Carry forward the provision that the lease asset be adjusted by the same amount as the lease liability.
    • Change the triggering event of “a change in the index or rate used to determine variable lease payments” so that a lessee will remeasure the variable lease payments only if the liability is already being remeasured for another reason.
    • The effects of a remeasurement due to a change in an index or rate used to determine variable payments should be recognized as an adjustment to the lease asset.
  • Carry forward the discount rate reassessment criteria except for when “the results of a change in the index or rate used to determine variable lease payments is expected to be significant.”
  • Carry forward the requirement to amortize the discount on the liability as interest expense/expenditure and to amortize the lease asset as a separate amortization expense.
  • Carry forward the proposal for lessors to recognize a lease receivable and a deferred inflow of resources for the lease.
  • Carry forward the provision that the lessor not derecognize the underlying asset in the lease.
  • Carry forward the provision for lessors to include in the lease receivable variable lease payments that depend on an index or rate.
  • Carry forward the thresholds for contingent payments to be included in the lease receivable, therefore maintaining alignment with gain contingency guidance in Statement 62 for lessors.
  • Carry forward the provision that the lessor discount the future lease payments using the rate the lessor charges the lessee, which may be implicit in the lease.
  • Carry forward the provision for lessors to allocate payments received first to accrued interest revenue and then to the lease receivable.
  • With respect to remeasurement of a lessor’s lease receivable:
  • Change the triggering event of “a change in the index or rate used to determine variable lease payments” so that a lessor will remeasure the variable lease payments only if the receivable is already being remeasured for another reason.
    • The effects of a remeasurement due to a change in an index or rate used to determine variable payments should be recognized with all other changes by adjusting the deferred inflow of resources.
    • Carry forward the discount rate reassessment criteria except for “the results of a change in the index or rate used to determine variable lease payments is expected to be significant.”
  • Carry forward the proposal that governments generally separate contracts into lease and nonlease components.
  • Carry forward the proposal that lessee governments separate lease contracts involving multiple underlying assets into multiple lease components if there are different lease terms or different underlying asset classifications.
  • Carry forward the proposal that lessor governments separate lease contracts involving multiple underlying assets only if they have different lease terms.
  • The allocation of consideration in a multiple component lease contract should follow a three-step approach: (1) use any separate contract prices if reasonable, (2) use observable stand-alone prices if readily available, and (3) choose either to develop reasonable estimates to allocate consideration to remaining components or to treat remaining consideration as a single lease unit.
  • Carry forward the proposed criteria for combining contracts.
  • Exclude from the scope for lessor recognition and measurement leases involving assets financed with outstanding conduit debt unless both the asset and the conduit debt are reported by the lessor.
  • Carry forward the proposed lessee and lessor disclosure requirements, except that only those governments whose principal ongoing operations consist of leasing assets to other entities would be required to disclose future lease payments that are included in the lease receivable, showing principal and interest separately.
  • Carry forward the proposal 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 of 12 months or less, including any options to extend.”
  • For short-term leases that include rent holidays (for example, one month free), carry forward the proposal to require recognizing lease payments based on the contract terms rather than allocating to lease expense or expenditures over the rent holiday period.
  • Both the lessee and lessor should account for that additional portion of the modified lease as a new lease, separate from the original portion of the lease if a lease modification gives the lessee an additional right-of-use not included in the original lease that is reasonably priced compared to its stand-alone price (in the context of a particular contract).
  • Carry forward the proposal that the gain on sale in a sale-leaseback transaction be deferred over the term of the lease.
  • Carry forward the proposed guidance on sublease transactions that subleases be accounted for separate from the original lease.
  • Carry forward the proposed guidance on the treatment of lease-leaseback transactions.
  • Exclude from the scope for lessor recognition and measurement leases in which external laws, regulations, or legal rulings significantly limit the ability of the lessor to set rates in excess of such costs, such as airport/airline agreements. However, require the following disclosures for those leases:
    • A general description of the agreement. The carrying amount of assets subject to exclusive use by one counterparty under the agreement, by major class of assets, and the amount of accumulated depreciation.
    • The total amount of revenue recognized in the reporting period from the agreement, if the total for all similar agreements is not displayed on the face of the financial statements.
    • A schedule of future minimum payments under the agreement for each of the subsequent five years and in five-year increments thereafter, based on existing debt disclosures.
    • The amount of revenue recognized in the reporting period for variable payments not included in the future minimum payments.
    • If the government has issued debt for which the principal and interest payments are secured by payments under the agreement, the existence, terms, and conditions of options by the counterparty to terminate the agreement.
  • Carry forward the proposal that leases between related parties be accounted for based on economic substance rather than legal form.
  • Propose the effective date be for periods beginning after December 15, 2018.
  • Propose the following transition provisions:
    • Leases should be recognized and measured using the facts and circumstances that exist at the beginning of the period of implementation. However, lessors should not restate the assets underlying their existing sales-type or direct financing leases. Any residual assets for those leases would become the carrying values of the underlying assets. Changes, if any, made to comply with this Statement should be reported as a restatement of beginning net position (or fund balance or fund net position, as applicable). In the first period that this Statement is applied, the notes to the financial statements should disclose the nature of the restatement and its effects.
  • Incorporate guidance in National Council on Governmental Accounting Statement 5, Accounting and Financial Reporting Principles for Lease Agreements of State and Local Governments, for accounting and reporting lease transactions in governmental funds.
  • Propose that certain leases, such as airport-airline agreements, recognize revenue based on the terms of the lease contract.