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. 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:
Preliminary Views approved on November 2014
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 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 leasing 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 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. 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
Current Developments: The comment period for the Preliminary Views, Leases, ended March 6, 2015. A field test was conducted during this period. Additionally, three public hearings were held in April 2015 and redeliberations began at the April 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

September 2015:

Redeliberate disclosures, short-term exemption, lease terminations and modifications, subleases and leasebacks, and intra-entity leases based on respondent feedback.

October 2015:

Deliberate transition and effective date.

November 2015:

Review draft standards section of an Exposure Draft.

January 2016:

Review preballot draft of an Exposure Draft.

January 2016 (T/C):

Review ballot draft and issue Exposure Draft.

February–May 2016:

Comment period and comment analysis.

June–September 2016:

Redeliberate issues based on respondent feedback.

October 2016:

Review preballot draft of a final Statement. 

November 2016(T/C):

Review ballot draft and issue final Statement. 


Lease Accounting —Recent Minutes


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 of Meetings, November 11-13, 2014

The Board provided clarifying edits and comments for the ballot draft of the Preliminary Views, Leases. The Board then voted unanimously for the issuance of the Preliminary Views.

Minutes of Meeting, September 30- October 1, 2014

The Board began deliberations by reviewing a table prepared by the project staff comparing the Board’s tentative decisions and the tentative decisions to date regarding leases made by the Financial Accounting Standards Board and the International Accounting Standards Board.

The Board then provided clarifying comments on the preballot draft of the Preliminary Views, Leases. The Board will review and consider for approval a ballot draft of the Preliminary Views at the November meeting.

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 noncancelable 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 Archive

Lease Accounting—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 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 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.
  • 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.