AASB Memorandum Leases Aasb gov au by alicejenny

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									                                                                                            Memorandum
 To:          AASB members                                             Date:                   3 April 2012

 From:        Nikole Gyles                                             Agenda Item:            16.1

 Subject:     Leases – project update                                  File:

Action
Receive an update on the recent tentative decisions made by the IASB and the FASB in their joint
project to develop a Standard on Leases and decide whether there are any issues that need to be
raised with the IASB on those tentative decisions at this stage.
Staff recommendation
Staff do not consider that there are any issues that are sufficiently substantive to warrant them being
raised with the IASB in relation to the tentative decisions made at the December 2011 IASB/FASB
meeting (outlined in the table below) prior to the AASB drafting its submission on the forthcoming
IASB ED.


 Question to Board members:
 Do you agree with staff’s recommendation?

Background
The IASB and the FASB are undertaking a joint project to develop a Standard on Leases, an
original objective of which was that all assets and liabilities arising under lease contracts are
recognised in the statement of financial position.

In August 2010, the AASB issued ED 202R Leases, which incorporated the IASB’s ED/2010/9
Leases. The comment period for IASB’s ED 2010/6 closed on 15 December 2010 and over
760 comment letters were received (the comment period for AASB ED 202R closed on
12 November 2010 and attracted 16 comment letters). The IASB and FASB began redeliberations
on the Leases project in January 2011. The IASB subsequently decided in July 2011 to re-expose
revised proposals. The IASB work plan (dated 13 March 2012) indicates that the re-exposure of the
Exposure Draft on Leases is expected to be issued in H2 2012. The work plan, which projects out to
the end of 2012, does not indicate when an IFRS is expected to be issued.


                        Australian Accounting Standards Board, Level 7, 600 Bourke Street, Melbourne, VIC, 3000
            Telephone: +61 3 9617 7600, Facsimile: +61 3 9617 7608, E-mail: standard@aasb.gov.au, Web site: www.aasb.gov.au
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                                                                                               Memorandum
Since January 2011 the AASB decided to write to the IASB only once, and that was in May 2011
on some of the tentative decisions made in the Leases project up to that date (link to Letter to IASB
- Leases).

Tentative decisions made by IASB/FASB on the Leases project – February 2012
At the joint IASB and FASB meetings held on 28 and 29 February 2012 the Boards discussed
different methods of amortising the right-of-use asset for lessees. The Boards did not make any
decisions. The IASB is next expected to discuss this issue at the April 2012 IASB/FASB meeting.
Staff will provide a verbal update of further IASB developments should any arise prior to the
April 2012 AASB meeting.

Extract from IASB update February 2012
The FASB and the IASB discussed lessee accounting and, in particular, different methods of amortising the right-of-use
asset. They also discussed any consequences that a change to the lessee accounting model would have on the tentative
decisions for lessor accounting. The boards were not asked to make any decisions.


More specifically, the boards discussed the following two approaches to amortising the right-of-use asset:

                                                                               1
    1.   The underlying asset approach described in agenda paper 2C/227 : under this approach, the lessee would
         amortise the right-of-use asset based on the estimated consumption of the underlying leased asset over the lease
         term. Consequently, the higher the consumption rate, the more the income statement effects would resemble those
         that would arise from purchasing the underlying asset and financing it separately. The lower the rate of
         consumption, the more the income statement effects would resemble the rental expense pattern under current
         operating lease accounting. Although the boards did not make any formal decision, the IASB indicated an initial
         leaning toward this approach, if it is confirmed that it is operational and useful.

    2.   The interest-based amortisation approach described in agenda paper 2C/227: under this approach, the lessee
         would amortise the right-of-use asset on a systematic basis that reflects the pattern of consumption of expected
         future economic benefits (this is consistent with the 2010 Leases exposure draft) for those leases for which
         substantially all of the risks and rewards of the underlying leased asset have been transferred to the lessee. For
         leases that do not transfer substantially all of the risks and rewards of the underlying leased asset, the lessee
         would use an amortisation approach that would result in recognising total lease expense in a pattern that would
         typically resemble the rental expense pattern under current operating lease accounting. Although the boards did
         not make any formal decision, the FASB indicated an initial leaning toward this approach.

The boards directed the staff to undertake further outreach and research on those two approaches before they reach a
tentative decision on which approach to propose in the re-exposure document.



In relation to the reference to outreach in the above, AASB staff are assisting IASB staff in their
outreach efforts.




1
    http://www.ifrs.org/Meetings/IASB+1+and+2+March+2012.htm
                       Australian Accounting Standards Board, Level 7, 600 Bourke Street, Melbourne, VIC, 3000
          Telephone: +61 3 9617 7600, Facsimile: +61 3 9617 7608, E-mail: standard@aasb.gov.au, Web site: www.aasb.gov.au
                                                                                                                      Page 2 of 3
                                                                                            Memorandum
Preliminary AASB staff view
The IASB’s current tentative decision for a lessee is to treat lease contracts as being equivalent to
the purchase of intangible assets (rights-of-use) that are financed separately. Right-of-use assets
would be amortised on a straight-line basis. This is the AASB staff’s preferred approach because,
consistent with the AASB’s comment letter to the IASB on ED/2010/9, AASB staff believe:

       the right-of-use asset is an intangible asset and, as such, should be amortised in accordance
        with IAS 38 Intangible Assets; and
       the liability to make lease payments is a loan and, as such, interest should be recognised.

If the IASB decides to reverse the current tentative decision as described above, and the choice of
method is between the underlying asset approach (Approach 1 in the IASB update above) or the
interest-based amortisation approach (Approach 2 in the IASB update above), we could accept the
underlying asset approach. This is on the basis that the resulting total lease expense varies based on
the level of consumption of the underlying asset over the lease term. This method reflects the
economics of lease transactions. The approach is also able to be applied to all leases without the
need to distinguish between different types of leases, or between a lease and a purchase.

AASB staff disagree with the interest-based amortisation approach (Approach 2). This approach
has the effect of recognising a straight-line total lease expense each period and, as such, does not
reflect the economics of lease transactions. AASB staff’s disagreement is also on the basis that
Approach 2 distinguishes between leases that do not transfer substantially all risks and rewards of
the underlying leased assets and other leases. AASB staff do not consider this approach to be an
improvement on the lease accounting that is currently required by AASB 117 Leases.




                    Australian Accounting Standards Board, Level 7, 600 Bourke Street, Melbourne, VIC, 3000
       Telephone: +61 3 9617 7600, Facsimile: +61 3 9617 7608, E-mail: standard@aasb.gov.au, Web site: www.aasb.gov.au
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