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International
Accounting Standards
Board
THE LEASING PROJECT
November 2007
Simon Peerless – Project Manager
The views expressed in this presentation are
those of the presenter and do not represent
positions of the International Accounting
Standards Board (IASB).
Will talk about…
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Project outline
Board discussion so far
Next steps
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Project outline
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July 2006 – FASB and IASB add Leasing
Project to agendas
February 2007 – First meeting of Leasing
Working Group
March 2007 – Board discussions start
2008 – Discussion paper/preliminary views
Exposure draft
Standard
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What will the leasing
project cover?
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Fundamental revision of all aspects of
lease accounting:
 Lessee accounting
 Lessor accounting
 Equipment leases
 Real estate leases
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Aim – a single accounting model to
cover all types of lease
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Discussion so far –
March 2007
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Identified rights and obligations arising
in a simple lease
Analysed whether rights and
obligations identified meet the
definitions of assets and liabilities
Discussed 4 different accounting
models
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Simple lease example
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A piece of machinery is leased:
 a fixed term - 5 years
 life of the machinery - 10 years
 non-cancellable
 no rights to extend the lease term or purchase the
machinery
 no guarantees of its value at any point
 lease payments at regular intervals
 payments are fixed amounts
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Simple lease example
0
5
Lessee has right to
use leased item
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10
Lessor has residual
right
Rights and obligations
Lessee
Lessor
Right to use machinery for the
lease term
Obligation to permit use of the
machinery for the lease term
Obligation to make specified
payments over the lease term
Right to receive payments
during the lease term
Obligation to return machinery
at the end of the lease
Right to return of machinery at
the end of the lease term
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Right to economic benefits of
the machinery after the end of
the lease term
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Lessee – assets and
liabilities
Description of right
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Asset?
Right to use the machinery for the lease term Yes
Description of obligation
Liability?
Obligation to make specified payments over
the lease term
Yes
Obligation to return the machinery at the end No
of the lease term
Lessor – assets and
liabilities
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Description of right
Asset?
Right to receive payments during the lease
term
Yes
Right to return of the machinery at the end of No
the lease term
Rights to the economic benefits of the
machinery after the end of the lease term.
Yes
Description of obligation
Liability?
Obligation to permit the use of the
machinery during the lease term
No
Accounting models –
Right of use
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Lessee recognises
 Asset
 Right to use machinery for lease term
 Liability
 Obligation to make payments over lease term
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Simple lease example
0
5
Lessee has right to
use leased item
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10
Lessor has residual
right
Accounting models –
Whole asset
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Lessee recognises
 Asset
 Machinery
 Liabilities
 Obligation to make payments over lease term
 Obligation to return the machinery at the end
of the lease
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Accounting models –
Executory contract
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Lessee’s right to use is viewed as
conditional upon making payments under
lease
Lessee’s obligation to pay is viewed as
conditional upon lessor granting lessee
quiet enjoyment.
Lessee recognises no assets or liabilities in
respect of the lease contract
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Accounting models –
Model in current standard
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Leases are treated as operating or
finance
 Operating leases – similar to executory
contract model
 Finance leases – similar to whole asset
model
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Reconsider lease classification criteria
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Accounting models –
Tentative conclusions
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Right of use model is the only model
that results in the recognition of the
assets and liabilities identified in a
simple lease
The Board directed the staff to develop
this approach further
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Discussion so far –
April 2007
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Joint meeting IASB/FASB
Discussed 2 possible approaches to scope
 Fundamental reconsideration of when an
arrangement conveys a right to use and asset
 Limit scope to arrangements currently within the
scope of IAS 17/FAS 13
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Instructed staff to develop model based on
the scope of the current standards
Will reconsider before issuing DP
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Discussion so far –
May 2007
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Discussed options to extend or terminate the
lease – one of the most difficult areas
Education session. No decisions were
reached
Discussed:
 Factors that affect whether an option to extend or
terminate is exercised
 The possible equivalence of options to extend or
terminate
 Four different ways of accounting for options
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Discussion so far –
May 2007
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Four different ways of accounting for
options
 Recognise right to use up to option exercise date
only + option to extend
 Recognise right to use for full period + option to
terminate
 Recognised right to use based on probable lease
term
 Measure right to use based on expected lease
term
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Discussion so far June 2007
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Measurement issues
Lessee’s liability
 Fair value?
 Amortised cost using EIR?
 Agreed that this should be consistent with
other financial liabilities
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Discussion so far –
June 2007
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Asset representing right to use – Board
considered:
 ‘Intangible asset’ approach
 ‘Nature of leased item’ approach
 Separate accounting model
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Preference for ‘nature of leased asset’
approach (but FASB preferred to
develop a separate accounting model)
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Discussion so far –
October 2007
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Other obligations of lessees
 Costs to remove leased equipment
 Obligation to return in specified condition
 Maintenance obligations
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Variable lease payments
 Index-linked and market-linked rentals
 Turnover-based rentals
 Usage-based rentals
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Next steps
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Project is at an early stage
Future Board discussions to include:
 Renewal and cancellation options
 Measurement
 Residual value guarantees
 Lessor issues
 Revenue recognition
 Asset derecognition
 Disclosure
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Next steps
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Discussion paper (DP) to be issued in 2008
DP to include:
 Background and alternative solutions
 Preliminary views of the Boards
 Invitation to comment
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Work on exposure draft to begin once
responses received on DP
Final standard to be published once
comments received on exposure draft
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