Tuesday, March 23, 2010

Disclosures and more – March 17 boards meeting

The FASB and IASB met again on March 17 (videoconference, viewable here; background materials available here) to continue working through issues related to the new lease accounting standard, still aiming to get out an exposure draft by the end of June 2010. Following are highlights of their decisions:

Lessee disclosure requirements

These are items that need to be reported in the footnotes to an entity’s financial statement, not placed in the primary financials. Both narrative and numerical disclosures will be required:


  • A general description of leasing activities, broken up by nature or function.
  • Statement if simplified short-term lease accounting is being used, with the amounts involved.
  • Statement if sale & leaseback transactions are entered into, along with material terms & conditions, and associated gains or losses.
  • Assumptions and estimates for options, contingent rentals, residual value guarantees, discount rate, and amortization method.
  • “Quantitative and qualitative financial information” to help evaluate uncertain future cash flows, and how the lessee manages those uncertainties.


  • Reconciliation between opening and closing balances for right to use assets and rental obligations (additions, activity, estimate changes, removals, etc.)
  • Maturity analysis of future rent obligations, breaking out contractual minimums and additional estimated payments by year for five years, with a lump sum for remaining amounts.

The reconciliation is a completely new disclosure. The maturity analysis is an unsurprising extension of the current future minimum rent disclosure.

Lessor transitional provisions

  • Like lessees, lessors will recognize the present value of the remaining rents at the implementation date on their balance sheet (as a receivable, matching the lessee’s obligation). The performance obligation will be booked for the same amount.
  • The discount rate for the lease should be the rate the lessor is charging the lessee (which seems to be the same as the implicit interest rate).
  • Under FAS 13, capital leased assets are derecognized. At transition, those assets will be reinstated at depreciated cost (adjusted for impairment, and for revaluation under IFRS).

Measurement at initial recognition

Assets and liabilities are to be calculated as of the inception of the lease, which can be earlier than the start date of the lease (inception is when the agreement is signed, even if possession is taken and rent starts being paid later).

Residual value guarantees – lessor accounting

  • The lessor’s receivable should include guaranteed residuals when they can be measured reliably.
  • Measurement uses an expected outcome technique (i.e., probability-weighted result).
  • The carrying amount should be reassessed each reporting period if new facts or circumstances indicate a material change.
  • Changes would be treated as an adjustment to the receivable and performance obligation just like a contingent rent change.

The boards did additional work on the new standard at their March 22 meeting, to be recapped next on this blog.

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