Friday, June 25, 2010

Derecognition over performance obligation (sometimes)

The FASB & IASB, in meetings June 16 & 17, decided to partially pull back from the concept of a performance obligation for lessors in the new lease accounting standard. They have now decided to use that approach (where the original leased assets remains on the lessor's books untouched, and a matching receivable debit and performance obligation credit are set up for the lessor lease, with the receivable amortized using the interest method and the performance obligation amortized straight-line) only for leases "that expose the lessor to significant risks and benefits associated with the underlying asset." In other cases, a derecognition approach is to be used: Once the receivable is calculated for the lessor lease, the owned asset is credited for that amount. The IASB staff commented that this is similar to the current distinction between operating and capital leases (wasn't the goal of the new standard to get away from that?).

The vote was actually split between the boards, with the IASB in favor of this hybrid approach, while a majority of the FASB prefers performance obligations for all leases. However, the FASB Action Alert summary states that "the Boards" decided on the hybrid approach, which suggests that in the interests of convergence, either the IASB has priority or the vote is being tallied in total. I don't know enough about the workings of the convergence project to clarify that.

Other topics covered:

Lessor transition under a derecognition approach

The boards have decided that lessors should recognize a lease receivable at the present value of the remaining lease paymentss, and a residual asset at fair value. The present value is based on the implicit rate at lease inception, but it looks like that includes the residual asset at its current, not original, estimate of future value.

Leases with a service component, lessor derecognition

The boards were unable to come to a conclusion for how to account for leases that include a service component (what is called executory costs under the current leasing standards), when the services and leases are not distinct, for a lessor lease involving derecognition. This will be discussed further in July.

Purchase options

Purchase options are to be accounted for only upon exercise (aside from bargain purchase options, which immediately turn it into an in-substance purchase). This applies to both lessees and lessors.

Retirement of IASB members

Gilbert Gelard, Robert Garnett, and James Leisenring are retiring from the IASB as of June 30. Jim Leisenring has been a particularly forceful voice on the board. He's a former member of the FASB as well, and does not hesitate to make his views known. The impact of the change in personnel remains to be seen.

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