Thursday, March 17, 2011

Purchase options and short-term leases

The FASB & IASB met this week for continuing discussions, on leases as well as other topics. In their meetings on March 14 & 15, they reached the following conclusions for the new lease accounting standard:
  • The ED had scoped out (excluded) leases with bargain purchase options and ownership transfers (also called "in-substance purchases") from the new lease accounting standard, stating that they should be treated as a sale & purchase and handled according to the revenue recognition standard (which is also at the ED stage). However, this decision was left over from when the boards had briefly planned to treat all lessor leases according to the "performance obligation" model, which would have been inappropriate for these transactions. With a derecognition model for lessors now in place, the need to separate out these types of leases is less evident. The boards agreed that leases with a bargain purchase option should be returned to the scope of the leases standard. It's not yet clear if leases with ownership transfer will be considered leases or sales.
  • Relatedly, the boards are adjusting the treatment of purchase options. In the ED, these did not need to be accounted for until exercised. Now, they must be accounted for if there is a "significant economic incentive" to exercise them. It remains to be determined how the accounting will work if the conclusion of a significant economic incentive changes in the middle of the life of the lease (in either direction), though the boards concluded that they would not permit a switch between the "finance" and "other than finance" categories they set up last month.
  • Short-term leases: The boards have decided that leases with a maximum lease term of 12 months or less, including renewal options, can be treated like current operating leases. They will not be shown on the balance sheet for lessees; income and expense will be shown on the income statement as currently (with rent leveling as needed). This will be an option; lessees & lessors can choose to treat short-term leases like other leases. However, the option must be chosen for all leases in an asset class, rather than lease by lease.
Thanks to Deloitte's IAS Plus and Asset Finance International for their reviews of the meetings, which were the basis for this entry.


  1. Hi, I just come to you for some help because you have a great understanding of lease Accounting. Could u please give me some suggestions about the proposition that IAS/AASB117 allow lessor to make a risk assessment of a firm's financial statement. I cannot find any information in the database.

  2. I don't have particular expertise on Australian accounting standards, though it looks like AASB 117 is similar to IAS 17. I'm not aware that any of the lease accounting standards are intended specifically to help lessors judge credit risks, though the goal of all of them is to help anyone looking at a company's financial statement to understand the commitments they have taken on through lessee leasing. The complaint about current operating lease accounting, of course, is that by excluding those commitments from the balance sheet, a company's obligations are not clearly presented, and thus the plans to revise the standard.

  3. Thanks a lot. About the essay I mention before, my lecture give me some ideas.He said I should list the difference between finance lease and operating lease and finance lease can appear in a balance sheet whereas operating lease can not. In fact, I was quite confused whether there is some relationship between my essay and his topic.