®International

Accounting Standards Board

THE LEASING PROJECTTHE LEASING PROJECTNovember 2007November 2007Simon Peerless – Project ManagerSimon 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…Will talk about… Project outline Board discussion so far Next steps

®Project outlineProject outline 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 What will the leasing project cover?project cover?

Fundamental revision of all aspects of lease accounting:Lessee accountingLessor accountingEquipment leasesReal estate leases

Aim – a single accounting model to cover all types of lease

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Discussion so far – March Discussion so far – March 20072007

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

®Simple lease exampleSimple lease example 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

®Simple lease exampleSimple lease example

5 100

Lessee has right to use leased item

Lessor has residual right

®Rights and obligationsRights 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

- Right to economic benefits of the machinery after the end of the lease term

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Lessee – assets and Lessee – assets and liabilitiesliabilities

Description of right 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 of the lease term

No

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Lessor – assets and Lessor – assets and liabilitiesliabilities

Description of right Asset?Right to receive payments during the lease term

Yes

Right to return of the machinery at the end of the lease term

No

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

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Accounting models – Accounting models – Right of useRight of use

Lessee recognisesAsset

Right to use machinery for lease termLiability

Obligation to make payments over lease term

®Simple lease exampleSimple lease example

5 100

Lessee has right to use leased item

Lessor has residual right

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Accounting models – Accounting models – Whole assetWhole asset

Lessee recognisesAsset

MachineryLiabilities

Obligation to make payments over lease termObligation to return the machinery at the end

of the lease

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Accounting models – Accounting models – Executory contractExecutory contract

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 – Accounting models – Model in current standardModel in current standard

Leases are treated as operating or financeOperating leases – similar to executory

contract modelFinance leases – similar to whole asset

model Reconsider lease classification criteria

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Accounting models – Accounting models – Tentative conclusionsTentative conclusions

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 – Discussion so far – April 2007April 2007 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

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 – Discussion so far – May 2007May 2007 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 – Discussion so far – May 2007May 2007 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 -Discussion so far -June 2007June 2007

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 –Discussion so far –June 2007June 2007

Asset representing right to use – Board considered: ‘Intangible asset’ approach ‘Nature of leased item’ approachSeparate accounting model

Preference for ‘nature of leased asset’ approach (but FASB preferred to develop a separate accounting model)

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Discussion so far – Discussion so far – October 2007October 2007

Other obligations of lessees Costs to remove leased equipment Obligation to return in specified condition Maintenance obligations

Variable lease payments Index-linked and market-linked rentals Turnover-based rentals Usage-based rentals

®Next stepsNext steps 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

®Next stepsNext steps Discussion paper (DP) to be issued in 2008 DP to include:

Background and alternative solutions Preliminary views of the Boards Invitation to comment

Work on exposure draft to begin once responses received on DP

Final standard to be published once comments received on exposure draft