International Financial Reporting Standards

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation.

© 2012 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Leases: Project updateUnited Leasing Association

(Russia)April 2012

Why a leases project?

• Existing lease accounting does not meet users’ needs– accounting depends on classification– contractual rights and obligations (assets and liabilities)

are off balance sheet– users forced to adjust financial statements

• Complexity– dividing line between finance and operating is arbitrary– is there an underlying principle?

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Where we are 3

2009 2010 2012 TBD

March 2009Discussion PaperLeases: Preliminary Views

August 2010Exposure DraftLeases

H2 2012Second Exposure DraftLeases

TBDFinal StandardLeases

Comment period 4 months

786 comment letters received

Contained proposals for both lessees and lessors

Re-expose proposals

Focus on revisions to 2010 proposals

Will contain proposals for both lessees and lessors

Effective date: TBDWill contain guidance for both lessees and lessors

Comment period 4 months

302 comment letters received

Primarily focused on lessee accounting

Proposed right-of-use model

• A lease contract is one in which the right to control the use of an underlying asset is transferred from the lessor to the lessee.

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Lessor LesseeRight of use

2010 ED proposals for lessees

• Right of use accounting model: Lessee has acquired the right to use an underlying asset and is obligated to pay for that right with its lease payments.

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Right of use model for lesseesBalance Sheet Income Statement

Right-of-use asset X Amortisation expense X

Liability to make lease payments*

X Interest expense X

* Discount at rate lessor charges the lessee or lessee’s incremental borrowing rate if lessor rate not available.

Why a right-of-use model?

• Reflects assets and liabilities arising in leases on the balance sheet

• Consistent with Conceptual Framework’s definition of assets and liabilities

• One accounting model for all leases – consistency and comparability

• Can be applied to all leases without arbitrary ‘bright lines’

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Redeliberations–lessee model• General support for a right-of-use model

– Basic lessee accounting principle widely accepted, ie leases create assets and liabilities

• Feedback– ‘front-loading’ expense in P&L– elimination of rent expense

• Considered a dual accounting approach– finance lease (in-substance purchase)–as ED– other than finance lease (operating lease)–on balance

sheet, but straight-line rental expense

• Discussion to eliminate frontloading reopened in February 2012

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Feb 2012: Lessee accounting approaches 8

Approach A: retain

current tentative decisions

(model proposed in 2010 ED)

Use different amortisation method for ROU asset

Approach B: interest-based

amortisation

Approach C: underlying

asset

2010 ED–lessor accounting 9

Does the lessor retain significant risks or benefits of the underlying asset?

Derecognition approach:•Derecognise underlying asset•Recognise residual asset•Profit on amount derecognised and interest income

Performance obligation approach:•Recognise underlying asset•Recognise performance obligation•Lease income, depreciation and interest income

No Yes

Both approaches: recognise lease receivable

Redeliberations–lessor model 10

All leases (except short-term leases and leases of investment property)

Balance Sheet Income Statement

Right to receive lease payments*

X Profit on transfer of right-of-use (gross or net based on business model)

X

Residual asset** X Interest income—on receivable and residual***

X

*Plus initial direct costs** Measured at an allocation of carrying amount of underlying asset*** Interest on residual based on estimated residual value—any profit on the residual asset is not recognised until asset sold or re-leased at end of lease term.

Redeliberations–investment property

Accounted for similar to today* Lessor measures IP at fair value or cost** Rental income recognised on a straight-line basis or another systematic basis, if more representative of pattern of earning rentals***If IP measured at cost, rental income plus depreciation recognised**** If IP measured at fair value, rental income plus fair value changes recognised

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Leases of investment property (IP)

Balance Sheet Income Statement

Investment property * X Rental income ** X

Depreciation ***, or (X)

Fair value changes **** X/(X)

Application example–equipment lease• Assumptions and workings:

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Fair value of leased asset CU1,000

Carrying amount of leased asset

CU950

Lease term 5 years

Residual (future value) CU500

Residual (present value) CU374

Rents (annual in arrears) CU149

Rate implicit in lease 6%

Initial direct costs none

PV of lease payments = Lease receivable

CU626

Total profit on transaction = FV of UA – CA of UA

1,000 - 950 = 50

Profit on ROU = lease rec/FV of UA * Total profit

626/1,000 * 50 = 31

Unearned income (profit relating to residual) = total profit – profit on ROU

50 – 31 = 19

Application example–equipment lease continued 13

Periods 0 1 2 3 4 5Balance sheetReceivable 626 515 397 273 140 0

Gross residual asset 374 396 420 445 472 500 Unearned income (19) (19) (19) (19) (19) (19)Net residual asset 355 377 401 426 453 481

Income statement

Gain on sale 31 -

-

-

-

-

Interest on receivable - 38 31 24 16 8

Unwinding interest for residual asset -

22 24 25 27 28 Total lease income 31 60 55 49 43 37

Reducing complexity and cost 14

2010 ED Post-ED simplifications

Options to extend the lease term (term options)

• Longest possible lease term more likely than not to occur

• Reassessed

• Option period included if lessee has significant economic incentive to exercise

• Reassessed other than for market conditions

Variable lease payments

• Included in lease liability on probability-weighted basis

• Reassessed

• Excluded from liability (unless in-substance fixed or based on an index or rate) and accounted for as occurred

• Reassessed for spot/index

Short–term leases (lease term ≤ 12 months)

• Liability/asset recognised with no discounting

• No liability/asset recognised• Rent expense• IAS17 operating lease model

Redeliberations–definition of a lease

• ‘Contract in which the right to use an asset (the underlying asset) is conveyed, for a period of time, in exchange for consideration’

– underlying asset=identifiable (physically distinct)– right to control use of underlying asset

• Notion of control changed– ‘ability to direct the use’ and receive benefits– change from EITF 01-8/IFRIC 4/ED:

if entity obtains substantially all output ≠ control–pricing does not determine control

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Redeliberations–lessee other issues

• Multi-element contracts– separately account for non-lease elements– allocate between lease and non-lease elements if there

are observable prices

• Lessee residual value guarantees– include in lease payments amounts expected to be

payable

• Sale and leaseback transactions– if sale, account for as sale then leaseback

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Redeliberations–lessor other issues

• Impairment– financial asset impairment guidance for receivable– non-financial impairment guidance for residual asset

• Residual value guarantees– not recognised separately– considered when assessing residual asset for

impairment

• Multi-element contracts– separately account for non-lease elements– allocate using revenue guidance (selling price)

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Redeliberations–lessee presentation

• Balance sheet– RoU asset presented as if owned– Liability to make lease payments

• Statement of cash flows– principal financing– interest as other interest payments are presented– variable lease payments not included in RoU asset:

operating– short-term lease payments operating

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Redeliberations–lessor presentation

• Balance sheet

• Statement of cash flows– cash inflows from leases operating activities

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ReceivableResidual

Lease assets

on the face or notes

on the face

Redeliberations–lessor disclosure

• Reconciliation of lease receivable and residual asset• Maturity analysis• A table of all lease income, including short-term• Details of contingent rentals and options• Details of purchase options• Details on residual asset risk management including

quantitative exposure• Similar requirements for investment property lessors

scoped out of receivable and residual approach

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Redeliberations–transition

• 2010 ED proposals gave rise to front-loading for lessees

• Revised approach– Retrospective application

with simplifications in determining the rate and calculations

– Use of hindsight– Grandfathering of finance leases– Option to apply without simplifications

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What happens next? 22

2-3Q2012

H22012 2012 TBD

Redeliberations Publish Revised Exposure Draft*

Consultation Issue Final Standard

OutreachWorking group meetings Redeliberations

Comment letter period TBD

Effective date: TBD

OutreachRedeliberations – lessee subsequent measurement

Where to go for more information 23

IASB website www.ifrs.org

Contact detailsProject team Investor liaison

Patrina Buchanan Aida Vatrenjak Jess Lion Hilary Eastman

pbuchanan@ifrs.org avatrenjak@ifrs.org jlion@ifrs.org heastman@ifrs.org

Questions or comments?

Expressions of individual views by members of the IASB and its staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation.

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