The Boards met last week to discuss the Joint Project on Lease Accounting and made progress on a number of issues with respect to proposed lessee accounting.
The staffs of the FASB and the IASB were directed to draft examples of how the proposed definition of a lease would be applied using the principles outlined in the 2013 Exposure Draft, particularly regarding the terms “use of an identified asset” and “right to control an identified asset”. Both of these elements of the definition have caused concern about how they would be applied in practice.
The issue of separating lease and nonlease components was discussed. The Boards decided to retain guidance similar to that provided in the 2013 Exposure Draft. However, the Boards also decided to allow lessees to adopt an accounting policy election by each class of assets, to not separate nonlease components from lease components. Thus, a lessee can now account for both lease and nonlease components as a single lease component. Allocation of the consideration in a lease contract between lease and nonlease components could be an onerous and subjective process. The proposed policy election is an initiative to eliminate this complexity.
The Boards also decided that only incremental costs should qualify for initial direct costs, costs that would not have been incurred if the lease had not been executed. A lessee would include these initial direct costs in the right-of-use asset to be amortized over the term of the lease.
The Boards also committed to continue deliberation of the Joint Project in future meetings.