Leases

The ASB is undertaking a research project on leases for the IASB. The project aims to develop a single method of accounting for leases that is consistent with the IASB's Framework. ASB staff has presented introductory papers at recent IASB meetings.

At its November 2003 meeting, the IASB tentatively agreed that recognising the assets and liabilities that arise from all leases would provide more relevant, reliable and comparable financial information than recognising assets and liabilities only in respect of finance leases. It was agreed that the project should explore a conceptual approach that analyses the contractual rights and obligations in leases and identifies the changes to assets and liabilities that arise from them. Under that approach:

a lessor would recognise assets that include:

• its contractual rights to receive cash
• its residual rights in the leased property

a lessee would recognise:

• an asset reflecting its unconditional right to use the leased property (subject to any restrictions in the lease as to how it may be used)
• a liability in respect of its contractual obligations under the lease

At its January 2004 meeting, the IASB discussed cancellation and renewal options in leases. Alternative approaches to a number of examples were considered. These covered lessee options to cancel and lessee options to renew at market and at predetermined rents. Under the first approach, assets and liabilities would be recognised only in respect of unconditional rights and obligations under the lease. This would mean, for example, that a lessee would have assets that include the right of use for the non-cancellable period and the right to renew the lease, and liabilities that include its unconditional obligation to make payments to the lessor. The lessor would have assets that include its unconditional right to receive payments from the lessee.

Under the second approach, the probability of the lessee exercising its options would be considered in recognising assets and liabilities under the lease. This would mean, for example, that if it was considered probable that the lessee would renew the lease, the lessee would have assets and liabilities that include a right of use for the renewal period and the associated obligation to make payments to the lessor. The lessor would have assets that include the estimated lease payments from the lessee.

A further paper has been prepared for consideration at IASB's April meeting which explores these approaches in respect of leases where some or all of the lease payments are contingent (or conditional) on future events. Three types of contingent payments are:

• payments that vary with external factors that are not within the control of the lessee or the lessor, such as price changes (including commercial property leases where the lease payments are varied periodically to open market rents)
• payments that depend on the lessee's usage
• payments that depend on the lessee's profits or other performance (including turnover leases)

A pervasive issue is whether or not the contingent cash inflows are assets of the lessor and the contingent cash outflows are liabilities of the lessee.

Reporting Comprehensive Income

Reports have been given in the January 2004 and earlier issues of Inside Track of the work being done in a joint project between the ASB and IASB to develop a statement of comprehensive income. For ASB, this represented a development at the international level of the proposals it had published in FRED 22 Reporting Financial Performance in 2000. Consultations by the IASB/ASB team over the first half of 2003 revealed a strong desire in numerous countries for the project to be conducted in conjunction with the FASB, which had by then adopted a separate project of its own embracing the balance sheet as well as the performance statements. Accordingly, in the autumn of 2003, staffs of the three boards were asked to develop a joint proposal on how the two projects might be combined and taken forward.

The resulting joint proposal was presented to separate meetings of the three boards in March 2004. It recommended dividing the work into two projects, the first dealing with the form and content of required primary financial statements and the second addressing more difficult issues, including how to present the effects of the "mixed attribute" model and whether there is value in the notion of recycling.

The aim of the first project would be to agree that all three boards should require the same set of primary financial statements. The most significant proposal stemming from this aim would be that there should be a new statement of comprehensive income, which in UK terms would mean that the items currently reported in the statement of total recognised gains and losses would appear immediately following profit for the period in a single primary statement. No attempt, however, would be made at this stage to agree on what particular items should be recognised below the line of profit for the period nor on whether or not they should be recycled above that line in a subsequent period. Another issue for the project would be agreement on the number of comparative periods to be presented, in the primary statements and in the notes. It should not be assumed that inclusion of this issue implies that a decision will be taken to adopt the two years of comparatives requirement, which is currently applied only by the SEC.

The second project would seek to standardise, both within individual statements and across different statements the content of key totals and sub-totals. Some of this work might be capable of resolution in the first project but definitions of items such as "operating" or "financing", used in both the comprehensive income statement and the cash flow statement, would involve many of the more difficult issues of the later project.

Better disaggregated information, for example on the constituents of revenue, is another goal that some would like to see in the first project but which, for some items at least, might have to await the second.

This joint staff proposal met with varying reactions from members of the three boards. Some agreed with the staff to divide the work into two, while others agreed that the main issues reserved for the second project were too closely related to the first to be ignored at that stage. The structure of the projects will be redebated in April. All boards agree that thorough consultation will be required.