SUMMARY OF BOARD DECISIONS
Summary of Board decisions are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions are included in an Exposure Draft for formal comment only after a formal written ballot. Decisions in an Exposure Draft may be (and often are) changed in redeliberations based on information provided to the Board in comment letters, at public roundtable discussions, and through other communication channels. Decisions become final only after a formal written ballot to issue a final standard.
November 19, 2008 Board Meeting
Leases. The Board discussed several areas that were identified by the joint working group meeting as areas that should be further explored before issuance of a Discussion Paper.
The Board decided that the determination of the lease term should be a recognition decision. For example, for a 10-year lease with an option to renew for 5 years, the lessee must determine if it is recognizing a 10-year lease or a 15-year lease, and then the lessee would recognize a right-to-use asset and obligation to pay rentals at the present value of the expected lease payments over that term. For leases with renewal, termination, and/or purchase options, the lessee would make a determination of the most likely lease term based on its own assessment of all contractual, noncontractual, and business factors.
The Board decided that a lessee would measure contingent rentals and any residual value guarantees based on the lessee’s best estimate of the expected lease payments over the term of the lease. A lessee would determine its best estimate by considering the range of possible outcomes and the likelihood of each, but the lessee is not required to probability-weight the various possible outcomes in determining the expected lease payments. However, if lease rentals are contingent on changes in an index or rate, such as the consumer price index or the prime interest rate, the lessee would measure the contingent rentals using the index or rate existing at the inception of the lease in its initial determination of the best estimate of expected lease payments.
The Board decided that a lessee would be required to reassess the lease term and its lease obligation using its current assumptions at each reporting date. The Board decided that a lessee should subsequently measure its lease obligation at the present value of its current best estimate of expected lease payments over the revised lease term, discounted at the effective interest rate determined at lease inception. A lessee would recognize changes in the lease obligation through a corresponding adjustment to the carrying value of the right-of-use asset to the extent that the change arises from updated expectations about the lease term (for example, a revised assessment of the likelihood that the entity will exercise a renewal option) and through profit or loss to the extent that the change arises from updated expectations about the measurement of contingent rentals or residual value guarantees.
The Board decided that a lessee would amortize/depreciate the right-of-use asset and apportion the lease payments between a finance charge and a reduction of the outstanding obligation, with interest expense and amortization/depreciation presented on the income statement. However, a majority of the Board believed that there were differences between leases that are in-substance purchases and leases that only convey a right to use that may merit differences in the subsequent measurement or presentation. Accordingly, the Board instructed the staff to include questions for financial statement users in the Discussion Paper to assess whether users believe that leases that are in-substance purchases should be measured or presented differently from leases that only convey a right to use.
The Board decided that leases should be presented separately from owned assets on the statement of financial position as either in-substance purchases or rights to use. The Board also decided that the obligation to pay rentals should be presented separately from other financial liabilities on the statement of financial position. The Board decided that presentation of the lease on the income statement and the statement of cash flows would be determined based on feedback from financial statement users regarding subsequent measurement and presentation of the right-of-use asset.
The Board instructed the staff to further analyze the accounting for subleases for its consideration before publication of the Discussion Paper. The analysis would (1) develop a proposed model to account for subleases, (2) indicate how that model would broadly apply to lessor accounting (in situations other than a sublease), and (3) indicate how the proposed model would compare to the Board’s tentative decisions regarding revenue recognition.
Financial instruments with characteristics of equity. The Board continued redeliberations of its Preliminary Views, Financial Instruments with Characteristics of Equity. The Board decided that all instruments that have no contractual settlement requirement (perpetual instruments) and entitle the holder to a share of the issuer’s net assets in liquidation should be classified as equity.
The Board decided that, in principle, derivatives on an issuer’s own equity instruments would be classified as liabilities or assets. The Board decided to discuss at a future meeting whether derivative instruments within the scope of FASB Statement No. 123 (revised 2004), Share-Based Payment, would be subject to that classification principle.
The Board briefly discussed several other matters without reaching decisions, including:
The Board directed the staff to continue analyzing those issues for further consideration at a future meeting.