Project Pages

Leases—Reexamination of NCGA Statement 5 and GASB Statement 13

Project Description: The objective of this project is to reexamine issues associated with lease accounting, considering improvements to existing guidance. Current guidance is provided by National Council on Governmental Accounting (NCGA) Statement 5, Accounting and Financial Reporting Principles for Lease Agreements of State and Local Governments, GASB Statement No. 13, Accounting for Operating Leases with Scheduled Rent Increases, GASB Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, and GASB Statement No. 65, Items Previously Reported as Assets and Liabilities. Statement 62 incorporated the provisions of FASB Statement No. 13, Accounting for Leases, as amended and interpreted, into the GASB’s authoritative literature.

Status:
Exposure Draft approved: January 2016
Preliminary Views approved: November 2014
Added to Current Agenda: April 2013
Added to Research Agenda: April 2011

Leases—Project Plan

Background: Governments routinely enter into leases. Under the current authoritative literature, many of these leases are reported as operating leases. Even though operating leases represent long-term commitments to make payments, no liabilities are reported, although there are disclosures. Likewise, no assets are reported when governments have long-term rights to receive operating lease payments. In Concepts Statement No. 4, Elements of Financial Statements, the Board established definitions of assets and liabilities. This project provides an opportunity for the Board to consider whether operating leases meet the definitions of assets or liabilities.

In 2010 and 2013, the FASB and the International Accounting Standards Board (IASB) issued Exposure Drafts proposing to replace private sector guidance for leases. The FASB and IASB issued final guidance in February and January 2016, respectively. Because of the similarities between private-sector leasing guidance and current public-sector leasing guidance and the significant changes of the FASB/IASB project, the staff received technical inquiries regarding whether there are any plans for the GASB to update its leasing guidance.

The GASB undertook this project during the final stages of the similar FASB and IASB projects in order to maximize efficiency and timeliness. A simultaneous lease accounting project on the GASB agenda provided the opportunity to follow the progress of the FASB and IASB projects to assess on a contemporaneous basis new or amended leasing guidance in the context of the state and local government environment. The GASB project provides an opportunity to reassess the existing GASB guidance, as well as consider improvements in the FASB and IASB projects in the context of the unique nature of governmental entities and the complexities of their leasing transactions.

Finally, part of the GASB’s strategic plan is to evaluate the effectiveness and impact of existing standards that have been in effect for a sufficient length of time. NCGA Statement 5 was issued in 1982 and GASB Statement 13 in 1990.

Accounting and Financial Reporting Issues: The major topic being considered is the forms of financial reporting display and disclosure that would meet essential financial statement user needs. The project is considering the following issues:
  1. Are current accounting and financial reporting standards, including the distinction between types of leases, appropriate to meet essential user needs?
  2. If current standards are not considered adequate, what other requirements should be considered?
Project History:
  • Pre-agenda research approved: April 2011
  • Added to current technical agenda: April 2013
  • Task force established? Yes
  • Deliberations began: August 2013
  • Preliminary Views approved: November 2014
  • Comment period: November 2014–March 2015
  • Field test completed: March 2015
  • Public hearings held: April 2015
  • Redeliberations began: April 2015
  • Exposure Draft issued: January 2016
  • Comment period: January–May 2016
  • Public hearing held: June 2016
  • Redeliberations began: August 2016
Current Developments: The comment period for the Exposure Draft, Leases, ended on May 31, 2016, and a public hearing was held. Redeliberations on the proposals in the Exposure Draft commenced at the August 2016 Board meeting.

Work Plan:

Board meetings

Topics to be considered

September 2016: Discuss the foundational principle, cash flows and revenue/expense classification, and the short-term exception.

October 2016:

Discuss the lessee model, including lease liability, leases that transfer ownership—lessee, and lessee disclosures.

December 2016:

Discuss the lessor model, including lease receivable, deferred inflows of resources, leases that transfer ownership—lessors, leases of assets that are investments, and lessor disclosures.

January 2017: Discuss multiple lease components and contract combinations, lease terminations and modification, subleases, leasebacks, intra-entity leases, leases between related parties, and transition and effective date.
April 2017: Review preballot draft of a final Statement.
May 2017 (T/C): Review ballot draft and consider a final Statement for approval.

Leases—Recent Minutes


Minutes of Meetings, August 10-12, 2016

The Board started redeliberations on the proposals in the Exposure Draft, Leases, commencing with the following topics: the definition of a lease, the scope of the leases guidance, and the lease term. The Board tentatively concluded that further guidance is not needed to clarify that the right-to-use asset is an intangible asset. The Board also tentatively concluded that further guidance is not needed on the degree of formality needed for a lease contract.

The Board next considered respondent comments about power purchase agreements, grazing and hunting rights, and land use agreements for farming, and tentatively agreed that explicitly mentioning the notion of control in the definition of a lease could help in determining situations in which contractual arrangements meet the definition of a lease. In further consideration of respondent comments about the definition of a lease, the Board tentatively decided to specifically note that the right to use a nonfinancial asset refers to the right to use another entity’s underlying asset. Thus, the definition of a lease would refer to “a contract that conveys control of the right to use another entity’s nonfinancial asset (the underlying asset)” (emphasis added). The Board also tentatively decided that the right-to-use asset should be what is “specified in the contract,” which would include the right to use the underlying asset for portions of time during a lease term, such as leases for certain days each week or for certain hours each day.

The Board also tentatively agreed to add guidance for determining when a lease contract conveys control of the right to use the underlying asset. The guidance would be similar to the FASB guidance but would be based on the notions of control found in Concepts Statement No. 4, Elements of Financial Statements, including (1) the right to obtain the present service capacity from use of the underlying asset and (2) the right to determine the nature and manner of use of the underlying asset. The control criteria would be applied to the right-to-use asset as specified in the contract. The Board tentatively agreed that the criteria would not limit a lease to contracts that convey “substantially all” of the present service capacity from use of the underlying asset.

The Board tentatively agreed to specifically exclude all supply contracts (such as power purchase agreements) from the scope of the leases guidance. In further considering hunting and grazing rights, the Board tentatively agreed that no additional guidance in the final Statement was considered necessary. With reference to comments about substantive rights of substitution, the Board tentatively agreed that the definition of a lease does not need to explicitly state that the asset be identified. The Board also tentatively agreed that additional guidance for determining when a substantive right of substitution exists was not considered necessary in the final Statement.

The Board next discussed issues primarily related to the scope of the guidance and tentatively decided not to add infrastructure as an example of a nonfinancial asset. The Board tentatively agreed to add inventory to the scope exclusions in the final Statement. The Board tentatively concluded that historical works of art and assets under construction should not be excluded from the scope of the leases guidance. The Board also tentatively reaffirmed that the following should not be excluded from the scope of the final Statement: leases of assets that are investments, certain regulated leases, and short-term leases.

The Board tentatively concluded that no further guidance was necessary for determining whether cell phone tower and antenna placement agreements are leases.

The Board tentatively decided to add “living plants, and living animals” after timber as examples of biological assets rather than defining that term. The Board next tentatively agreed that additional guidance for contracts that involve both software and hardware and for contracts for cloud services and hosting services was not necessary at this time.

The Board tentatively agreed to not provide a quantitative threshold exception for lower value leases in the final Statement.

The Board tentatively agreed to supersede paragraphs 221, 225, 239, 240, and 254 of Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, and incorporate them into the final Statement. The Board also tentatively decided that leases in which the underlying asset is financed with outstanding conduit debt, unless both the underlying asset and the conduit debt are reported by the lessor should be excluded from the scope of the final Statement.

During the discussion regarding the lease term, the Board tentatively agreed to carry forward the requirement to include lessee renewal and termination options when assessing the lease term at the beginning of a lease. The Board also tentatively agreed that lessor-only options to extend (or not to terminate) the lease should be included in the lease term assessment. Lessees and lessors would be required to evaluate lessor-only options in the same manner as other options, based on whether it is reasonably certain that the option will be exercised.

The Board tentatively agreed to provide examples of cancelable periods and additional clarifying guidance in the text of the standard. The Board also considered comments on the probability threshold of reasonably certain used in evaluating the likelihood of an option being exercised and tentatively decided to carry that threshold forward. The Board tentatively agreed that no additional guidance is needed with respect to fiscal funding or cancellation clauses and nonpayment issues.

The Board tentatively decided to carry forward the lease term reassessment criteria from the Exposure Draft to the final Statement. The Board also tentatively decided to add the following criterion to the lease term reassessment criteria: “an event written in the contract that obligates the lessee to extend or terminate the lease occurs, resulting in a change in the lease term.”

Minutes of Meetings, June 22-23, 2016

The Board reviewed a summary of due process comments received on the Exposure Draft, Leases. The Board provided comments on issues raised in respondent comments and discussed issues to be addressed in future redeliberations. No tentative decisions were reached by the Board.

Minutes of Teleconference, January 25, 2016

The Board reviewed a ballot draft of an Exposure Draft of a proposed Statement, Leases, and provided clarifying edits on the draft document. The Board then voted unanimously to approve the issuance of the Exposure Draft.

Minutes of Meetings, January 5-6, 2016

The Board reviewed a preballot draft of the proposed Exposure Draft, Leases, and provided clarifying edits on the draft document. The Board tentatively decided that the Exposure Draft should propose that only governments whose principal ongoing operations consist of leasing assets to other entities be required to disclose future lease payments that are included in the lease receivable, showing principal and interest separately.

Minutes of Meetings, November 18-20, 2015.

The Board reviewed a draft Standards section of a proposed Exposure Draft. The Board provided clarifying edits on the proposed guidance.

The Board tentatively decided that the Exposure Draft should incorporate the guidance in National Council on Governmental Accounting (NCGA) Statement 5, Accounting and Financial Reporting Principles for Lease Agreements of State and Local Governments, for accounting and reporting lease transactions in governmental funds. The Board tentatively agreed to propose that the leases standard supersede NCGA Statement 5 and GASB Statement No. 13, Accounting for Operating Leases with Scheduled Rent Increases.

The Board also tentatively agreed that the Exposure Draft should propose that the lessee and lessor disclosure of future lease payments present principal and interest requirements separately. This proposed requirement mirrors the schedule of principal and interest payments required for long-term debt under Statement No. 38, Certain Financial Statement Note Disclosures.

The Board tentatively decided that the Exposure Draft should propose that certain leases, such as airport-airline agreements, recognize revenue based on the terms of the lease contract.

Minutes of Task Force Meeting, October 6, 2015

GASB Chairman Dave Vaudt opened the meeting at 1:00 p.m. by welcoming the task force members and providing introductory remarks. The task force members at the table and on the phone and others at the table introduced themselves to the group. Mr. Vaudt then turned the meeting over to Wesley Galloway.

The task force discussed the Board’s tentative decisions to date regarding the foundational principle that all leases are financings of the right to use an asset. Mr. Galloway explained that this foundational principle underlies many of the decisions made in the proposed accounting for lessees and lessors in the Preliminary Views and during the Board’s redeliberations. Task force members did not express specific objections to the foundational principle. Some task force members noted that the legal treatment of a lease arrangement should not dictate the accounting treatment.

Mr. Galloway then presented the Board’s tentative decisions regarding the scope of the proposed Leases guidance, specifically noting the Board’s tentative decisions to (1) limit the definition of a lease to exchange or exchange-like transactions, (2) narrow the scope of the Preliminary Views to exclude all leases of intangible assets, (3) treat a lease as a financed purchase if it a contains a provision to transfer ownership of the underlying asset to the lessee, and (4) treat bargain purchase options in the same manner as any other purchase options included in the lease. Mr. Galloway explained that the narrowing of the scope was a response to stakeholder feedback requesting clarification about whether certain types of technology leases would be in the scope of the proposed guidance. The tentative decision regarding bargain purchase options was made in response to stakeholder concerns about the presumption that all bargain purchase options will be exercised. Task force members generally did not express specific objections to these scope issues, particularly the exclusion of intangible assets and the treatment of bargain purchase options. A task force member, however, expressed concern with the scope exclusion of intangible assets.

The next topic discussed was the proposed guidance regarding the lease term. Ms. Beams presented the Board’s tentative decisions on the lease term, including the replacement of the threshold of probable for assessing renewal and termination options with the term reasonably certain. Some task force members provided feedback on this issue, expressing their concern regarding the subjectivity in determining when the threshold is met. Some task force members also discussed the difficulty involved in assessing renewal and termination options at the beginning of the lease term and in evaluating governments when some leases have options and others do not.

Ms. Beams then explained the Board’s tentative decisions regarding lessee accounting. The Preliminary Views proposed an approach that would require lessee governments to recognize a lease asset and liability for all leases other than those meeting the definition of a short-term lease. A lessee government would recognize interest expense on the lease liability and amortization expense on the lease asset. Ms. Beams noted that, in redeliberations, the Board tentatively reaffirmed many of the proposals from the Preliminary Views, with the exception of a change in the threshold for including certain potential lease payments in the lease liability from probable to reasonably certain. Ms. Beams also explained the proposed guidance regarding remeasurement of the lease liability and reassessment of the discount rate as part of that remeasurement. Ms. Beams presented the tentative Board decisions regarding remeasurement and then solicited task force feedback on all tentative Board decisions regarding the lessee accounting approach. Some task force members asked for clarification regarding the impact of reassessment on reported assets and liabilities and future amortization, and expressed concern that the changes to the lease liability due to reassessment would not be observable in the notes to the financial statements. Task force members did not express specific objections to the Board’s tentative decisions to make the proposed lessee model related to remeasurement less complex.

Mr. Galloway then presented the Board’s tentative decisions regarding lessor accounting, including the Board’s tentative reaffirmation of the provision that lessors not derecognize the underlying asset in a lease. In addition, Mr. Galloway discussed proposed exceptions to lessor recognition and measurement in which certain lessors would not record a lease receivable (and related deferred inflow of resources). Those exceptions include (1) leases of assets that meet the definition of an investment, (2) leases involving assets financed with outstanding conduit debt, and (3) leases with characteristics of airport/airline agreements and similar leases. Task force members generally expressed no specific objections to the proposed exclusions, including the exception for airport leases and other leases with similar regulatory involvement.

The task force then discussed the Board’s tentative decisions regarding contracts with multiple components, including lease contracts that contain service components or multiple lease components. Ms. Beams presented the Board’s tentative decision to carry forward the proposal that governments generally separate contracts into lease and nonlease components, as well as the proposed three-step approach for allocation of consideration in a multiple component lease contract. Some task force members expressed specific concern as to whether the benefits provided to users would outweigh the costs incurred by preparers in order to separate multiple components. Other task force members noted the potential subjectivity of the proposed allocation guidance and indicated that presentation as a single lease unit may be preferable when, for example, the service component is needed to keep the underlying asset in working condition.

The task force also discussed the Board’s tentative decisions regarding a short-term lease exception. The Preliminary Views defined a short-term lease as “a lease that, at the beginning of the lease, has a maximum possible term under the contract of 12 months or less, including any options to extend.” Mr. Galloway explained the Board’s tentative affirmation of that 12-month provision as well as the Board’s tentative decision to not require lessees to disclose the amount of short-term lease expenses or expenditures in the interest of cost-benefit. Many task force members did not express specific objections to the provision, although some task force members indicated that the proposed length of short-term leases could be extended beyond one year. Those task force members felt that a short-term lease definition of one year would not provide substantial cost relief to preparers.

The task force then discussed effective date and transition provisions, which had not been deliberated yet by the Board. Mr. Galloway presented the project staff’s recommended approach, including (1) a proposed effective date for periods beginning after December 15, 2018, and (2) transition provisions that include recognition and measurement using the facts and circumstances that exist at the beginning of the period of implementation. Task force members generally did not express specific objections to the recommended effective date and transition guidance. Some task force members asked clarifying questions regarding the application of guidance to existing leases, while another task force member advocated for prospective implementation.

Finally, the task force discussed other tentative decisions made throughout the Board’s redeliberations of the Leases project. Ms. Beams noted issues such as note disclosures, lease terminations/modifications, subleases, sale-leaseback transactions, lease-leaseback transactions, and intra-entity leases as potential topics of discussion. Task force members voiced no specific objections to the Board’s tentative decisions on those topics but briefly discussed the applicability of a capitalization threshold to the proposed Leases guidance.

Mr. Vaudt thanked all task force members for their participation and concluded the meeting at 4:15 p.m.

Minutes of Meetings, October 6-8, 2015

The Board concluded redeliberations of major issues for the Leases project.

The Board first discussed the characteristics for exclusion of certain airport leases and similar leases. (The Board tentatively decided at the September 2015 meeting to further consider an exception to the leases recognition and measurement guidance for leases with characteristics of airport/airline agreements and similar leases.) The Board tentatively decided to propose excluding from lessor recognition and measurement those leases in which external laws, regulations, or legal rulings significantly limit the ability of the lessor to set rates in excess of costs, such as airport/airline agreements. The Board tentatively decided that those leases excluded from lessor recognition and measurement should continue to be accounted for based on the current guidance for operating leases and be required to provide the following disclosures, which mirror the disclosures proposed for lessors generally: 1) A general description of the agreement; 2) The carrying amount of assets subject to exclusive use by one counterparty under the agreement, by major class of assets, and the amount of accumulated depreciation; 3) The total amount of revenue recognized in the reporting period from the agreement, if the total for all similar agreements is not displayed on the face of the financial statements; 4) A schedule of future minimum payments under the agreement for each of the subsequent five years and in five-year increments thereafter; 5) The amount of revenue recognized in the reporting period for variable payments not included in the future minimum payments; and 6) If the government has issued debt for which the principal and interest payments are secured by payments under the agreement, the existence, terms, and conditions of options by the counterparty to terminate the agreement.

The Board then considered the remaining areas of existing leases guidance that had not yet been discussed in redeliberations. The Board tentatively decided that the Exposure Draft should not propose guidance on participation by third parties in leases. The Board tentatively agreed that the Exposure Draft should not propose guidance on leveraged leases. The Board also tentatively decided that the guidance on participation by third parties in leases and leveraged leases in Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, should be eliminated.

The Board then discussed lessor disclosures of investment property, a topic that arose in response to the Board’s July 2015 decision that lessors would not recognize a receivable (and related deferred inflow of resources) when they lease out a tangible asset that meets the definition of an investment in Statement No. 72, Fair Value Measurement and Application. The Board tentatively decided that the Exposure Draft should not propose lessor disclosures for leases in which the underlying asset meets the definition of an investment except for the following, in addition to other currently required investment disclosures: If the government has issued debt for which principal and interest payments are secured by the lease payments, the existence, terms, and conditions of options by the lessee to terminate the lease.

The Board then reviewed all previous tentative decisions taking into consideration their effect on symmetrical recognition and measurement by lessees and lessors. The Board tentatively agreed that symmetry has been achieved to an appropriate extent and that the remaining differences between lessee and lessor accounting are justified, based on the Board’s previous tentative decisions.

The Board then reviewed differences between its proposed Leases guidance and the FASB’s proposed guidance (based on FASB’s 2013 revised Exposure Draft, Leases, and subsequent redeliberations), focusing on differences that had not yet been discussed during redeliberations. No modifications were made to the proposals based on this discussion.

The Board then discussed the transition and effective date of the proposed Leases guidance and the comment period for the Exposure Draft and tentatively decided that the Exposure Draft should propose an effective date for periods beginning after December 15, 2018, which is expected to be two years after issuance of the final standard. The Board tentatively decided that the proposed effective date provisions should allow rather than encourage early implementation. The Board also tentatively decided that the Exposure Draft should propose the following transition provisions:

Leases should be recognized and measured using the facts and circumstances that exist at the beginning of the period of implementation. However, lessors should not restate the assets underlying their existing sales-type or direct financing leases. Any residual assets for those leases would become the carrying values of the underlying assets. Changes, if any, made to comply with this Statement should be reported as a restatement of beginning net position (or fund balance or fund net position, as applicable). In the first period that this Statement is applied, the notes to the financial statements should disclose the nature of the restatement and its effects.
 
In addition, the Board tentatively agreed to provide a 120-day comment period for the Exposure Draft.

The Board then discussed whether illustrations should be provided in the Exposure Draft and tentatively agreed that they are not needed.

The Board then discussed whether the expected benefits of information to users and other stakeholders from the Exposure Draft exceed the anticipated costs to preparers and other stakeholders. The Board tentatively agreed that the expected benefits associated with the requirements to be proposed in the Exposure Draft outweigh the perceived implementation and ongoing costs.

The Board then discussed the characteristics of the financial information that would be provided as a result of the proposed standard. The Board tentatively agreed that the accounting and financial reporting requirements to be proposed in the Exposure Draft would produce financial information that meets the needs of users, results from economic or financial events affecting the assessment of the governmental reporting entity, is relevant to reporting objectives, and falls within an appropriate information category in general purpose external financial reports.

Minutes of Meetings, September 1-3, 2015

The Board continued redeliberations of the Leases project taking into consideration public hearing testimonies, comment letters, and field test responses received during due process.

The Board first discussed airport leases and related issues. The Board tentatively decided to pursue an exception to the leases recognition and measurement guidance for leases with characteristics of airport/airline agreements and similar leases, with those characteristics to be identified.

The Board next discussed leases involving assets financed with outstanding conduit debt. The Board tentatively decided that the Exposure Draft should propose explicitly excluding such leases from its scope for lessor recognition and measurement unless both the asset and the conduit debt are reported by the lessor.

The Board then discussed issues related to lessee disclosures. The Board tentatively decided that the Exposure Draft should not propose clarifying guidance regarding the presentation of lessee disclosures. The Board also tentatively decided that the Exposure Draft should propose the disclosures for lessees as set forth in the Preliminary Views. In addition, the Board tentatively decided that the Exposure Draft should not propose any additional lessee disclosures not included in the Preliminary Views.

The Board then discussed issues related to lessor disclosures. The Board tentatively decided that the Exposure Draft should not propose clarifying guidance regarding the disclosure of the cost of assets on lease or held for lease. The Board tentatively agreed that the Exposure Draft should propose the lessor disclosures as set forth in the Preliminary Views. The Board also tentatively decided that the Exposure Draft should propose that leases may be grouped for disclosure purposes. The Board tentatively agreed that the Exposure Draft should not propose any additional lessor disclosures not included in the Preliminary Views.

The Board then discussed issues related to the short-term lease exception. The Board tentatively decided that the length of “short-term” should not be extended to longer than 12 months in the proposed definition of a short-term lease in the Exposure Draft. The Board tentatively agreed that the Preliminary Views’ proposal to use “a maximum possible term, including any options to extend” should not be replaced by “the lease term” in the proposed definition of a short-term lease in the Exposure Draft. The Board also tentatively agreed that the Exposure Draft should not propose edits or clarifications to the definition of a short-term lease. For short-term leases that include rent holidays (for example, one month free), the Board tentatively decided that the Exposure Draft should, consistent with the Preliminary Views, propose requiring recognition of lease payments based on the contract terms rather than allocating lease expense or expenditures over the rent holiday period. The Board tentatively agreed the Exposure Draft should not propose the requirement for lessees to disclose the amount of short-term lease expenses or expenditures.

The Board then discussed issues related to lease terminations and modifications. The Board tentatively decided that specific illustrations of accounting for lease terminations and modifications should not be included in the Exposure Draft. The Board tentatively agreed that the Exposure Draft should not include the statement that a lease modification is in essence a change in accounting estimate. The Board also tentatively decided that the Exposure Draft should propose the following exception to the accounting for lease modifications: if a lease modification gives the lessee an additional right-of-use not included in the original lease that is reasonably priced compared to its stand-alone price (in the context of a particular contract), then both the lessee and lessor should account for that additional portion of the modified lease as a new lease, separate from the original portion of the lease.

The Board then discussed issues related to subleases and leaseback transactions. The Board tentatively decided that the Exposure Draft should propose guidance on subleases. The Board tentatively agreed that the Exposure Draft should propose that subleases be accounted for separate from the original lease as set forth in the Preliminary Views. The Board also tentatively decided that the Exposure Draft should propose that any gain or loss on sale in a sale-leaseback transaction should be deferred over the term of the lease as set forth in the Preliminary Views. The Board tentatively decided that the Exposure Draft should not specifically address the treatment in governmental funds of the inflow of resources resulting from the sale in a sale-leaseback transaction. The Board tentatively agreed not to provide specific guidance on the determination of the fair value of the asset as provided in the determination of off-market terms in a sale-leaseback transaction. The Board also tentatively agreed to propose clarifying guidance on, but make no change to the substance of, the calculation of the present value of the lease payments at a market rate as provided in the determination of off-market terms in a sale-leaseback transaction. The Board also tentatively agreed that the Exposure Draft should propose guidance on the treatment of lease-leaseback transactions as set forth in the Preliminary Views.

The Board then discussed issues related to intra-entity leases (leases between a primary government and discretely presented component units or joint ventures) and agreed that no changes to the requirements in Statement No. 14, The Financial Reporting Entity, were necessary. Consistent with that, the Board tentatively decided that the Exposure Draft should not propose specific guidance on the elimination of lease transaction components of the primary government and a blended component unit, or lease transaction elements between a joint venture and a joint venture participant prior to the calculation of the equity interest.

Minutes Archive

Leases—Tentative Board Decisions to Date


These tentative decisions have been made since the issuance of the Exposure Draft and in anticipation of the final Statement. The Board tentatively agreed to propose the following:
  • The definition of a lease should include the notion of control, and also clarify that the right to use a nonfinancial asset refers to the right to use another entity’s underlying asset, by stating that a lease contract “conveys control of the right to use another entity’s nonfinancial asset (the underlying asset).”
  • The right-to-use asset should be what is “specified in the contract,” which would include the right to use the underlying asset for portions of time during a lease term, such as leases for certain days each week or certain hours each day.
  • Guidance on when the contract conveys the control of the right to use the underlying asset should be provided. The guidance should be based on the notions of control found in Concepts Statement No. 4, Elements of Financial Statements, including (1) the right to obtain the present service capacity from use of the underlying asset and (2) the right to determine the nature and manner of use of the underlying asset. The control criteria should be applied to the right to use asset as specified in the contract. The criteria should not limit a lease to contracts that convey “substantially all” of the present service capacity from use of the underlying asset.
  • Exclude all supply contracts, such as power purchase agreements, from the scope of the leases guidance.
  • Exclude inventory from the scope of the leases guidance.
  • Clarify that the scope exclusion of leases of biological assets includes timber, and “living plants, and living animals.”
  • Supersede and incorporate into the final Statement paragraphs 221, 225, 239, 240, and 254 of Statement 62.
  • Carry forward the exclusion of leases in which the underlying asset is financed with outstanding conduit debt, unless both the underlying asset and the conduit debt are reported by the lessor.
  • Carry forward the requirement to include lessee renewal and termination options when assessing the lease term at the beginning of a lease.
  • Include lessor-only options to extend (or not to terminate) the lease if reasonably certain of being exercised in the assessment of the lease term at the beginning of a lease
  • Remove periods “for which only the lessor has the option to terminate the lease” from cancelable periods.
  • Carry forward the probability threshold of reasonably certain used in evaluating the likelihood of an option being exercised in the assessment of the lease term.
  • Carry forward the criteria for reassessment of the lease term, with edits to incorporate the following additional criterion:
    • An event written in the contract that obligates the lessee to extend or terminate the lease occurs, resulting in a change in the lease term.