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Leases are an important project that the IASB is undertaking jointly with the FASB. The IASB and the FASB (the boards) are working together to improve the accounting for leases. To meet this objective, the boards think that a customer leasing assets should recognise assets and liabilities arising from those leases (including leases that are off balance sheet today).
The boards jointly published a revised Exposure Draft Leases (the 2013 ED) in May 2013. The boards received extensive feedback on their proposals, and have heard a broad range of views. Since March 2014 the boards have redeliberated most aspects of the project. The boards will finalise their redeliberations shortly. They will decide upon the effective date of the new Leases Standard in the next few months.
The IASB plans to issue a new Leases Standard before the end of 2015.
The new Leases Standard will contain a definition of a lease and accompanying guidance to help entities assess whether a contract is (or contains) a lease. The definition and accompanying guidance will apply to both parties to a contract, ie the customer (lessee) and the supplier (lessor). The boards have jointly agreed the definition and guidance.
The definition of a lease is important because, when a contract is (or contains) a lease, the customer (lessee) will recognise assets and liabilities arising from the lease on its balance sheet.
Leases are different from services because, at the start of a lease, the customer obtains control of a resource (the right to use an item). So the definition and accompanying guidance focus on whether a customer controls the use of an item.
A customer controls the use of an item when the customer has exclusive use of the item for a period of time and can decide how to use it.
In contrast, in a service contract, the supplier retains control of the use of any items needed to deliver the service, even if those items are located at the customer’s premises. In such contracts, the customer does not obtain control of a resource at the start of the contract but, instead, commits to purchasing a particular service that it will receive in the future.
The definition of a lease in the new Leases Standard will be substantially similar to the existing definition in IFRIC 4 Determining Whether an Arrangement Contains a Lease. The guidance accompanying the definition, however, has been changed to:
In the vast majority of cases, the assessment of whether a contract is a lease or a service is straightforward. However, in some scenarios— for example, when both the customer and the supplier make decisions about the use of the item—the distinction may require judgement. The additional guidance on the definition of a lease has been provided in particular to assist those applying the definition to such scenarios.