Financial Reporting Committee Rachel Knubley Senior Project ...

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Question 17 The IASB tentatively decided that the measurement of the lessee’s obligation to pay rentals should include a probability-weighed estimate of contingent rentals payable. The FASB tentatively decided that a lessee should measure contingent rentals on the basis of the most likely rental payment. A lessee would determine the most likely amount by considering a range of possible outcomes. However, this measure would not necessarily equal the probability-weighted sum of the possible outcomes. Which of these approaches to measuring the lessee’s obligation to pay rentals do you support? Please explain your reasons. We do not support the probability-weighted estimate (or expected value) approach that is favoured by the IASB for the reasons that are set out in paragraph 7.16 of the Discussion Paper, i.e. it will be difficult to determine the probability of each of the possible outcomes and in most cases the resulting obligation to pay rentals will reflect an outcome that will never happen. We are concerned that users will wrongly believe that the outcome is more accurate than that resulting from a less complex approach. We support the most likely rental payment approach that is favoured by the FASB because it will be workable in practice and will result in an obligation to pay rentals that will reflect a possible outcome. Moreover, we believe that the most likely rental payment approach is consistent with IAS37. In its discussion of making a ‘best estimate’ of the expenditure required to settle an obligation IAS37 specifies the use of ‘expected value’ where the provision being measured involves a large population of items, but where a single obligation is being measured it states that “the individual most likely outcome may be the best estimate of the liability”. We are, of course, aware that nearly four years ago the IASB proposed revisions to IAS37, but in our comments on those proposals we similarly opposed the indiscriminate use of the expected value approach. Question 18 The FASB tentatively decided that 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 should measure the obligation to pay rentals using the index or rate existing at the inception of the lease. Do you support the proposed approach? No. Consistent with our answer to Question 16, we believe that the obligation to pay rentals should be the best estimate of the expenditure required to settle the obligation (which would include the effect on future cash flows of expected changes in such indices). Question 19 The boards tentatively decided to require the remeasurement of the lessee’s obligation to pay rentals for changes in estimated contingent rental payments. Do you support the proposed approach? Please explain your reasons. Yes. Page 10 of 12
Question 20 The boards discussed two possible approaches to recognising all changes in the lessee’s obligation to pay rentals arising from changes in estimated contingent rental payments: (a) recognise any change in the liability in the profit or loss; (b) recognise any change in the liability as an adjustment to the carrying amount of the right-of-use asset. Which of these two approaches do you support? Please explain your reasons. If you support neither approach, please describe any alternative approach you would prefer and why. Consistent with the right-of-use principle underlying the proposed accounting model, we believe that a change in the obligation to pay rentals should be recognised as an adjustment of the right-of-use asset if it reflects a change in the right to use the asset. Otherwise it should be recognised in profit or loss. As indicated in our answer to Question 14, we believe that reassessment of the lease term will usually reflect a change in the right to use the asset and therefore the effect on the obligation to pay rentals should be recognised as an adjustment to the right-of-use asset. On the other hand, we believe that a change in the estimate of contingent rentals is unlikely to reflect a change in the right to use the asset and therefore the effect on the obligation to pay rentals should be recognised in profit or loss. We believe, however, that the effect of changes in contingent rentals should be distinguished from the depreciation or amortisation of right-of-use assets. Question 21 The boards tentatively decided that the recognition and measurement requirement for contingent rentals and residual value guarantees should be the same. In particular, the boards tentatively decided not to require residual value guarantees to be separated from the lease contract and accounting for as derivatives. Do you agree with the proposed approach? If not, what alternative approach would you recommend and why? Yes. CHAPTER 8: PRESENTATION Question 22 Should the lessee’s obligation to pay rentals be presented separately in the statement of financial position? Please explain your reasons. What additional information would separate presentation provide? We do not believe that it is necessary to mandate separate presentation in the balance sheet of the obligation to pay rentals. Entities should be permitted to do so if they wish. Where the obligation to pay rentals is not shown separately in the balance sheet, it should be shown separately in the notes to the financial statements. Page 11 of 12
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