® International Accounting Standards Board THE LEASING PROJECT November 2007 Simon Peerless – Project Manager The views expressed in this presentation are those of the presenter and do not represent positions of the International Accounting Standards Board (IASB).

® Will talk about… Project outline Board discussion so far Next steps

® Project outline July 2006 – FASB and IASB add Leasing Project to agendas February 2007 – First meeting of Leasing Working Group March 2007 – Board discussions start 2008 – Discussion paper/preliminary views Exposure draft Standard

® What will the leasing project cover? Fundamental revision of all aspects of lease accounting:  Lessee accounting  Lessor accounting  Equipment leases  Real estate leases Aim – a single accounting model to cover all types of lease

® Discussion so far – March 2007 Identified rights and obligations arising in a simple lease Analysed whether rights and obligations identified meet the definitions of assets and liabilities Discussed 4 different accounting models

® Simple lease example A piece of machinery is leased:  a fixed term - 5 years  life of the machinery - 10 years  non-cancellable  no rights to extend the lease term or purchase the machinery  no guarantees of its value at any point  lease payments at regular intervals  payments are fixed amounts

® Simple lease example Lessee has right to use leased item Lessor has residual right

® Rights and obligations LesseeLessor Right to use machinery for the lease term Obligation to permit use of the machinery for the lease term Obligation to make specified payments over the lease term Right to receive payments during the lease term Obligation to return machinery at the end of the lease Right to return of machinery at the end of the lease term -Right to economic benefits of the machinery after the end of the lease term

® Lessee – assets and liabilities Description of rightAsset? Right to use the machinery for the lease termYes Description of obligationLiability? Obligation to make specified payments over the lease term Yes Obligation to return the machinery at the end of the lease term No

® Lessor – assets and liabilities Description of rightAsset? Right to receive payments during the lease term Yes Right to return of the machinery at the end of the lease term No Rights to the economic benefits of the machinery after the end of the lease term. Yes Description of obligationLiability? Obligation to permit the use of the machinery during the lease term No

® Accounting models – Right of use Lessee recognises  Asset  Right to use machinery for lease term  Liability  Obligation to make payments over lease term

® Simple lease example Lessee has right to use leased item Lessor has residual right

® Accounting models – Whole asset Lessee recognises  Asset  Machinery  Liabilities  Obligation to make payments over lease term  Obligation to return the machinery at the end of the lease

® Accounting models – Executory contract Lessee’s right to use is viewed as conditional upon making payments under lease Lessee’s obligation to pay is viewed as conditional upon lessor granting lessee quiet enjoyment. Lessee recognises no assets or liabilities in respect of the lease contract

® Accounting models – Model in current standard Leases are treated as operating or finance  Operating leases – similar to executory contract model  Finance leases – similar to whole asset model Reconsider lease classification criteria

® Accounting models – Tentative conclusions Right of use model is the only model that results in the recognition of the assets and liabilities identified in a simple lease The Board directed the staff to develop this approach further

® Discussion so far – April 2007 Joint meeting IASB/FASB Discussed 2 possible approaches to scope  Fundamental reconsideration of when an arrangement conveys a right to use and asset  Limit scope to arrangements currently within the scope of IAS 17/FAS 13 Instructed staff to develop model based on the scope of the current standards Will reconsider before issuing DP

® Discussion so far – May 2007 Discussed options to extend or terminate the lease – one of the most difficult areas Education session. No decisions were reached Discussed:  Factors that affect whether an option to extend or terminate is exercised  The possible equivalence of options to extend or terminate  Four different ways of accounting for options

® Discussion so far – May 2007 Four different ways of accounting for options  Recognise right to use up to option exercise date only + option to extend  Recognise right to use for full period + option to terminate  Recognised right to use based on probable lease term  Measure right to use based on expected lease term

® Discussion so far - June 2007 Measurement issues Lessee’s liability  Fair value?  Amortised cost using EIR?  Agreed that this should be consistent with other financial liabilities

® Discussion so far – June 2007 Asset representing right to use – Board considered:  ‘Intangible asset’ approach  ‘Nature of leased item’ approach  Separate accounting model Preference for ‘nature of leased asset’ approach (but FASB preferred to develop a separate accounting model)

® Discussion so far – October 2007 Other obligations of lessees  Costs to remove leased equipment  Obligation to return in specified condition  Maintenance obligations Variable lease payments  Index-linked and market-linked rentals  Turnover-based rentals  Usage-based rentals

® Next steps Project is at an early stage Future Board discussions to include:  Renewal and cancellation options  Measurement  Residual value guarantees  Lessor issues  Revenue recognition  Asset derecognition  Disclosure

® Next steps Discussion paper (DP) to be issued in 2008 DP to include:  Background and alternative solutions  Preliminary views of the Boards  Invitation to comment Work on exposure draft to begin once responses received on DP Final standard to be published once comments received on exposure draft