Leases: Project update United Leasing Association (Russia) April 2012

1. Leases: Project updateUnited Leasing Association (Russia)April 2012

2. Why a leases project? • Existing lease accounting does not meet users’ needs • accounting depends on classification • contractual rights and obligations (assets and liabilities) are off balance sheet • users forced to adjust financial statements • Complexity • dividing line between finance and operating is arbitrary • is there an underlying principle?

3. Where we are 2010 2012 TBD 2009 August 2010 Exposure Draft Leases H2 2012 Second Exposure Draft Leases TBD Final Standard Leases March 2009 Discussion Paper Leases: Preliminary Views Comment period 4 months 302 comment letters received Primarily focused on lessee accounting Comment period 4 months 786 comment letters received Contained proposals for both lessees and lessors Re-expose proposals Focus on revisions to 2010 proposals Will contain proposals for both lessees and lessors Effective date: TBD Will contain guidance for both lessees and lessors

4. Proposed right-of-use model • A lease contract is one in which the right to control the use of an underlying asset is transferred from the lessor to the lessee. Lessor Lessee Right of use

5. 2010 ED proposals for lessees • Right of use accounting model: Lessee has acquired the right to use an underlying asset and is obligated to pay for that right with its lease payments. * Discount at rate lessor charges the lessee or lessee’s incremental borrowing rate if lessor rate not available.

6. Why a right-of-use model? • Reflects assets and liabilities arising in leases on the balance sheet • Consistent with Conceptual Framework’s definition of assets and liabilities • One accounting model for all leases – consistency and comparability • Can be applied to all leases without arbitrary ‘bright lines’

7. Redeliberations–lessee model • General support for a right-of-use model • Basic lessee accounting principle widely accepted, ie leases create assets and liabilities • Feedback • ‘front-loading’ expense in P&L • elimination of rent expense • Considered a dual accounting approach • finance lease (in-substance purchase)–as ED • other than finance lease (operating lease)–on balance sheet, but straight-line rental expense • Discussion to eliminate frontloading reopened in February 2012

8. Feb 2012: Lessee accounting approaches Approach A: retain current tentative decisions (model proposed in 2010 ED) Use different amortisation method for ROU asset Approach B: interest-based amortisation Approach C: underlying asset

9. 2010 ED–lessor accounting Does the lessor retain significant risks or benefits of the underlying asset? No Yes • Derecognition approach: • Derecognise underlying asset • Recognise residual asset • Profit on amount derecognised and interest income • Performance obligation approach: • Recognise underlying asset • Recognise performance obligation • Lease income, depreciation and interest income Both approaches: recognise lease receivable

10. Redeliberations–lessor model *Plus initial direct costs ** Measured at an allocation of carrying amount of underlying asset *** Interest on residual based on estimated residual value—any profit on the residual asset is not recognised until asset sold or re-leased at end of lease term.

11. Redeliberations–investment property Accounted for similar to today * Lessor measures IP at fair value or cost ** Rental income recognised on a straight-line basis or another systematic basis, if more representative of pattern of earning rentals ***If IP measured at cost, rental income plus depreciation recognised **** If IP measured at fair value, rental income plus fair value changes recognised

12. Application example–equipment lease • Assumptions and workings:

13. Application example–equipment lease continued

14. Reducing complexity and cost

15. Redeliberations–definition of a lease • ‘Contract in which the right to use an asset (the underlying asset) is conveyed, for a period of time, in exchange for consideration’ • underlying asset=identifiable (physically distinct) • right to control use of underlying asset • Notion of control changed • ‘ability to direct the use’ and receive benefits • change from EITF 01-8/IFRIC 4/ED: if entity obtains substantially all output ≠ control • pricing does not determine control

16. Redeliberations–lessee other issues • Multi-element contracts • separately account for non-lease elements • allocate between lease and non-lease elements if there are observable prices • Lessee residual value guarantees • include in lease payments amounts expected to be payable • Sale and leaseback transactions • if sale, account for as sale then leaseback

17. Redeliberations–lessor other issues • Impairment • financial asset impairment guidance for receivable • non-financial impairment guidance for residual asset • Residual value guarantees • not recognised separately • considered when assessing residual asset for impairment • Multi-element contracts • separately account for non-lease elements • allocate using revenue guidance (selling price)

18. Redeliberations–lessee presentation • Balance sheet • RoU asset presented as if owned • Liability to make lease payments • Statement of cash flows • principal  financing • interest  as other interest payments are presented • variable lease payments not included in RoU asset:  operating • short-term lease payments operating

19. Redeliberations–lessor presentation • Balance sheet • Statement of cash flows • cash inflows from leases  operating activities on the face or notes on the face

20. Redeliberations–lessor disclosure • Reconciliation of lease receivable and residual asset • Maturity analysis • A table of all lease income, including short-term • Details of contingent rentals and options • Details of purchase options • Details on residual asset risk management including quantitative exposure • Similar requirements for investment property lessors scoped out of receivable and residual approach

21. Redeliberations–transition • 2010 ED proposals gave rise to front-loading for lessees • Revised approach • Retrospective application with simplifications in determining the rate and calculations • Use of hindsight • Grandfathering of finance leases • Option to apply without simplifications

22. What happens next? H2 2012 2012 TBD 2-3Q 2012 Publish Revised Exposure Draft* Consultation Issue Final Standard Redeliberations Effective date: TBD Comment letter period TBD Outreach Working group meetings Redeliberations Outreach Redeliberations – lessee subsequent measurement

23. Where to go for more information 23

24. Questions or comments? Expressions of individual views by members of the IASB and its staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation.