The FASB and IASB decided that an intermediate lessor (that is, an entity that is both a lessee and a lessor of the same underlying asset) should account for a head lease and a sublease as two separate contracts unless those contracts meet the contract combinations guidance adopted by the Boards at the April 2014 joint Board meeting.
LeaseQuery Comments: Essentially, if a lessee enters into a lease and then subsequently subleases the asset to another lessee, then the two contracts (the initial lease and the sublease) would be treated as two different contracts.
The FASB decided that, when classifying a sublease, an intermediate lessor should determine the classification of the sublease with reference to the underlying asset (for example, the item of property, plant, and equipment that is the subject of the lease), rather than with reference to the right-of-use (ROU) asset arising from the head lease.
LeaseQuery Comments: So the test for capital leases should be determined based on the fair value of the underlying asset, NOT based on the fair value of the ROU asset.
The IASB decided that, when classifying a sublease, an intermediate lessor should determine the classification of the sublease with reference to the ROU asset arising from the head lease.
LeaseQuery Comments: Note that this is a difference from the FASB’s proposal.
The Boards decided that an intermediate lessor should not offset lease assets and lease liabilities arising from a head lease and a sublease that do not meet the respective IFRS and GAAP financial instruments requirements for offsetting.
LeaseQuery Comments: The assets (ROU) and liabilities (lease liabilities) that result from subleases should not be netted against one another. Basically, the liabilities from the head lease should not be netted against any assets from the sublease or vice versa.
The Boards decided that an intermediate lessor should not offset lease income and lease expense related to a head lease and a sublease, unless it recognizes sublease income as revenue and acts as an agent (assessed in accordance with the “principal-agent” guidance in the recently published standard on revenue from contracts with customers).