IFRS Manual of Accounting » 15 - Leases (IFRS 16) Intemational How should the retailer account for the key money paid? Payments from anew lessee to an ald lessee qualify as intial direct costs, and they are included in the initial measurement of the right-of-use asset ‘When determining the subsequent measurement of the right-of-use asset, one acceptable approach isto treat the key money asa separate component of the right-of-use asset when applying the depreciation requirements of LAS 16, as required by paragraph 31 of IFRS 16. Such a treatment, in line with paragraphs 43 and 44 of IAS 16, recognises thet the key money provides financial benefits over a period longer than the IFRS 16 lease term, Paragraph 52 of IAS 16 states that depreciation is recognised, provided that the residual value does not exceed the asset’s carrying amount, the retailer expects that the residual amount will be equal to, or exceed, the key money component, the depreciation charge will be zero for this component. [IAS 16 para 54] ‘An altemative approach is to treat the right-of-use asset (tha i, including the key money) as a single asset, viewing the key ‘money as linked to the rightof-use asset itself. The contract as a whole (including the key money) gives several rights to the tenant, which would not be distinguished under this approach, and the right-of-use asset his a residual value based on what the lessee expects to recover when it vacates the premises. Under this approach, subsequent increases in the expected recoverable amount of the key money will therefore inerease the residual value of the rightoF-use asset as @ whole, and hence reduce the total depreciation charge, Applying IFRS 16 to key money might representa eritical accounting judgement, in which case the lessee should consider the IAS 1 disclosure requirements. See chapter 4 para 152 for further details Ilustrative text - Accounting by lessees - Modification of a lease - FAQ 15.8.1 — What are examples of lease modifications? Publication date: 13 Dec 2019 toferonce to standard. IFRS 16 App A teference to standing text: 15.88 Industry: ‘There are many different reasons why the parties to a contract might decide to renegotiate and modify an existing lease contract during the lease term, One objective might be to extend or shorten the term of an existing contract (with or without changing the other contractual terms); another reason might be to change the underlying asset (for example, a lessee already leases two floors ofa building, and the parties agree to add a third one).New agreements could also be in-substance ‘modifications of an existing lease, For example, midway through a lease, the same patties enter into a new lease agreement for the same underlying asset commencing when the original lease ends. The original lease remains effective, without any changes. In substance, this is comparable to a modification of the existing lease which extends the lease term without adding the right to use more underlying assets, and it should be accounted for as a lease modification, Illustrative text - Accounting by lessees - Modification of a lease - for a modification that decreases the scope of a lease (example) FAQ 15.93.1 — Lessee accounting Publication date: 13 Dee 2019 ference to standard. IFRS 16 paras 45, 46, IFT (example 17 ference 10 standing text: 15,93 Industry: A lessee enters into a lease for 5,000 square metres of office space for 10 years. The lease payments are fixed at C50,000 per annum. After five years, the parties amend the contract to reduce the office space by 2,500 square metres. From year 6 ‘Copyright protected - see copyrant notices) wihin te document, For your own use only =o nol redetibute ‘These materials were downloaded from Inform (www. inform.pwe.com) under licence. page 78 / 104IFRS Manual of Accounting » 15 - Leases (IFRS 16) Intemational ‘onwards, the annual lease payments will be C30,000. At the beginning of year 6, the lessee’s incremental borrowing rate is ‘5% (assume that the rate implicit in the lease at that date is not readily determinable), The carrying amounts of the lease liability and right-of-use asset before modification are as follows: Right-of-use asset 184,002 Lease liability £210,618 How is the modification accounted for? ‘The value of the lease liability after the modification is C129,884 (© €30,000/1.05 + €30,000/1.052 + C30,000/1.053 + C30,000/1.054 + €30,000/1.055), Ina first step, the right-oF-use asset and the lease liability are reduced by 50%, because the original office space is reduced by 50%, The difference between these two amounts is recognised as a gain in profit or loss: Lease lability (50% of the carrying amount before modification) 105,309 Right-of-use asset (50% of the carrying amount before modification) 92,001 Gain 13,308 Ina second step, the right-of-use asset has to be adjusted to reflect the updated discount rate and the change in the consideration, Accordingly, the difference between the remaining lease liability (C105,309) and the modified lease liability (C129,884) is recognised as an adjustment tothe right-of-use asset: Right-of-use asset 24,575 Lease liability 24,595 Illustrative text - Accounting by lessees - Modification of a lease - FAQ 15.95.1 — How is an increase in scope without a corresponding increase in the lease consideration accounted for? Publication date: 13 Dee 2019 teference to standard: IFRS 16 para 45 ference 10 standing text: 15.98 Industry: A lessee enters into a lease for 5,000 square metres of office space for 10 years. The lease payments are fixed at C100,000 per annum. After five years, the parties amend the contract for an additional $,000 square metres. The annual lease payments increase to C150,000. The market rent for the additional 5,000 square metres is C100,000. At the beginning of year 6, the lessee’s incremental borrowing rate is 7% (assume that the interest rate implicit in the lease at that date is not readily determinable). ‘The parties decided to add an additional right of use (that is, for 5,000 square metres of office space) and increase the scope ofthe lease, However, the additional lease payments are not commensurate with the stand-alone price for the additional office space and any appropriate adjustments. Accordingly, the modification is not accounted for as a separate lease, but as aan adjustment to the original lease. The modified lease lability is calculated as the present value of the five remaining lease payments (C150,000 each), discounted using the lessee’s incremental borrowing rate atthe effective date ofthe lease ‘modification (7%). This results ina (revised) lease liability of C615,030, The difference between this amount and the carrying amount of the lease liability immediately before the modification ofthe lease is recognised as an adjustment to the right-ofuse asset. If however, the consideration for the additional office space is increased by C100,000 per annum to 200,000 per annum ‘Copyright protected - see copyrant notices) wihin te document, For your own use only =o nol redetibute ‘These materials were downloaded fom Inform (www. inform.pwe.com) under licence. page 79 / 104