1982: IAS 17 originally issued

Substance over Form Present Value

Essentially unchanged for 27 years

2016: New standard IFRS 16

Operating vs. Finance Concept of Different reporting in the

Lease “Right-to-Use” financial statements

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 IFRS 16 Leases => 1 January 2019
=> IAS 17 Leases will no longer apply
=> early application only with IFRS 15!

Objective => To specify the principles for recognition, measurement

presentation and disclosure of LEASES

 IFRS 16 does NOT apply to:

 Leases to explore for / use of minerals, oil, natural gas and similar

 Leases of biological assets (IAS 41)  Service concession arrangements (IFRIC 12)

 Intellectual property licenses (IFRS 16)  Rights under licensing agreements (IAS 38)

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 What is a lease?

=> contract that conveys the right to use an asset for a period of time
in exchange for consideration

asset

CONTRACT lessor lessee

consideration

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 What is a lease?

=> contract that conveys the right to use an asset for a period of time
in exchange for consideration

 In most arrangements => Very straightforward

 In some arrangements => Judgment necessary to assess

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 Does an arrangement contain a lease?

= throughout the period of use, the customer has both of the following rights
to the identified asset:

 The right to obtain  The right to obtain

substantially all substantially all

Economic benefits

- Exclusive right of use - Decisions about why and

how the asset is used
- Including its primary output - Protective rights do not limit
and by-products the right to direct the use

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 Does an arrangement contain a lease?

= throughout the period of use, the customer has both of the following rights
to the identified asset:

Explicitly Implicitly

Capacity portion = identified asset IF:

 Physically distinct OR  Substantially all of the capacity
Unit XYZ    90% 
Warehouse Pipeline
60 m2  50% 

OR
4/8/2019 The Hisab
 Does an arrangement contain a lease?
NO
START Q1: Is there an identified asset?
YES

Q2: The right to obtain substantially all NO

of the economic benefits?
YES
Customer Q3: The right to direct the asset’s use – Supplier
customer? Supplier? Neither party?
Neither
YES
Q4: The right to operate the asset –
customer?
NO
YES NO
Q5: Did the customer design the asset NO
LEASE
(predetermined use)? LEASE
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 Does an arrangement contain a lease?

=> An entity accounts for a lease component SEPARATELY from a non-lease component if:

 The lessee can benefit from  The asset is NOT highly dependent on or
the use of asset interrelated with other assets in the contract

- 4-year contract
- Monthly: CU 10 000 Rent of equipment Maintenance Admin

- Total: CU 480 000 CU 9 400 CU 500 CU 100

=> Allocate CU 480 000 to rent and maintenance based on relative stand-alone prices
=> LESSEES do not need to separate if they elect not to

4/8/2019 The Hisab

 IFRS 16: Key terms
Dates:

Inception of a contract Commencement date

Earlier of: = when lessor makes an underlying asset

available for use by a lessee

 Date of lease  Date of commitment

agreement by the parties

=> Assessment of the contract is made => Accounting starts

- Contract signed: 20 Jan 20X1 ✔ Assess contract on 20 Jan 20X1

- Asset taken: 1 Mar 20X1
- 1st rental payment: 1 May 20X1 ✔ Recognize right-of-use asset on 1 Mar 20X1
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 IFRS 16: Key terms
Lease term

= non-cancellable period of the lease

+ period covered by an option to extend (if option exercised)
+ period covered by an option to terminate (if option not exercised)

=> Assess whether the option will be exercised:

✔ Terms and conditions of option ✔ Costs of terminating the lease

✔ Leasehold improvements ✔ Importance of underlying asset

- Non-cancellable term: 3 years ✔ Lease term = 3 years

- Extension for another 2 years
possible at market rates ✔ Lease term = 5 years
- Lessee built expensive glass partitions
4/8/2019 The Hisab
 IFRS 16: Key terms
Lease payments

= payments made by a lessee to a lessor for the right-of-use

of an underlying asset during the lease term:

✔ Fixed payments (also in-substance fixed payments) less any lease incentives

✔ Variable payments depending on an index or a rate

=> Include at prevailing rate/index at measurement date; remeasure only when
changed
✔ Exercise price of purchase option (if to be exercised)
✔ Penalties for terminating the lease
✔ Residual value guarantees

4/8/2019 The Hisab

 Leases: Accounting by lessees

!!! No classification of leases !!!

AT THE COMMENCEMENT

Right-of-use asset Lease Liability

Lease payments
✔ Amount for lease liability
not paid at the
✔ Lease payments before/on commencement
commencement date – lease incentives date
✔ Initial direct costs
✔ Estimate of dismantling costs
Interest rate implicit in the lease

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 Leases: Accounting by lessees

!!! No classification of leases !!!

AT THE COMMENCEMENT

Right-of-use asset Lease Liability

Except for (optional)

Lease term < 1 year Underlying asset of

low value when new

=> Lease payments on a straight-line (or another systematic) basis

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 How to determine the appropriate Discount rate

Lessor Lessee

=> Interest rate implicit in the lease (IRR) => Interest rate implicit in the
lease (IRR) (difficult to determine)

=> Incremental borrowing rate

✔ PV of lease payments ✔ FV of underlying asset
✔ Similar term and security
✔ PV of unguaranteed ✔ Lessor’s initial direct ✔ Observable rates
residual value cost

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 Leases: Accounting by lessees
AFTER THE COMMENCEMENT

Right-of-use asset Lease Liability

constant periodic
Debit: Credit: interest rate
P/L-Depreciation ✔ Interest on the LL
ROU-Accumulated
Ex. depr

Debit: P/L Credit: Lease

Interest Liability
✔ Cost model (IAS 16)
✔ Fair value model (IAS 40) ✔ Reduction of the LL
✔ Revaluation model (IAS 16)
✔ Impairment tests (IAS 36) Debit: Lease Credit: Cash/bank
4/8/2019 The Hisab Liability
 Leases: Accounting by lessees

Complications

Variable lease
payments

Do they depend on the index or rate?

✔ Included in the lease payments ✔ Excluded from the lease payments

✔ Measured at the rate prevalent ✔ In profit or loss

at the measurement date

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 Leases: Accounting by lessees

Complications

Initial direct costs

= incremental costs of obtaining a lease that would NOT have been incurred without the lease
(except for manufacturer or dealer lessors)

✔ Legal fees (contract drafting…) ✗ Internal costs

✔ Commissions ✗ Certain legal advices

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 Leases: Accounting by lessees

Complications Not below 0,

rest in P/L

✔ After the commencement date: => Lessee re-measures

Lease liability As an adjustment Right-of-use asset

HOW? Discount revised lease payments

Revised discount rate Unchanged discount

rate

WHEN? ✔ Change in lease term ✔ Change in amounts for residual value

✔ Change in option to purchase ✔ Change in future payments due to
assessment index/rate
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 Leases: Accounting by lessees

Lease modifications

= change in the scope, or consideration that was NOT part of original terms

NO
Are the rights added to the lease contract to LEASE MODIFICATION
use one or more underlying assets?
YES
=

Does the consideration increase NO CHANGE IN EXISTING

commensurate with the stand-alone price for LEASE
the increase in scope? (any adjustments
reflect circumstances of contract)
YES

LEASE MODIFICATION =
SEPARATE LEASE
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 Leases: Accounting by lessees

Lease modifications

= change in the scope, or consideration that was NOT part of original terms

Lessee accounts:

✔ Allocates the consideration in LEASE MODIFICATION

✔ Determines the lease term of =

✔ Applies revised discount rate CHANGE IN EXISTING
LEASE

✔ Adjustment to right-of-use asset

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 Leases: Presentation & Disclosures (Lessee)

Presentation:

✔ Present right-of-use asset separately from other assets => Or disclose in the notes
✔ Present lease liabilities separately from other liabilities

✔ Present interest on the lease liability separately from depreciation of ROU asset

✔ Cash flows:

• Payments for principal: => Financing activities

• Payments for interest: => Choice (financing or operating)

• Payments for short-term leases, => Operating activities
low-value asset leases and variable
payments not within lease liability

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 Leases: Presentation & Disclosures (Lessee)

Presentation:

1. Disclosures of assets, liabilities, expenses and cash flows:

✔ In tabular format

✔ Depreciation of ROU by class ✔ Income from subleasing of ROU assets

✔ Interest expense on lease liabilities ✔ Cash outflow for leases
✔ Expense related to short-term leases ✔ Additions to ROU assets
✔ Expense related to low-value leases ✔ Gains/losses froms sale and leaseback
✔ Expense related to variable LP not within ✔ Carrying amount of ROU by class

4/8/2019 The Hisab

 Presentation / disclosures
Presentation
A lessee shall either present in the statement of financial position, or disclose in the
notes:
(a) right-of-use assets separately from other assets.
(b) lease liabilities separately from other liabilities.
Disclosures
(a) depreciation charge for right-of-use assets by class of underlying asset;
(b) interest expense on lease liabilities;
(c) the expense relating to short-term leases;
(d) the expense relating to leases of low-value assets;
(e) the expense relating to variable lease payments not included in the
measurement of lease liabilities;
(f) income from subleasing right-of-use assets;
(g) total cash outflow for leases;
(h) additions to right-of-use assets;
(i) gains or losses arising from sale and leaseback transactions; and
(j) the carrying amount of right-of-use assets at the end of the reporting period by class of
underlying asset
In preparing the maturity analyses, an entity uses its judgment to determine an appropriate
number of time bands.
(a) not later than one month;
(b) later than one month and not later than three months;
(c)
4/8/2019 later than three months and not later than one year; and
(d) later than one year and not later than five years. The Hisab
 Accounting by lessors:
Classification of Leases

Are risks and rewards of ownership transferred to lessee?

RISKS REWARDS

Finance Lease Operating Lease

4/8/2019 The Hisab

 Accounting by lessors:
Classification of Leases

Situations: Ownership transferred by the end of lease term

Option to purchase the asset at price < fair value
Lease term => major part of economic life of asset
Present value of lease payments => close to fair value
Leased assets are of specialized nature

Indicators: If lessee can cancel the lease → lessor’s losses are borne by lessee
Gains or losses from fluctuation accrue to the lessee
Lessee can continue the lease for secondary period at rent < market
rent

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 Accounting by lessors:
Classification of Leases
Land + Building =>Land = indefinite economic life

Separate classification

LAND BUILDING

Operating lease unless title

passes at the end of lease term Operating or finance lease

G Allocation of lease payments = based on proportion of fair values

4/8/2019 The Hisab
 Accounting by lessors:
Finance lease

AT THE COMMENCEMENT

DEBIT: CREDIT:
Lease Receivable PPE

Net Investment in the Lease: CREDIT:

Payments not paid
✔ Fixed payments P/L Gain on sale of PPE
at the
(or Debit if loss)
✔ Variable payments (index) commencement
✔ Residual value guarantees date
+ initial direct costs
✔ Exercise price of purchase option
✔ Penalties for terminating
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 Accounting by lessors:
Finance lease

AT THE COMMENCEMENT

LR: Lease Payments

Reduction of LR Finance income

Debit: Cash Credit: Lease Receivable

P/L-Interest Income

Constant periodic rate of return

Apply IFRS 9 to the net investment in the lease (impairment, de-recognition)

Lease re-measurement and modification => Similar as lessees
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 Accounting by lessors:
Finance lease

Manufacturer / Dealer Lessors

Selling profit Finance lease

✔ Revenue – cost of sales ✔ Initial direct costs in P/L

✔ As outright sales under IFRS 15 ✔ If artificially low interest rate => selling
profit is restricted

4/8/2019 The Hisab

 Accounting by lessors:
Operating lease

Lease payments Underlying asset

✔ Revenue on straight-line (or other) basis ✔ Initial direct costs are added to the asset

✔ Depreciation

Manufacturer / Dealer Lessors => No selling profit

4/8/2019 The Hisab

 Lease Modification: LESSOR

Finance lease Operating lease

Adding one or more

assets
New lease
(whole contract)
No Yes

The modification Stand alone price

results in lease
being classified as
operating lease Yes

Yes Separate lease

A/c for modification No

as new lease from
modification date
by measuring CV of
IFRS 9
asset as net
investment in lease
4/8/2019 The Hisab
 Accounting by lessor:
Sublease

Original lessee
Lessor Head lease Sublease Lessee
Intermediate lessor (sub-lessee)

Type of sublease Accounting by the intermediate lessor

Operating Keeps recognizing the head lease as before

Finance Debit Net investment in the lease / Credit ROU asset

(difference in profit or loss)

Head lease = short-term Recognition exemption; sublease = operating

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 Sale & Leaseback

Sells an asset

Seller = lessee Buyer = lessor

Leases the same asset back

LEASE !!!

4/8/2019 The Hisab

 Sale & Leaseback

Is the transfer of asset a sale under

IFRS 15 Revenue from ?
Contracts with Customers

✔ Seller (lessee): ✔ Seller (lessee):

• Right-of-use asset at proportion • Continues to recognize an asset
of the previous carrying amount • Financial liability (IFRS 9)
• Gain/loss related to the
transferred rights only
✔ Buyer (lessor): ✔ Buyer (lessor):
• Asset under applicable standards • Financial asset (IFRS 9)
• Lease under IFRS 16
✔ Leaseback:
•4/8/2019
As for any other lease (adjustment for off-market
PAC terms)
 Sale & Leaseback

Not Sale – IFRS 15 Sale –IFRS 15

LOAN securitized by asset Gain/ loss Gain/ loss

Right to use retained transferred

Seller keeps + Financial

asset liability – IFRS 9

(CV of asset / [(FV of asset-CV of (FV of asset –

FV of asset) x asset) / FV of asset]x CV of asset) –
PV of L. PV of L. Liability Gain retained
Payments
Excess= SP – FV Loan
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 Leases: Disclosures (Lessor)

✔ In tabular format

=> For finance leases: => For finance leases:

✔ Selling profit or loss ✔ Lease income

✔ Finance income on net inv. in the lease ✔ Income related to variable LP
not depending on an index/rate
✔ Income related to variable LP not within LR

✔ Additional quantitative and qualitative disclosures

✔ Maturity analysis (refer to examples)

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 IFRS 16 How to implement?
= mandatory effective date
(earlier application with IFRS 15 is permitted)

How to make a transition?

Full retrospective adoption Modified retrospective adoption

= retrospectively to each prior reporting period
✔ No need to reassess whether contract
is/contains a lease at the date of initial application
(if IAS 17/IFRIC 4 applied)
= retrospectively with cumulative effect at the
date of initial application
✔ Comparatives presented under prior IFRS
✔ IFRS 16 applied to existing and new contracts
onwards
✔ Adjustment to opening retained earnings

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