IFRS 16

Leases Overview
WHY A NEW LEASING STANDARD?
Currently analysts adjust
financial statements foroff-
balance sheet leases

Under IFRS 16, companies

will bring these leases on
balance sheet, using a
common methodology

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MAJOR IMPACTS
FOR LESSEES

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG
International. Liability limited by a scheme approved under Professional Standards Legislation.
LESSEES FACE MAJOR CHANGES
Leases on balance sheet

Balance sheet P&L

Lease expense
Asset
Depreciation
= ‘Right-of-use’ of underlying asset
+ Interest
Liability
= Front-loaded total lease
= Obligation to make lease
expense
payments

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IMPACT ON BALANCE SHEET

Companies with operating

leases will appear to be
more asset-rich, but also
more heavily indebted

Asset Liability

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IMPACT ON PROFIT/LOSS

Total lease expense will

be front-loaded even
when cash rentals are
constant

Depreciation Interest
Cash rental payments

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IMPACT ON FINANCIAL RATIOS

Profit/loss Balance sheet Ratios

EBITDA Total assets Gearing

EPS Net assets Interest cover

(in early years) Asset turnover

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NEW DEFINITION

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG
International. Liability limited by a scheme approved under Professional Standards Legislation.
LEASE DEFINITION
The new on/off-balance sheet test
for lessees – a key judgement area

Lease
classification ON OFF
test

New standard Lease Service

Finance Operating
Old standard
lease lease

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LEASE DEFINITION

Contract, or part of a contract, that

conveys the right to use an asset for a
period of time in exchange for
consideration
(IFRS 16, Appendix A)

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LEASE DEFINITION – IDENTIFIED ASSET
No
The new definition Is there an identified asset?
increases focus on
 Identify asset can be specified explicitly
who controls the or implicitly
asset and may  No identified asset if supplier has
change which substantive right to substitute asset
contracts are leases • Practical ability (right & availability)
• Benefits economically from
exercising right to subscribe asset
 Identified asset is physically distinct
Contract does not contain a lease

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LEASE DEFINITION – CONTROL
No
Is there an identified asset?
Yes
No
Customer has right to substantially all the economic benefits?

 Primary output and any by-products

 Benefits from use – not ownership of asset

Contract does not contain a lease

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SOLAR FARM EXAMPLE

Company C Company D

20 yr purchase electricity Construction tax credits

Renewable energy credits

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LEASE DEFINITION – CONTROL
No
Is there an identified asset?
Yes
No
Customer has right to substantially all the economic benefits?
Yes
Who directs how and for what purpose the asset is used?

 Consider decision making rights that are most relevant to changing how
and for what purpose
 Examples include : type of output, when, where and whether to produce
 Protective rights of the supplier do not prevent the customer from having
right to direct the use Contract does not contain a lease
LEASE DEFINITION – CONTROL

Who directs how and for what purpose the asset is used?

Customer Predetermined Supplier

Customer
Yes No
 Operates the asset or
 Has designed the
asset?

Contract contains a lease Contract does not contain a lease

POWER PURCHASE EXAMPLE

• Company C acquires all the output from

cogeneration power plant owned by Company D

• What if:
i. Company C directs how and for what purpose?
ii. Company D directs how and for what purpose?

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NEW ACCOUNTING

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG
International. Liability limited by a scheme approved under Professional Standards Legislation.
LEASE RECOGNITION EXEMPTIONS

Two major optional

exemptions make
the standard easier Short term Leases of low
to apply leases value items

≤ 12 months ≤ USD 5,000

for example

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MEASURING THE LEASE LIABILITY

Present value of
Lease liability
= Present value of
lease rentals + expected
payments at
end of lease

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LEASE PAYMENTS
Fixed payments includes in-substance fixed payments / incentives
+
Variable lease payments only for index or rate / rate at commencement

+
Residual value guarantees at amount lessee expects to pay

+
Purchase option exercise price if lessee reasonably certain to exercise
+
Payments for terminating if lease term reflects termination by lessee
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VARIABLE LEASE PAYMENTS

Which variable lease payments are included in the lease liability?

Payments based on an Payments based on

index or rate turnover or usage

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MEASURING THE RIGHT-OF-USE ASSET

Lease liability

+
-
Initial direct costs
Right-of-use
asset = + Incentives rec’d

+
Prepayments

Restore/dismantle

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LESSOR ACCOUNTING

Lease classification
Lessor accounting test
remains similar to
current practice… Finance leases and
operating leases

but lacks consistency Consistent

with new lessee accounting model for
lessors and lessees
accounting model

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LESSOR ACCOUNTING

Wider changes have an impact

• Definition of lease
• Lease payment guidance
• Sale and lease back guidance
• Sub-lease guidance
• Modification accounting
• Disclosure requirements
Changes in contract terms and business practices
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SALE-AND-LEASEBACK

Is there
a sale?
IFRS 16 essentially kills Yes No
sale-and-leaseback as
an off-balance sheet
On-balance
financing structure On-balance
sheet financing,
sheet lease at
potentially at fair
cost
value (IFRS 9)

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MULTIPLE TRANSITION
OPTIONS

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG
International. Liability limited by a scheme approved under Professional Standards Legislation.
APPLYING THE NEW LEASE DEFINITION

Cost Comparability

Apply the new definition to all

contracts

OR
Grandfather existing contracts
and apply the new definition
only to new contracts

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APPLYING THE NEW STANDARD

A lessee can choose to

apply the standard… Cost Comparability

Retrospectively to all
accounting periods

OR

As a ‘big bang’ at the date of

initial application
EFFECTIVE DATE

Effective date Annual report

1 January 2019 31 December 2019

2016 2017 2018 2019 Mar June Sep Dec

Early adoption permitted Interim report

if IFRS 15 is adopted

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BROADER BUSINESS IMPACTS
Systems
Leasing
database
System solution
ERP integration Finance
Treasury
Transition
Covenants options
Credit rating Data collection
Regulatory Tax
capital (banks)
KPIs
IFRS 16
Accounting
change
Strategy Investor
Lease vs buy relations
Lease Analyst queries
structuring KPI’s (e.g. EPS)
Sale and Credit rating
leaseback
Employee
benefits
Management
remuneration
KPI’s 30