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IFRS 16 Leases

Presented by:

Priyoshini Fernando
Ernst & Young
God bless
 DEVELOPMENT

August 2010: January

Exposure 2016:
March 2009: Final
Draft
Discussion standard
July 1996: paper
G4+1 - Leases:
Implementation
of a New
Approach

• Effective date: 1 January 2019

(early adoption permitted in
conjunction with IFRS 15)

13 July 2020 IFRS 16 Leases 2

 OVERVIEW

13 July 2020 IFRS 16 Leases 3

 Definition of a lease

IAS 17.4 IFRS 16 Appendix A

An agreement whereby the A contract, or part of a

lessor conveys to the contract that conveys the

us
lessee in return for a payment right to an asset
e
asset
or a series of payments the (the underlying for
)
us perio exchang
right to e an asset for a of time in
d e
perio for consideration
an agreed of time
d
Defining characteristic of a lease (i.e. convey right to use an asset)
has not
13 July changed
2020 IFRS 16 Leases 4
 Overview

IFRS 16 Appendix A

Terms defined in other standards and used in IFRS 16

with the same meaning:
Consistent with the
definition in IFRS 15

CONTRACT: An agreement between two or more

parties that creates enforceable rights and
obligations

13 July 2020 IFRS 16 Leases 5

 Overview
Rights & Obligations arising from a lease: LESSEE

Description of right Control Past Event FEB s Asset?

Right to use Legally enforceable Signing of Yes Yes

machinery during right established by lease
lease term lease contract contract and
delivery of
asset
Description of
Control Past Event FEB s Liability?
Obligation
Obligation to make Legally enforceable Delivery of Yes Yes
specified payments obligation established asset
over lease term. by lease contract

Obligation to return Legally enforceable Delivery of No No

machinery at end of obligation established asset
lease term. by lease contract
13 July 2020 IFRS 16 Leases 6
 Overview
Rights & Obligations arising from a lease: LESSOR

Description of right Control Past Event FEB s Asset?

Right to receive Legally enforceable Signing of Yes Yes

payments during right established by lease
lease term. lease contract contract and
delivery of
asset
Right to return of Legally enforceable Delivery of No No
machinery at end of obligation established asset
lease term. by lease contract

Description of
Control Past Event FEB s Liability?
Obligation
Obligation to permit Legally enforceable Signing of No No
use of machinery obligation established contract outflow
during lease term. by lease contract of FEB

13 July 2020 IFRS 16 Leases 7

 Overview

Statement of Income Statement of

Financial Position Statement Cashflows

Dr
Right of Use (RoU) Depreciation or
Asset Amortization

Cr
Interest Expense Repayment of
Lease Liability
(Finance Cost) principle

Interest Paid

13 July 2020 IFRS 16 Leases 8

How will the numbers work?

IFRS 16 Leases 9
How will the numbers work?

IFRS 16 Leases 10
 Trivia

Which statement is most appropriate ?

(a) Under IFRS 16, almost all leases are required to be

recognized in the balance sheet.

(b) Under IFRS 16, all material leases are required to be

recognized in the balance sheet.

(c) Under IFRS 16, all leases are required to be

recognized in the balance sheet.

IFRS 16 Leases 11
 Recognition & measurement
exemptions
Exemption for short – term leases:
• Short term lease has a lease term of 12 months or less; lease that contains
a purchase option is not a short-term lease

• Accounting policy choice available only to lessees:

A lessee may elect not to apply the requirements in paragraphs 22–49 to
short-term leases. If so, the lessee shall recognize the lease payments
associated with those leases as an expense on either a straight-line basis
over the lease term or another systematic basis. The lessee shall apply
another systematic basis if that basis is more representative of the pattern
of the lessee’s benefit (paragraph 6)

• Exemption to be applied by class of underlying assets

• Also applies in business combinations (Acquiree is lessee):

Lease term ends within 12 months after acquisition date

Acquirer can apply short-term leases exemption
Subsequent periods:
Lease modification
Consider lease to be a new lease
Change in lease term
12
 Recognition & measurement
exemptions
Exemption for leases of which underlying asset is of a low value:

• Assets with a value, when new, of USD 5,000 or less (as per BC
paragraph100)

• Accounting policy choice available only to lessees

A lessee may elect not to apply the requirements in paragraphs
22–49 to leases of low value. If so, the lessee shall recognize the
lease payments associated with those leases as an expense on
either a straight-line basis over the lease term or another
systematic basis. The lessee shall apply another systematic basis
if that basis is more representative of the pattern of the lessee’s
benefit

• Exemption to be applied on a lease-by-lease basis

• Also applies for contracts of Acquiree in a business combination

(i.e. no asset (liability) for favourable (unfavourable) contracts)
IFRS 16 Leases 13
 Effective date and withdrawal of other
standards
• An entity shall apply this standard for annual reporting periods
beginning on or after 1 January 2019. (IFRS 16.C1)

• Date of initial application: Beginning of annual reporting period

entity first applies IFRS 16.

• Therefore, what is the “Date of Initial Application” of IFRS 16?

• A. 1 January 2019 • B. 1 January 2018

• C. I do not know

13 July 2020 IFRS 16 Leases 14

 TRANSITION

13 July 2020 IFRS 16 Leases 15

 Transition
• Adopt IFRS 16 for all periods commencing on or after 1 January 2019.

• Earlier application permitted if entity :

(a) Discloses that fact
(b) Applies IFRS 15 Revenue from Contracts with Customers at or
before date of initial application of IFRS 16.

• Date of initial application (“DOIA”) – beginning of the annual reporting

period the entity first applies IFRS 16. Example

Financial year DoIA Reporting period we first apply

IFRS 16
1st January to 31st 1st January 2019 1st January 2019 to 31st December
December 2019
1st April to 31st March 1st April 2019 1st April 2019 to 31st March 2020
16th June to 15th July 16th June 2019 16th June 2019 to 15th July 2020
13 July 2020 IFRS 16 Leases 16
 Transition

• Practical expedient :
(a) Both lessees & lessors are permitted to “grandfather”
previous conclusions under IAS 17 and IFRIC 4 for all
contracts existing as at DOIA.
(b) IFRS 16 requirements to be applied only for identification of
leases of contracts entered into (or modified) on or after
DoIA.
Practical expedient applied as at DoIA?
Previously identified as Yes No
An operating lease Apply IFRS 16 Re-examine to
determine if contract
An finance lease Apply IFRS 16
contain a lease
A non – lease IFRS 16 is not
contract applicable.

13 July 2020 IFRS 16 Leases 17

 Case study
An entity (lessee) entered into 3-year lease of retail space beginning at 1
January 2017 with three annual lease payments of CU1,000,000 due on 31
December 2017, 2018 and 2019, respectively. The lease is classified as an
operating lease under IAS 17.

The entity initially applies IFRS 16 for the first time in the annual period
beginning at 1 January 2019 ["Date of initial application" or "DoIA"].

The incremental borrowing rate at the DoIA is 3% p.a.. The incremental

borrowing rate at the commencement of the lease was 6% p.a.

The right-of-use asset is subject to straight-line depreciation. For simplicity

let's assume, Lessee did not incur initial direct costs, there were no lease
incentives and there were no requirements for the lessee to dismantle and
remove the underlying asset, restore the site on which it is located or restore
the underlying asset to the condition under the terms and conditions of the
lease;

13 July 2020 IFRS 16 Leases 18

 Case study

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 Fully Retrospective Approach

IFRS 16. C5 (a)

• Fully retrospective approach applies IAS 8 Accounting Policies, Changes in

Accounting Estimates and Errors. An entity electing to adopt the standard using
the full retrospective method must apply the requirements of IFRS 16 to each
period presented in the financial statements.

• Therefore, if Financial Statements are prepared for year ended 31st December
2019, we will have to present:
• A Balance Sheet as at 31st December
2019
• A Balance Sheet as at 31st December
2018
• A Balance Sheet as at 1st January 2018

• An Income Statement for YE 2019

• An Income Statement for YE 2018
13 July 2020 IFRS 16 Leases 20
 Fully retrospective approach

Right of Use Asset Lease Liability

Discount rate Lease commencement Lease commencement

Lease payments Lease commencement Lease commencement

Necessary for Fully

Retrospective
Approach

13 July 2020 IFRS 16 Leases 21

 Worked example – Fully Retrospective
approach

13 July 2020 IFRS 16 Leases 22

 Case study

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 Modified Retrospective Approach

IFRS 16. C5 (b)

• An entity that elects the modified retrospective method would apply IFRS 16
retrospectively with the cumulative effect of initially applying the standard
recognized as an adjustment to the opening balance of retained earnings (or
other component of equity) at the date of initial application.
• The comparative information for each of the primary financial statements would
not have been restated and would have been presented based on the
requirements of previous standards. (E.g. IAS 17, IFRIC 4, etc.)

• There is also no need to present a statement of financial position as at

commencement of earliest comparative period presented (E.g., no third balance
sheet as at 1st January 2018 ).

• The cumulative effect of initially applying the standard would have been
recognized as an adjustment to the opening balance of retained earnings (or
other component of equity, as appropriate) as at 1 January 2019 in the statement
of changes in equity for the year ended 31 December 2019.

13 July 2020 IFRS 16 Leases 24

 IFRS 16.C8
If a lessee elects to apply this Standard in accordance with paragraph C5(b), the
lessee shall:.

(a) Recognize a lease liability at the date of initial application for leases previously
classified as an operating lease applying IAS 17. The lessee shall measure that lease
liability at the present value of the remaining lease payments, discounted using the
lessee’s incremental borrowing rate at the date of initial application

(b) Recognize a right-of-use asset at the date of initial application for leases
previously classified as an operating lease applying IAS 17. The lessee shall choose,
on a lease-by-lease basis, to measure that right-of-use asset at either:

(i) its carrying amount as if the Standard had been applied since the
commencement date, but discounted using the lessee’s incremental
borrowing rate at the date of initial application; or
(ii) an amount equal to the lease liability, adjusted by the amount of any
prepaid or accrued lease payments relating to that lease recognized in the
statement of financial position immediately before the date of initial
application
13 July 2020 IFRS 16 Leases 25
 Modified Retrospective Approach -
B1
Right of Use Asset Lease Liability

Discount rate DoIA DoIA

Lease payments Lease commencement DoIA

*DoIA – Date of Initial Application

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 Worked example: Modified
Retrospective approach - B1

13 July 2020 IFRS 16 Leases 27

 Case study

13 July 2020 IFRS 16 Leases 28

 Modified Retrospective Approach -
B2

Right of Use Asset Lease Liability

Discount rate DoIA DoIA

Lease payments DoIA DoIA

*DoIA – Date of Initial Application

13 July 2020 IFRS 16 Leases 29

 Worked example : Modified
Retrospective approach - B2

13 July 2020 IFRS 16 Leases 30

 Illustrative disclosures

The following are some of the common disclosure requirements of IFRS 16.
They have been provided only for the purpose of illustration only.

For the purpose of these illustrations, it is assumed financial year end of the
Reporting Entity is 31st December 2019. Date of initial application is 1st
January 2019.

13 July 2020 IFRS 16 Leases 31

Accounting policy – extracts of illustrative
disclosures
Accounting policy – extracts of illustrative
disclosures
Accounting policy – extracts of illustrative
disclosures
Accounting policy – extracts of illustrative
disclosures
 Accounting policies – extracts of illustrative
disclosures
IAS 1. 122

Estimating IBR is presented as an illustration

of significant accounting judgement. It is
necessary for preparers to include all other
significant judgements, as appropriate.

13 July 2020 IFRS 16 Leases 36

 Maturity analysis for lease liabilities –
extracts of illustrative disclosures
IFRS 7. 39 and B11D

The contractual amounts disclosed in the maturity

analyses as required by paragraph 39(a) and (b)
are the contractual undiscounted cash flows. E.g.
gross lease liability (before deducting finance
charge)

13 July 2020 IFRS 16 Leases 37

Right of Use Asset – extracts of illustrative
disclosures
 Lease liability – extracts of illustrative
disclosures

13 July 2020 IFRS 16 Leases 39

 Effect on profit (loss) disclosures – extracts
of illustrative disclosures

13 July 2020 IFRS 16 Leases 40

 Transition: Fully retrospective approach –
extracts of illustrative disclosures
IAS 8.28 (f)

13 July 2020 IFRS 16 Leases 41

Transition: Fully retrospective approach –
extracts of illustrative disclosures
IAS 8.28 (f)
 Transition: Modified retrospective approach
– extracts of illustrative disclosures

13 July 2020 IFRS 16 Leases 43

 Transition: Modified retrospective approach
– extracts of illustrative disclosures

The weighted average incremental borrowing rate applied to lease liabilities recognized
in the statement of financial position as at 1 January 2019, and an explanation of any
difference between the discounted operating lease commitments as at 31 December
2018 and the lease liabilities as at 1 January 2019, as required by IFRS 16.C12, would
have been disclosed.
 Transition

Lessor

• Lessor in general not required to make adjustment on transition.

Intermediate lessor:
• Reassessment of ongoing operating subleases
• If operating subleases now have to be classified as finance
leases, lessor shall account for sublease as new finance lease
entered into on date of initial application

13 July 2020 IFRS 16 Leases 45

 Effective date and withdrawal of
other standards

What would IFRS 16 supersede?

IAS 17 Leases;
IFRIC 4 Determining whether an arrangement
contains a lease;
SIC – 15 Operating Leases – Incentive;
SIC – 27 Evaluating the Substance of
Transactions involving the Legal Form of a Lease;

13 July 2020 IFRS 16 Leases 46

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13 July 2020 IFRS 16 Leases 47

 OBJECTIVE & SCOPE

13 July 2020 IFRS 16 Leases 48

 Objective of IFRS 16

• IFRS 16 contains principles for recognition, measurement,

presentation and disclosure of leases.

• Objective: ensure that lessees and lessors provide

relevant information in a manner that faithfully represents
lease transactions. Therefore, users are provided a basis
to assess effect leases have on financial position,
financial performance and cash flows of an entity.

• Entity shall consider terms & conditions of contracts and

all relevant facts and circumstances when applying the
IFRS 16.

13 July 2020 IFRS 16 Leases 49

 SCOPE

All leases are in scope of IFRS 16, EXCEPT for:

Leases to explore for or use non – regenerative resources Out - of - Scope
Biological assets within scope of IAS 41 Out – of - scope
Service concession arrangements within scope of IFRIC Out – of - scope
12
Licenses of intellectual property granted by lessor within Out – of - scope
scope of IFRS 15
Rights held by lessees under licensing agreements Out – of - scope
(motion picture films, patents, copyrights,...etc.)
Other intangible assets Policy choice for
lessees

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 IDENTIFYING A LEASE

13 July 2020 IFRS 16 Leases 51

 Lease

CONTRACT

IDENTIFIED
RIGHT TO USE
ASSET
13 July 2020 IFRS 16 Leases 52
 Identifying
Identified Asset a lease

Specific identifiability

• Explicitly specified in contract, or Implicitly specified by

customer;

• Physically distinct. If not, represents substantially all of

the capacity of underlying asset.

13 July 2020 IFRS 16 Leases 53

 Identifying
Identified Asset a lease

• Explicitly specified in contract:

E.g. 1: Vehicle: Honda CR – V 2018 VTi – L 2WD

brand – new brilliant blue 7 - seater bearing
Vehicle Identification Number (VIN)
3H3tXB69CWDY 967474 / Engine Number
72WXB70447.

13 July 2020 IFRS 16 Leases 54

 Identifying
Identified Asset a lease

• Implicitly specified by customer:

E.g. Falcon Machine Tools Ltd. (FMT) is machine tool manufacturer. ACE
Engineering Services (ACE) is a key customer of FMT.

FMT has only one Flat – Bed CNC Lathe

machine model DMTG CKE 6150 - CKE 6166
capable of satisfying ACE’s specific
requirement for a particular type of precision
tool. Such Lathes require a significant
investment. The Lathe machine can produce
only 5,000 units of that specific precision
tool per set – up / day.

ACE requires 250,000 units of that precision

tool by 4th November 2020. This requirement
can be satisfied only if the Lathe machine is
used on a full – time basis over a 50 – day
period.
13 July 2020 IFRS 16 Leases 55
 Identifying
Identified Asset a lease

• Physically distinct:

10 storey mixed development

in the heart of Kathmandu
valley.

10th Floor
9th Floor
…th Floor
…th Floor
…rd Floor
2nd Floor
1st Floor
Ground Floor
13 July 2020 IFRS 16 Leases 56
 Identifying
Identified Asset a lease

• Physically distinct:
N th Floor

13 July 2020 IFRS 16 Leases 57

 Identifying
Identified Asset a lease

If not, represents substantially all of the capacity of

underlying asset

Fiber Optic Cable Gas Pipe line

13 July 2020 IFRS 16 Leases 58
 Identifying a
Identified Asset lease

Assess as at date of inception

based on all facts and
circumstances.
Supplier has no
substantive right to
substitute underlying
asset

13 July 2020 IFRS 16 Leases 59

 Identifying
Identified Asset a lease

Specified explicitly or IDENTIFIED Supplier has no substantive

implicitly ASSET right of substitution
Supplier’s right to substitution is
substantive if –

• Supplier has practical ability to

substitute
and
• Supplier would benefit
economically from substituting

Practical ability:

• Supplier has right to substitute

asset
and
• Alternative assets are readily
available or could be sourced
13 July 2020 IFRS 16 Leases 60
within a reasonable period of time
 Supplier’s Substitution Identifying
a lease
Rights
E.g. The Case of a Medical Students’ Hostel
The boy’s hostel of the Faculty of Medicine,
Colombo is situated at Ward Place, next to
Carey College, Colombo. This is occupied
by approx. 388 boys. It has easy access to
the Colombo Medical Faculty and National
Hospital of Sri Lanka. It is a property of the
University of Colombo. For academic
activities of the students there are many
facilities such as a study area, a computer
room etc. There is one TV room and a
newspaper table for the leisure time of the
students. There is also a gymnasium for the
students to improve their physical fitness.
Food for the students is supplied by a chummery system and there's also
a canteen which is functioning from 6.00 a.m. to 12 midnight. The hostel
is maintained by the Bloem committee, which see to the development
and maintenance of the hostel facilities.
13 July 2020 IFRS 16 Leases 61
 Supplier’s Substitution Identifying a
lease
Rights

Supplier’s substitution rights are not

substantive where -

• Right relates to substituting asset

for technical upgrade or repair
(when asset is not working
Assessment whether
properly)
substitution rights are
substantive will exclude
• Substitution right is exercisable on future events not
or after a particular date or on
considered likely to
occurrence of a future event
occur

• When lessee cannot readily

determine whether right is
substantive (Therefore, right is
presumed not substantive)
13 July 2020 IFRS 16 Leases 62
 Identifying
Definition of a lease a lease

1 There is an identified asset

AND
Contract conveys the right to control the use of an
2
identified asset

Customer’s right to obtain substantially all economic

benefits from use of the identified asset throughout
the period of use,
AND
Customer’s right to direct the use of identified asset
throughout the period of use
13 July 2020 IFRS 16 Leases 63
 Right to control use Identifying
a lease
of identified asset
Customer shall have right to obtain substantially all economic
benefits throughout period of use.

• Economic benefits from use of an asset include its primary output

and by-products (including potential cash flows derived from these
items), and other economic benefits from using the asset that could
be realized from a commercial transaction with a third party.

• Example:
Power purchase agreements often comprise the sale of multiple
products, which may include energy, capacity, steam, renewable
energy credits, and ancillary services.

13 July 2020 IFRS 16 Leases 64

 Right to control use Identifying
a lease
of identified asset
Customer has right to direct use throughout period of use if –

A. Customer has right to direct how and for what purpose asset is
used throughout the period of useProtective rights
of supplier do not prevent customer
from having right to direct use
OR
E.g. Rights to protect supplier’s interest
B. Relevant decisions arein asset or other assets, to protect its
predetermined
personnel, or to ensure the supplier’s
AND
compliance with laws or regulations
• Customer has right to operate asset throughout period of use,
OR
• Customer designed the asset (or specific aspects of asset) in a
way that predetermines how and for what purpose the asset will
be used
13 July 2020 IFRS 16 Leases 65
 Right to control use Identifying
a lease
of identified asset
Customer has right to direct use throughout period of use if –

A. Customer has right to direct how and for what purpose asset is
used throughout the period of use

E.g. Manish operates a pop – corn stall at the foyer of Fcube Cinema. Pop –
corn is produced by a portable pop – corn vending machine leased by
Manish.
Type of output produced E.g. Sweet, Caramel, Cheesy, perfect Buttery, Spicy

When output is produced E.g. 10.30 am, 1.30 am, 4.30 p.m., 7.30 p.m.

Where output is produced E.g. At the foyer or at his residence

Whether output is E.g. No of packets per type of popcorn

produced and quantity of
output
13 July 2020 IFRS 16 Leases 66
 Right to control use Identifying
a lease
of identified asset
Customer has right to direct use throughout period of use if –
B. Relevant decisions are predetermined
AND
• Customer has right to operate asset throughout period of use,
OR
• Customer designed the asset (or specific aspects of asset) in a
way that predetermines how and for what purpose the asset will
be used

Example: The case of Royal Lace Nepal

Royal Lace Inc. is a leading manufacturer of embroidered lace located in

Paris, France.
An application was made by its subsidiary in Nepal, Royal Lace Nepal, to the
Investment Board Nepal requesting to set up / conduct and operate a
business to manufacture embroidered lace (“business”) in collaboration with
Royal Lace Inc.
13 July 2020 IFRS 16 Leases 67
 Right to control use Identifying
a lease
of identified asset
Example: The case of Royal Lace Nepal Ltd (Contd) .
The IBN considered the application under its scheme for large scale
developments and approved the application. Consequently, an agreement
between IBN and RLN was entered into. According to the agreement,

• The RLN was entitled to set up / conduct and operate the said
business;
• RLN has to pay to the IBN an annual fee of Rupees 120,000/- p.a.
• The set up/conduct and operation of the said business should be on a
land identified by RLN with prior clearance and approval from IBN. For
this purpose, the specific plot of land of A1 – R2 – P7.00 situated at
Special Economic Zone was identified. A manufacturing facility
equipped with specialized lace – manufacturing machinery was
constructed by the Enterprise on this land at a cost of Rupees 500
million.
• RLN was contractually prohibited from conducting any other business
on this land and premises.
• At least 90% of output from the Enterprise should be marketed abroad.
13 July 2020 IFRS 16 Leases 68
 Identifyin
Decision flow chart g a lease

Is there an identified asset? NO

YES
Does customer have right to obtain substantially all of the economic benefits from use
of the asset throughout the period of use ?
NO
YES
Who has right to direct how & for what purpose the asset is used throughout the period
of use?
NO

Customer Predetermined Supplier

Does customer have right to (i) operate asset throughout

period of use without supplier having right to change operating
instructions or (ii) has customer designed asset in a way that
YES predetermines how and for what purpose asset will be used YES
throughout period of use?
YES NO

Contract contains a lease Contract does not contain a lease

13 July 2020 IFRS 16 Leases 69
 Illustrative example

• Customer enters into contract with Supplier for one week for
exclusive use of a specified truck to transport cargo from
New York to San Francisco. Contract prohibits Supplier from
substituting alternative truck.
• Cargo to be transported, timing and location of pick-up in
New York and delivery in San Francisco are specified in
contract.
• Customer is responsible for driving truck from New York to
San Francisco.
Does contract contain a lease?
Identified asset? ✔
Substantially all of the economic benefits? ✔
Right to direct the use? See next slide
13 July 2020 IFRS 16 Leases 70
 Illustrative example

• Customer enters into a contract with Supplier for one week.

• Cargo to be transported, timing and location of pick-up in New
York and delivery in San Francisco are specified in contract.
• Customer is responsible for driving truck from New York to San
Francisco

Right to direct use?

How and for what purpose? Predetermined
Customer operates the asset ✔
Customer has designed the asset? Not applicable

Contract contains a lease. However, it is a short term lease.

13 July 2020 IFRS 16 Leases 71
 SEPARATING CONTRACT
COMPONENTS

13 July 2020 IFRS 16 Leases 72

 Separating contract components
Entity shall identify and account
IFRS 16 for each separate component
Criteria
lease component Lessee can benefit from the component on its own or
with other readily available resources
and
Components are neither dependent nor highly
interrelated;
Lease contract
Allocation of consideration:

Lessee: Based on relative stand alone price

Lessor: Based on relative stand alone price in
accordance with IFRS 15. 73- 90

Non – lease Apply other applicable standards

component
Policy choice:
A lessee may elect, by class of underlying asset, not to separate non - lease
components from lease components, but instead to account for each lease
and
13 July 2020associated non - lease component as a single lease component.
IFRS 16 Leases 73
 Identifyin
Combination of contracts g a lease

Combine two or more contracts with

same counterparty if :

• Entered into at or near same time

Contract 1 And
Either -
• Negotiated as a package with
Contract 2 overall commercial objective,
or
• Consideration in one contract
Contract 3 depends on price / performance on
other contract
or
• Assets involved are single lease
component
13 July 2020 IFRS 16 Leases 74
 LEASE TERM

13 July 2020 IFRS 16 Leases 75

 Lease
Lease term Term

Non – cancellable period of lease

Together with
Periods covered by option to
Lessee is reasonably
extend If
certain to exercise option

Periods covered by option to If Lessee is reasonably certain

terminate not to exercise option

Reassess lease term upon the occurrence of a significant event or a

significant change in circumstances that is within the control of the
lessee and affects whether the lessee is reasonably certain to exercise
an option not previously included in its determination of the lease term,
or not to exercise an option previously included in its determination of the
lease term. (paragraph B41)
13 July 2020 IFRS 16 Leases 76
 Lease term
Reasonable certainty of
exercising (or not
exercising) an option Conditionality
associated with
exercising the
Economic Incentive for option and
Lessee likelihood that
Contractual those conditions
terms & exsist.
conditions for
optional periods Past practice
compared with Importance
market rates of underlying
Significant asset to
leasehold lessee’s
improvements operations
undertaken or Termination
expected to be costs
undertaken
13 July 2020 IFRS 16 Leases 77
 Lease term
E.g. The case of Perera and Sons.

Perera & Sons (PNS) is a bakery business with

a network of over 140 outlets. PNS has a
franchised outlet at No. 203, De Saram Place
Colombo 10, operating daily from 6 a.m. to 7
p.m.
Given the outlet’s strategic location at the
heart of a high – density locality, this PNS outlet
is one of the top 5 outlets with highest turnover
& profitability. During the year 2019, it extended
its dining area at a significant cost for the
benefit of its patrons.
Assume its current lease agreement will expire
on 31 July 2020. PNS will enter into a new lease
agreement with the Landlord on 1 August 2020.
The new lease agreement has a non –
cancellable period of 5 years with an option to
extend for another 5 years at a premium rate
(over the market rate) at the end of the initial
term.
13 July 2020 IFRS 16 Leases 78
 Recognition & Identifying
a lease
measurement exemptions
Exemption for short – term leases:
• Short term lease has a lease term of 12 months or less; lease that contains
a purchase option is not a short-term lease

• Accounting policy choice available only to lessees:

A lessee may elect not to apply the requirements in paragraphs 22–49 to
short-term leases. If so, the lessee shall recognize the lease payments
associated with those leases as an expense on either a straight-line basis
over the lease term or another systematic basis. The lessee shall apply
another systematic basis if that basis is more representative of the pattern
of the lessee’s benefit (paragraph 6)

• Exemption to be applied by class of underlying assets

• Also applies in business combinations (Acquiree is lessee):

Lease term ends within 12 months after acquisition date

Acquirer can apply short-term leases exemption
Subsequent periods:
Lease modification
Consider lease to be a new lease
Change in lease term
13 July 2020 IFRS 16 Leases 79
 Recognition & Identifying
a lease
measurement exemptions
Exemption for leases of which underlying asset is of a low value:

• Assets with a value, when new, of USD 5,000 or less (as per BC
paragraph100)

• Accounting policy choice available only to lessees

A lessee may elect not to apply the requirements in paragraphs
22–49 to leases of low value. If so, the lessee shall recognize the
lease payments associated with those leases as an expense on
either a straight-line basis over the lease term or another
systematic basis. The lessee shall apply another systematic basis
if that basis is more representative of the pattern of the lessee’s
benefit

• Exemption to be applied on a lease-by-lease basis

• Also applies for contracts of Acquiree in a business combination

(i.e. no asset (liability) for favourable (unfavourable) contracts)
13 July 2020 IFRS 16 Leases 80
 Identifyin
Other exemptions g a lease

Portfolio approach: (paragraph B1)

Lease contracts with similar characteristics

and

Applying standard to portfolio does not differ materially from

applying to individual leases within portfolio

Portfolio approach permitted for lessee and lessor

13 July 2020 IFRS 16 Leases 81

 Click to edit title

13 July 2020 IFRS 16 Leases 82

 LESSEE ACCOUNTING

13 July 2020 IFRS 16 Leases 83

 Lessee
Initial measurement accountin
g

Right of Use Asset Lease liability

(paragraph 24) (paragraph 26)

Lease Payments
Lease liability
Discount Rate

Lease payments made prior to

or at commencement date Only when an obligation
has been recognized in
respect of these costs by
Restoration costs applying IAS 37

Initial Direct Costs

13 July 2020 IFRS 16 Leases 84
 Lessee
Initial measurement – accountin
lease liability g

Initial measurement: (paragraph 27)

Fixed payments Includes in – substance fixed

payments less any lease incentives

Only if it depends on an index / rate

Variable payments Measured using index / rate as at
commencement date

Residual value guarantees Expected payments lessee has to

make under guarantee

Exercise price of purchase Lessee is reasonably certain to

If
options exercise option

Lease term reflects the termination

Penalties for terminating If
13 July 2020 IFRS 16by the lessee
Leases 85
 Initial measurement – Lessee
accounting
lease liability

In-substance fixed
Variable lease payments
payments
Dependent on

Index / rate Other variable

e.g. inflation/ Please refer illustrative Please refer illustrative

interest rate or example example
market rental
rates

Part Not part of lease Part

of lease liability liability of lease liability

13 July 2020 IFRS 16 Leases 86

 Lessee
Variable lease payments accountin
g

Example 1 : Variable lease payments – other

PNS enters into a 10-year lease for commercial space at 203, De

Saram Place, Colombo 01 with the Landlord. The annual lease
payments are SL Rs. 6,000,000/- plus an amount equal to 5% of PNS
sales. PNS’s annual sales have exceeded SL Rs. 9,000,000/- since it
began operations and are projected to grow at a rate of 10% annually.
What are the lease payments for purposes of measuring the lease?

Answer:
The lease payments for purposes of classifying the lease are the
fixed annual lease payments of SL Rs. 6,000,000/-.

Although there is a high probability of some variable lease payments

being made in light of PNS’s historical results and projections, the
variable lease payments are based exclusively on, and vary with, the
performance of the underlying asset . Therefore, should not be
considered as lease payments for measuring the lease.
13 July 2020 IFRS 16 Leases 87
 In- substance fixed Lessee
accounting
lease payments
Example 2 : In substance fixed lease payments

PNS enters into a ten -year lease for commercial space with the
Landlord. The initial base rent is SL Rs. 500,000/- per month. Rents
increase by the greater of 1% of PNS’s generated sales or 3% of the
previous rental rate on each anniversary of the lease commencement
date. What are the lease payments for purposes of measuring the
lease?

Answer:
Lease payments for purposes of classifying lease are fixed monthly
payments of SL Rs. 500,000/- plus minimum annual increase of 3%.

PNS is required to pay no less than a 3% increase regardless of the

level of sales activity; therefore, this minimum level of increase is an in
substance fixed lease payment.

13 July 2020 IFRS 16 Leases 88

 Initial measurement Lessee
accounting
- lease liability
Discount rate =
Interest rate implicit in lease

Can it be readily
determined?

No

Incremental borrowing rate

of lessee as at
commencement date
13 July 2020 IFRS 16 Leases 89
 Lessee
Initial measurement – accountin
right of use asset g

Any lease payments made at or before the commencement date, less

any lease incentives received

Initial direct costs:

Incremental costs of obtaining a lease that would have not been

incurred if lease had not been obtained. E.g. commissions,
payments to existing tenant to obtain lease

Restoration costs:
Restoring underlying asset to conditions required by lease
contract
Dismantle and remove underlying asset
Restore the site on which underlying asset is located
Measured at estimated costs
13 July 2020 IFRS 16(IAS
Leases37) 90
 Lessee
Subsequent measurement accountin
g

Item Subsequent measurement

Right - of - use asset Depreciation (in general on a straight – line
basis)
Assessment of impairment based on guidance
of IAS 36
Adjustments for re-measurement of lease
liability
Lease liability Measured using effective interest rate method
Re-measured to reflect reassessment,
modifications or revised in-substance fixed
payments
Variable lease Recognised in profit/loss in period in which
payments – not incurred
dependent on rate or
index
13 July 2020 IFRS 16 Leases 91
 Lessee
Subsequent measurement accounting

Illustration : Change in index/rate used to calculate variable lease

payments
Entity enters into a 10 year lease contract. Annual lease payments
are CU 50,000 p.a. payable at commencement of each year. Lease
payments increase every 2 years to reflect change in Consumer
Price Index (CPI); at date of commencement, CPI = 125.

Commencemen Beginning of Beginning of

t date second year third year
New lease payment: CU
CPI = 125 54,000
CPI = 130 CPI = 135
(CU 50,000 × 135 / 125)
Lease liability reflects
nine payments
Lease liabilityofNo
CUreassessment
remeasured to as the
50,000 Cash flow changes
reflect eight payments of not
change has CU affected
= Reassessment!
54,000 payments
13 July 2020 IFRS 16 Leases 92
 MODIFICATION OF LEASE

13 July 2020 IFRS 16 Leases 93

 Lessee
Modification of lease accountin
g

Does renegotiation change scope of lease?

YES YES NO

Decrease Increase

Change to consideration is
commensurate with the stand-alone
price for the increase (plus
appropriate adjustments)?
YES NO
Remeasurement of lease
liability Remeasurement of
Seperate lease liability
and lease
Decrease of carrying and
contract Adjustment of
amount of right-of-use
asset (partly profit/loss) right-of-use asset
13 July 2020 IFRS 16 Leases 94
 Lessee
Other measurement accountin
models g

Property, plant & equipment:

Lessee may elect to apply
revaluation model in IAS 16 to
right-of-use asset (by class) if
(a) it relates to a class of
property, plant and Investment Property:
equipment and Lessee shall apply fair value
(b) lessee applies revaluation model in IAS 40 to
model to all assets in that right-of-use asset if
class (a) it meets definition of
investment property in
IAS 40 and
(b) lessee applies fair value
model in IAS 40 to its
investment properties

13 July 2020 IFRS 16 Leases 95

 LESSOR ACCOUNTING

13 July 2020 IFRS 16 Leases 96

 Lessor
Classification indicators accountin
– finance lease g

Transfer of ownership of Option to purchase that is

underlying asset reasonably certain

Present value of lease

Lease term is for a major part
If none of thepayments at least substantially
of economic life of asset indicators areall of underlying asset’s fair
present, it is an
value
OPERATING LEASE
Lessee’s option to continue
Underlying asset is of a
lease at a rent substantially
specialized nature
lower than market rate

Gains or losses from

Lessee bears lessor’s losses if
fluctuation of residual value
it cancels lease
accrues to lessee
13 July 2020 IFRS 16 Leases 97
 Lessor
Subleases accounting

Head Lessor Lessor Lessee

Head lease Sub lease

• Lessor evaluates sublease with reference to right-of-use asset

• If head lease is a short-term lease, sublease shall be classified as

operating lease

13 July 2020 IFRS 16 Leases 98

 Lessor
Subleases accounting

Head Lessor Lessor Lessee

Head lease Sub lease

Balance sheet

Right-of-u Lease
se asset liability

Lease Net – off is not permitted!

receivable
13 July 2020 IFRS 16 Leases 99
SALE & LEASEBACK
TRANSACTIONS

IFRS 16 Leases 100

 Sale & leaseback transactions
IFRS 15 Revenue
from Contracts with
Customers.
Contract of Revenue
Step 1: Transfer of asset =
Accounted for as a “sale”
under IFRS 15
SELLER BUYER

LESSEE Step 2: Conveys right to LESSOR

use

Contract of Lease
IFRS 16 Leases
IFRS 16 Leases 101
 Sale & leaseback transactions

Does transfer of the asset satisfy the requirements in

IFRS 15 to be accounted for as a sale?
Yes No

Transfer is a sale Transfer is not a sale

Scoped in to IFRS 16 Scoped out of IFRS 16

Transaction in substance is
a financing arrangement
IFRS 16 Leases 102
 Sale & leaseback transactions
Measure sales proceeds at fair value.
Consideration for
Fair value of Underlying Asset
sale
OR
Payments for lease Market rate – based payments

Adjust to measure proceeds at fair

value

Terms Accounting
Below - Market Prepayment of lease payments
Above - Market Additional Financing

IFRS 16 Leases 103

 Sale & leaseback transactions

Seller - Lessee Buyer - Lessor

Transfer Right-of-use asset = proportion of the No special
is a previous carrying amount that relates to requirements
sale the right of use retained.

Gain/loss on sale = amount of gain or loss

that relates to the rights transferred.

interest in value of
Underlying Asset is sold
SELLER BUYER

LESSEE LESSOR

Right to use Underlying

Asset is retained IFRS 16 Leases 104
 OTHER

13 July 2020 IFRS 16 Leases 105

 IFRS 16 Vs IAS 17 Other

Issue IFRS 16 IAS 17 / IFRIC 4

Definition of a Right to use an asset, that is In general similar to IFRS
lease • identified asset, & 16, but different detailed
• right to control the use guidance

Separating lease Separate component, if No specific guidance

components • separate benefit for (except for lease of land
lessee, & and building)
• not highly dependent on,
or highly interrelated with,
other component

Combination of • Combine contracts if • No comprehensive

contracts certain criteria are met guidance
(see SIC 27)

13 July 2020 IFRS 16 Leases 106

 IFRS 16 Vs IAS 17 Other

Issue IFRS 16 IAS 17 / IFRIC 4

Exemptions
(lessee)
Short term Lease term ≤ 12 months No
lease (provided no purchase option)

Low value Value ≤ USD 5,000 No

assets
Lessee accounting

Balance sheet Right-of-use asset and lease • Operating lease: No

liability for all leases asset/liability
(only accruals or
prepayments)
• Finance lease: Leased
asset and lease
liability
13 July 2020 IFRS 16 Leases 107
 IFRS 16 Vs IAS 17 Other

Issue IFRS 16 IAS 17 / IFRIC 4

Variable lease Part of the lease liability if Not part of the lease liability
payments they depend on index/rate

Income • Right-of-use asset: • Operating lease: Lease

statement depreciation payments on a straight-line
• Lease liability: effective basis
interest rate method • Finance lease:
• Variable lease payments • Leased asset:
not included in lease depreciation
liability • Lease liability: effective
interest rate method
• Variable lease payments
not included in lease
liability

13 July 2020 IFRS 16 Leases 108

 Other
IFRS 16 Vs IAS 17
Issue IFRS 16 IAS 17 / IFRIC 4

Cash flow • Part of lease payment that represents • Operating lease:

statement principal portion: Cash flow resulting operating cash
from financing activities flow

• Part of lease payment that represents • Finance lease:

interest portion: operating cash flow Similar to IFRS 16
or cash flow resulting from financing
activities (depending on entity’s
policy)

• Payments for short-term leases, for

lease of low-value assets and variable
lease payments not included in lease
liability: operating cash flow

13 July 2020 IFRS 16 Leases 109

 IFRS 16 Vs IAS 17 Other

Issue IFRS 16 IAS 17 / IFRIC 4

Lessor accounting
Balance sheet • Operating lease: Assets subject to lease
• Finance lease: Receivable at amount equal to the investment
in the lease
Income • Operating lease: lease payments on straight-line basis
statement • Finance lease: interest on receivable measured using the
effective interest method
Modifications • Adjustment of existing lease, or No specific
• Accounted for as a separate lease, guidance
depending on kind of modification
Sale and leaseback Distinction based on whether transfer is Distinction based on
transactions sale classification of
leaseback
Subleases Classification of sublease refers to Classification of
right-of-use asset sublease refers to
leased asset

13 July 2020 IFRS 16 Leases 110

 Disclosures - lessee Other

Right-of-use asset
Depreciation charge (by class of underlying asset)
Carrying amount (by class of underlying asset)
Additions
Lease liabilities
Interest expense
Maturity analysis in accordance with paragraph 39 and B11 of IFRS 7
Recognition and measurement exemptions
Expense relating to short-term leases
Expense relating to leases of low-value assets
Other disclosures relating income statement
Expense relating to variable lease payments not included in lease liabilities
Income from subleasing right-of-use assets
Gains or losses arising from sale and leaseback transactions
**13This
Julytable
2020 covers the major disclosure requirements; depending on the particular facts and
IFRS 16 Leases 111
circumstances additional disclosures might be necessary
 Disclosures - lessee Other

Future cash outflows from -

Variable lease payments
(includes key variables on which payments depend and how they affect them)

Extension options and termination options

Residual value guarantees

Leases not yet commenced to which the entity is committed

Short-term lease commitments

Total cash outflows for leases

Qualitative disclosures
Nature of the lessee’s leasing activities

Restrictions or covenants imposed by leases

Sale and leaseback transactions

**This table covers the major disclosure requirements; depending on the particular facts and
13 July 2020
circumstances additional disclosures might beIFRS 16 Leases
necessary 112
 DISCLOSURES - LESSOR Other

Finance lease
Selling profit or loss

Finance income on the net investment in the lease

Lease income relating to variable lease payments not included in the measurement
of the lease receivable
Qualitative and quantitative explanation of the significant changes in the carrying
amount of the net investment in the lease
Maturity analysis of lease receivable for a minimum of each of the first five years
plus a total amount for the remaining years; reconciliation to the net investment in
the lease

**This table covers the major disclosure requirements; depending on the particular facts and
13 July 2020
circumstances additional disclosures might beIFRS 16 Leases
necessary 113
 Disclosures - lessor Other

Operating lease
Lease income, separately disclosing income relating to variable lease payments
that do not depend on an index or rate

Maturity analysis of lease payments for a minimum of each of the first five years
plus a total amount for the remaining years

Disclosure requirements in IAS 36, IAS 38, IAS 40 and IAS 41 for assets subject to
operating leases

Disclosure requirements in IAS 16 for items of property, plant and equipment

subject to an operating lease

Qualitative disclosures for all leases

Nature of the lessor’s leasing activities
Management of the risk associated with any rights it retains in underlying assets

**This table covers the major disclosure requirements; depending on the particular facts and
13 July 2020
circumstances additional disclosures might beIFRS 16 Leases
necessary 114
 THANK YOU
The views expressed in this presentation are those of the presenter

Priyoshini Fernando | Senior Manager

Ernst & Young

201, De Saram Place,, Colombo 10, Sri Lanka
[email protected]
Direct: +94112463500 Ext 875
Mobile: +94764715228

13 July 2020 IFRS 16 Leases 115