IFRS 16 – Leases

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 Why change IAS 17?

• Estimated $3.3 trillion of lease commitments globally

• 85% of all lease commitments not on balance sheet

Off balance sheet leases

On balance Off balance sheet leases (discounted)
Company Country Undiscounted Discounted* sheet debt as a multiple of on balance sheet debt
Woolworths UK £2,432m £1,602m £147m 10.9
Clinton Cards UK £652m £525m £58m 9.1
HMV UK £1,016m £809m £115m 7.03
Pearson Plc UK £1,391m £1,113m £38m 29.3
JD Sports Plc UK £642m £514m £7m 77.8
* based on estimates

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 Development of IFRS 16

2009 Discussion 2010 2013 2014-2015 2016

Paper 1st ED 2nd ED Redeliberations IFRS 16

Proposed dual-lessee
Introduced RoU model for
model to address front-
lessees Reverts to IAS 17
loading issue
approach for lessors and
single lessee model (with
Proposed a new model for simplifications)
lessors

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 Impact analysis Industry Future
payments for
PV of future
payments for
off-B/S leases off-B/S leases
÷ total assets ÷ total assets
Airlines 28.8% 22.7%
Retailers 28.3% 21.4%
IASB sampled over 1,000
Travel and leisure 28.6% 20.7%
businesses and this is what they
found… Transport 15.5% 11.6%
Telecommunications 7.7% 6.1%
Energy 7.7% 5.5%
Media 7.0% 5.5%
Distributors 5.4% 4.3%
Information technology 3.7% 3.0%
Healthcare 3.8% 2.9%
Others 2.9% 2.2%

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 IFRS 16 Leases – Snapshot
WHO WHAT WHEN
is affected? is the impact? are the changes effective?

• Entities that lease assets as a Lessees • Annual periods beginning on

lessee or a lessor or after 1 January 2019
• All leases ‘on-balance sheet’, • Various transition reliefs
some exemptions
• Early application is permitted
• ‘Front loaded’ lease expense if IFRS 15 'Revenue from Contracts
with Customers' is applied
• Lease liability to exclude most
option periods and contingencies
Lessors
• Only minor changes from the
current Standard – IAS 17
• Impact on business model and
customers

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 Agenda
IFRS 16 - Leases

Identifying a lease

Accounting by lessees

Accounting by lessors

Effective date and Transition

Broader implications

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 Identifying a lease
So what is a lease?

Definition of a “lease”
A contract, or part of a contract, that conveys the right to use an asset (the
underlying asset) for a period of time in exchange for consideration
(IFRS 16.Appendix A)

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 Identifying a lease
Does IFRS 16 apply to all leases?

NO. The following leases are excluded from the scope of IFRS 16:

• Leases to explore for or use minerals, oil,

• Licences of intellectual property granted
natural gas etc.
by a lessor in scope of IFRS 15
• Leases of biological assets in scope of
• Rights under licensing agreements in
IAS 41
scope of IAS 38 for films, videos, plays,
• Service concession arrangements in manuscripts, patents and copyrights*
scope of IFRIC 12

*Lessee may elect (but is not required) to apply IFRS 16 to leases of other intangible assets in scope of IAS 38

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 Identifying a lease
Does IFRS 16 apply to all leases?

NO. There are also two optional recognition exemptions applying to:

• Low value asset leases • Short-term leases

These will be discussed in detail later on

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 Identifying a lease
What is the contract? (ie, the “unit of account” question)

IFRS 16 will sometimes be applied:

• To a component of a contract Contract A
(non-lease
(for a contract with lease and components)
Contract B
non-lease components) Lease
component

• To a combination of contracts
combination
representing a single lease, or
Contract C
Portfolio
• To a portfolio of leases (as a of leases
practical expedient)

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 Identifying a lease
What is the contract? (ie, the “unit of account” question)
Combining contracts (IFRS 16.B2)
Account for two or more contracts as a single contract if:
• Entered into at, or near, the same time Contra
ct A Contra
ct B
• With same counterparty, or related parties of the
counterparty, and
Contra
• Meet one or more of the following: ct C
 Negotiated as a package – commercial objective cannot be
understood without considering contracts together
 Consideration paid in one contract depends on price or
performance of the other contract
 Rights to use underlying assets in the contracts form a single
lease component

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 Identifying a lease
What is the contract? (ie, the “unit of account” question)

Separating components (IFRS 16.12 & 16.B32-B33)

Contract
A Contracts may contain both lease and non-lease
(non-lease
components)
Contrac components
tB
It’s a lease component if:
Lease

Contra
• Lessee can benefit from use of underlying
ct C asset either on its own or together with readily
available resources; and
• Underlying asset not highly dependent on, or
highly interrelated with, other assets in the
contract
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 Definition of a lease
Separating components

Use practical
1 Basic rule 2 expedient?
3 Allocate

Contract A If no expe
Account for Lease and non- Consider practical
(non-lease components)
lease components expedient: considerat
separately: non-lease
Lease
Lessees can make a policy
Lease components = apply election (by underlying Lessees
IFRS 16 asset class) to account for S
lease and non-lease
Non-lease components = components as lease Lessors –
apply other standards components

* standalone selling price

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 Identifying a lease
What is the contract? (ie, the “unit of account” question)

Portfolio of leases (IFRS 16.B1)

Contra Contra
• A practical expedient (it’s discretionary)
ct A ct B
• May apply IFRS 16 to a portfolio of leases if:
Contra - Leases have similar characteristics
ct C
Portfolio of leases
- Impact on F/S is materially the same as result
obtained by applying to leases individually
• Use estimates and assumptions that reflect the
size and composition of the portfolio

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 Identifying a lease
Flowchart: The three key evaluations
No
Is there an identified asset? (IFRS 16.B13)

Yes
Contract
Does the customer have the right to obtain
is not
Does my contract substantially all of the economic benefits from
use of the identified asset throughout the
No
(does not
contain)
contain a lease? period of use? (IFRS 16.B9(a))
a lease
Yes
Does the customer have the right to direct the No
use of the identified asset throughout the period
of use? (IFRS 16.B9(b))
Yes

Contract is (or contains) a lease

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 Identifying a lease
Does my contract contain a lease?

• Assets may be explicitly mentioned or

Flowchart: The three key evaluations
implicitly specified when the asset is
No
Is there an identified asset? (IFRS 16.B13) made available for the customer’s use
(IFRS 16.B13)
Yes
Contract
Does the customer have the right to obtain
No
is not • No right to use specified asset if supplier
substantially all of the economic benefits (does not
from use of the identified asset throughout
contain) has substantive substitution rights
the period of use? (IFRS 16.B9(a))
a lease
Yes • A capacity portion of an asset is an
Does the customer have the right to direct No identified asset if:
the use of the identified asset throughout
the period of use? (IFRS 16.B9(b)) - it is physically distinct, or
Yes
- represents substantially all the
Contract is (or contains) a lease
capacity of the asset (IFRS 16.B20)

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 Application Insights

Capacity portions of fibre-optic cable

• To be an identified asset, a capacity portion of an asset must be physically
distinct or represents substantially all of the capacity of the asset (IFRS 16.B20)
• According to paragraph B20, a capacity portion of a fibre optic cable is an
example of something that is not physically distinct
- Notwithstanding this statement, a single strand within a cable is generally
accepted as being physically distinct. What about colour/wavelength?
• If a customer acquires the exclusive right to use all of the capacity of the blue
wavelengths in a single strand of fibre optic cable, is this an identifiable asset?

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 Identifying a lease
Does my contract contain a lease?

Substantive substitution rights

• Customer does not have the right to use a specified asset if Supplier has:
- practical ability to substitute asset throughout
period of use, and
- would benefit economically from exercising its
right to substitute the asset (IFRS 16.B14-B19)
• Assess at inception, and ignore future events not likely
to occur

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 Identifying a lease
Does my contract contain a lease?

Flowchart: The three key evaluations

Is there an identified asset? (IFRS 16.B13)
No • Customer could obtain benefits in many
Yes
ways including using, holding, sub-leasing
Contract
Does the customer have the right to obtain is not
substantially all of the economic benefits No
(does not
• Assess economic benefits from use within
from use of the identified asset throughout
the period of use? (IFRS 16.B9(a))
contain) defined scope of customer’s right to use
a lease
Yes
No
• Variable lease payments based on use
Does the customer have the right to direct
the use of the identified asset throughout do not reduce the total economic benefits
the period of use? (IFRS 16.B9(b))
available to the customer
Yes
Contract is (or contains) a lease

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 Identifying a lease
Does my contract contain a lease?

• Can the customer direct how and for

Flowchart: The three key evaluations
what purpose (“HAFWP”) the asset is
No
Is there an identified asset? (IFRS 16.B13) used throughout the period of use?
Yes
Contract • Alternatively, are relevant decisions
Does the customer have the right to obtain is not
substantially all of the economic benefits No
(does not about HAFWP predetermined? If so,
from use of the identified asset throughout
the period of use? (IFRS 16.B9(a))
contain) consider right to operate and design of
a lease
Yes the asset
Does the customer have the right to direct No
the use of the identified asset throughout • Focus is on determining who has
the period of use? (IFRS 16.B9(b)) control over use of the underlying asset:
Yes
Contract is (or contains) a lease
• Supplier = service contract
• Customer = lease

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 Identifying a lease
Does my contract contain a lease?
How can a customer determine how and for what purpose an asset is
used?
Relevant decision Example
Whether to use shipping container for transport or
Type of output
storage
When output is produced When to use machinery
Specifying destination of a truck or ship, or where a
Where output is produced
piece of equipment is used

Whether to produce energy from a power plant and

Whether output is produced, and how much
how much

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 Identifying a lease
Does my contract contain a lease?
Step 3 Flowchart: Does the customer have the right to direct the use of an identified
asset throughout the period of use? (IFRS 16.B9(b) and B24)

Can customer direct HAFWP the asset is used throughout Yes

Yes – customer has right to direct the use
the period of use?

No Yes

Yes Does customer also have the right to operate the

Are relevant decisions about HAFWP predetermined? asset throughout the period of use without supplier
interference re: operating instructions?
No No

No Did the customer design the asset (or aspects of it) Yes
No – Customer does not have right to direct the use in a way that predetermines HAFWP the asset will
be used throughout the period of use?

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 Identifying a lease
Examples 1 and 2

(Please refer to handouts)

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 Example 1
Identifying a Lease - Solution

• The contract does not contain a lease

• Contract describes the space, but customer does not have right to use an
identified asset because supplier has a substantive right of substitution:
- Supplier can change the space used by customer throughout
the 2 years
- No need for customer approval
- Many areas meet the specifications in the contract
- Minimal costs associated with changing the space
- Supplier would benefit economically

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 Example 2
Identifying a Lease - Solution
The contract contains a lease of retail space.
Requirement Facts
Customer’s has the right to use an identified • Unit B is specifically identified in the contract.
asset • Supplier’s right of substitution is not substantive
(supplier benefits economically only in circumstances
which, at inception, are not considered likely to occur)
Customer has right to substantially all of the • Customer has exclusive use
economic benefits from Unit B over the 5 yrs • Sales-based payments ignored for this purpose
Customer has right to direct the use of Unit B • Contractual restrictions on goods to be sold simply
define the scope of Customer’s right to use Unit B
• With the scope of its right to use the space, Customer
makes all relevant decisions about HAFWP the space
is used (eg, mix of goods, pricing, etc)

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 Application Insights

Customer premises equipment (CPE)

• Consider typical cable TV set-top box
• Does customer determine HAFWP the box is used?
• Simple box may only deliver/decode channel content
• More complex boxes offer significant additional functionality
• What if the box also provides strategic information to the cable provider on
your viewing habits?

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 Agenda
IFRS 16 - Leases

Identifying a lease

Accounting by lessees

Accounting by lessors

Effective date and Transition

Broader implications

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 IFRS 16 – Accounting by lessees
Lessees – Balance sheet
IAS 17 IFRS 16

Finance leases Operating leases All leases

Assets
–

Liability
$$ – $$$$$$$

Off balance sheet

rights/obligations –
$$$$$

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 IFRS 16 – Accounting by lessees
Lessees – Profit or loss
IAS 17 IFRS 16

Finance leases Operating leases All leases

Revenue (no change) £££ ££ £££££
Operating costs
(excluding deprecation nil Single expense (rent) Nil êê
and amortisation)
EBITDA 
Depreciation and
amortisation
Depreciation – Depreciation 
Operating profit 
Finance costs Interest expense – Interest expense 
Profit before tax 

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 Accounting by lessees
Optional exemptions
• Treat similar to IAS 17 operating lease if • Treat similar to IAS 17 operating lease if fair value of
the lease term is 12 months or less at the identified asset when new is around US$5,000
commencement or less
• Cannot qualify if the lease contains a • Assessment of value is based on the absolute value
purchase option of each leased asset when new
• Use of this exemption is an accounting • Leases of assets such as low value IT equipment,
policy choice that must be made office equipment and furniture would typically qualify
consistently for each class of underlying
• Use of this exemption is an accounting policy choice
asset
that can be made on a lease-by-lease basis

Short-term Low-value asset

leases leases

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 Accounting by lessees

Definition of “lease term”

The non-cancellable period for which the lessee has the right to use
an underlying asset, together with both:
a) periods covered by an option to extend the lease if the lessee is
reasonably certain to exercise that option, and
b) periods covered by an option to terminate the lease if the lessee is
reasonably certain not to exercise that option” (IFRS 16.Appendix A)

Note that if only the lessor has right to terminate, non-cancellable period includes period covered by their
option to terminate (IFRS 16.B35)

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 Optional accounting simplifications
Examples 3 and 4

(Please refer to handouts)

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 Example 3
Low-value asset exemption – Solution

Likely outcomes, subject to further investigation.

Identified asset Exempt?
New company cars
û
Delivery trucks and delivery vans û
Laptop computers and mobile phones ü
Office buildings and warehouses
û
Servers
û
Modules added over time to increase storage capacity of servers
û
Office furniture and water dispensers ü
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 Example 4
Short-term lease exemption – Solution

Conclusion The leases qualify for the short-term exemption

Mining company has a policy choice to either apply the general IFRS 16
Impact lessee model, or account for the leases similarly to operating leases under
IAS 17 (ie straight line or other systematic basis if more representative)

How to apply Consistently to all short-term leases of underlying assets of the same class
(eg all short-term leases of transport vehicles)

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 Lessees
Measuring the lease liability

Initial measurement of the lease liability

Fixed (and Variable payments Amounts expected to Exercise price of a Termination penalties if
in-substance fixed) linked to an index/rate be payable under purchase option if the lease term reflects
future payments for based on level of residual value lessee is reasonably exercise of a
lease elements, less index/rate at guarantees certain to exercise that termination option
any lease incentives commencement option
receivable over the
lease term (including (see next slide)
payments in optional
extension periods if
extension 'reasonably
certain')

Discount at rate implicit in the lease (or lessee's incremental borrowing rate)

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 Application Insights

Discount rate issues

“The lease payments shall be discounted using the interest rate implicit in the
lease, if that rate can be readily determined. If that rate cannot be readily
determined, the lessee shall use the lessee’s incremental borrowing rate.”
IFRS 16.26

Issue Finding
In the real estate industry (where residual values
No. The currently prevailing view is that the need
may be large), entities frequently employ valuation
to use complex models means the rate is not
experts to help them compute the discount rate
readily determinable. The incremental borrowing
implicit in a lease. Is such a rate considered to be
rate should be used.
“readily determinable”?

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 Application Insights

Discount rate issues

Issue Finding
Should the calculation of i-rate implicit in the lease No. True variable payments should be excluded,
ever include variable payments other than those even if the lessor considered them when
based on an index or rate (and not in-substance negotiating the lease.
fixed)?
A lessee has all the information needed to readily No. When the result of the implicit rate calculation
determine the interest rate implicit in a lease. appears nonsensical (negative or sharply diverging
However, it is a negative number due to a high from the entity’s incremental borrowing rate
percentage of variable payments. Paragraph 26 [“IBR”]), the currently prevailing view is that the
seems clear. Must the implicit rate be used? lessee should revert to its IBR. Exercise caution.

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 Variable lease payments
Definition

The portion of payments made by a lessee to a lessor for the right to use an underlying asset during
the lease term that varies because of changes in facts or circumstances occurring after the
commencement date, other than passage of time (IFRS 16.Appendix A)

Type of payment Initial accounting Subsequent accounting

Adjust lease liability and asset
Payments that depend on an index, Include in lease liability and ROU asset based
when revised index or rate changes
rate, or reflect market rents on level of index/rate at commencement date
the lease payments (use the original discount rate)

Other variable lease payments Recognisean

Recognise an expense
expensein in the
the period
period that
thatthe
theevent
event
Exclude from lease liability and asset
(e.g. payments linked to sale or usage) oror conditionthat
condition that triggers
triggers the
thepayments
paymentsoccurs
occurs

In-substance fixed lease payments Treat as fixed lease payments Treat as fixed lease payments

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 Application Insights

When to expense variable payments based on usage/sales

• IFRS 16.38(b) says recognise expense when triggering event occurs
• An apparent conflict is presented by IAS 34.B7 which says:
“…If a lease provides for variable payments based on the lessee
achieving a certain level of annual sales, an obligation can arise in the
interim periods of the financial year before the required annual level of
sales has been achieved, if that required level of sales is expected to be
achieved and the entity, therefore, has no realistic alternative but to
make the future lease payment.”

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 Application Insights

When to expense variable payments based on usage/sales

• Assume expectation is there 1 January, and threshold met 30 September
• How to account? Mixed views. Caution: not all views are created equal!
- IAS 34: Begin accruing on 1 January (dr. P&L, cr. Lease liability). But do
you spread it over 3 or 4 interim periods?
- IFRS 16: Book 100% of expense on 30 September
- Hybrid: Begin accruing in Q3, but spread over Q3 & Q4
- Recognise 100% asset in Q1 and amortise over 3 or 4 quarters

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 Lessees
Measuring the right-of-use asset

Initial measurement of the right-to-use asset

Initial amount Lease payments Lease incentives Initial Estimated cost

of lease liability made to lessor at already received direct costs of removing
or before and/or restoring
(lease incentives
commencement receivable over the
leased asset
date lease term were
already deducted when
computing the initial
liability)

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 Subsequent measurement
ROU asset

General requirement is to apply IAS 16 cost model to ROU asset,

with two exceptions

• If ROU asset relates to class of PP&E currently measured

using IAS 16’s revaluation model, may elect to apply the
revaluation model to the ROU asset

• If lessee currently applies IAS 40 FV model to investment

properties, lessee must apply FV model to ROU assets also
meeting definition of investment property

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 Subsequent measurement
Lease liability

Adjustments to the lease liability over time

Carrying amount Interest Lease payments Reassessments Modifications that

of lease liability at made affecting the lease add the right to use
commencement (Note that the rate liability, including: additional underlying
date applied could vary if • lease term assets and/or
there are subsequent change the
reassessments or • purchase option
consideration
modifications) • In-substance fixed
lease payments
(see next slide)
• RV guarantees
• Δ in index or rate

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 Example 5
Simple Numerical Illustration – Facts

(Please refer to handouts)

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 Example 5
Simple Numerical Illustration – Solution

CU
Initial amount of lease liability 355,391
First lease payment (paid in cash at inception) 50,000
Initial direct costs paid 20,000
Less: Lease incentive received (5,000)
Right of use asset 420,391

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 Example 5
Simple Numerical Illustration – Solution

Lease liability Right-of-use asset

Year Opening balance Lease payment 5% interest expense Closing balance Opening balance Depreciation charge Closing balance
1 355,391 - 17,770 373,161 420,391 (42,039) 378,352
2 373,161 (50,000) 16,158 339,319 378,352 (42,039) 336,313
3 339,319 (50,000) 14,466 303,785 336,313 (42,039) 294,274
4 303,785 (50,000) 12,689 266,474 294,274 (42,039) 252,235
5 266,474 (50,000) 10,824 227,298 252,235 (42,039) 210,196
6 227,298 (50,000) 8,865 186,162 210,196 (42,039) 168,156
7 186,162 (50,000) 6,808 142,971 168,156 (42,039) 126,117
8 142,971 (50,000) 4,649 97,619 126,117 (42,039) 84,078
9 97,619 (50,000) 2,381 50,000 84,078 (42,039) 42,039
10 50,000 (50,000) 0 0 42,039 (42,039) 0

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 Example 6
Variable payment Illustration – Facts

(Please refer to handouts)

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 Example 6
Variable payment illustration – Solution

Lease liability Right-of-use asset

5% interest
Year Opening balance Lease payment Closing balance Opening balance Depreciation charge Closing balance
expense

1 355,391 - 17,770 373,161 420,391 (42,039) 378,352

2 373,161 (50,000) 16,158 339,319 378,352 (42,039) 336,313

Lease liability Right-of-use asset

/1 2 5
5% interest
ft balance
Year Opening balance Lease payment
35 expense
Closing balance Opening balance Depreciation charge
t e
Closing
l
x1 s a
3 366,464 (54,000) 15,623 328,087 363,458
$a
(45,432)
e(45,432)
318,026

m
Sa
4 328,087 (54,000) 13,704 287,792 318,026 272,594

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 Example 6
Illustrative impact on 2016 Balance Sheet

Balance sheet Pre-IFRS 16 Post IFRS-16

Increase in tangible Fixed assets
fixed asset approx. CU378k Tangible 360 725
Other 35 35
Total fixed assets 395 760
Current assets 721 721
Increase in current Current liabilities (287) (321)
liabilities approx. CU34k Net current assets 434 400
Total assets less current liabilities 829 1,160

Other liabilities (180) (519)

Increase in non-current incl. pension asset
liabilities approx. CU339k Net assets 649 641
Equity 649 641

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 Example 6
Illustrative Impact on 2016 P&L

Increase in operating Income Statement Pre-IFRS 16 Post IFRS-16

Profit and loss
profit approx. CU8k
Revenue 1,534 1,534
Costs
Increase in finance Lease expense (50) (0)
costs approx. CU18k Depreciation (39) (80)
Other costs and income (1,354) (1,354)
Decrease in profit Operating profit 91 100
approx. CU10k Finance costs (10) (28)
Profit before tax 81 73
Tax 1 1
Increase in EBITDA
Profit 80 72
approx. CU50k
EBITDA 130 180

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 Lease modifications
Definition

A change in the scope of a lease, or the consideration of a lease, that was not part of
the original terms and conditions of the lease (IFRS 16.Appendix A)

Does modification (i) increase the scope of the lease by adding a right to use one or more underlying assets;
and (ii) increase consideration by an amount commensurate with stand-alone price for increased scope (and any appropriate price
adjustments to reflect circumstances)?
No

Yes Does modification decrease scope of lease (e.g. full or partial termination)?

No Yes

Adjust lease liability to reflect revised consideration;

Adjust liability to reflect revised consideration,
adjust asset to reflect decrease in scope plus
Account for lease modification as a separate lease with corresponding adjustment to asset
effect of revised pricing and discount rate.
(revised discount rate) (IFRS 16.46(b))
Gain or loss on termination may arise (IFRS 16.46(a))

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 Example 7
Subsequent measurement

(Please refer to handouts)

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 Example 7
Subsequent measurement - Solution

Committing to move Entity A’s staff to the same building:

• creates an economic incentive for Lessee to extend its original lease (IFRS 16.B37)
Impact on lease • is a significant event, within the control of the lessee, that affects whether it is reasonably certain
term to exercise the option (IFRS 16.B41)
• means that the original floor provides greater benefits to Lessee than alternative assets that could
be leased for a similar amount for the optional period (IFRS 16.B37(d))

• The lease term now includes the optional period (12 years total, less 5 years elapsed)
Measurement • The lease liability must be remeasured on the date of the reassessment (IFRS 16.36(c))
impacts • Liability = PV (3xCU100,000 + 4xCU110,000) discounted using the relevant rate (see below)
• The ROU asset will simply be adjusted by the same amount (IFRS 16.39)
When there is a change in the lease term, the lease liability is remeasured by discounting the revised
Impact on other
variables lease payments using a revised discount rate (IFRS 16.40). In this case, the lessee’s new IBR on the
date of reassessment would be used (not provided).

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 Sale-Leaseback transactions
• Apply IFRS 15
• Presence of a leaseback
does not preclude a sale
Determine whether the transfer of the asset is a sale

Transfer is a sale Transfer is not a sale

Seller-lessee will: Seller-lessee will:

• recognise the sale at fair value • not derecognise the underlying asset
• derecognise the underlying asset • recognise a financial liability - IFRS 9/IAS 39
• recognise a lease liability
• recognise a ROU asset as proportion of previous Buyer-lessor will:
carrying amount of underlying asset • not recognise the transferred asset
• recognise only the gain/loss that relates to the • recognise a financial asset - IFRS 9/IAS 39
rights transferred to buyer-lessor

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 Example 8
Sale and Leaseback – Facts

(Please refer to handouts)

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 Example 8
Sale and Leaseback – Solution

Debit Credit
 Journal entry prepared by SellCo  (CU) (CU)
Cash       1,800,000  
Buildings (carrying value of building at time of transaction, given in facts)  1,000,000
Lease liability (present value of the lease payments SellCo is committed to make, given in facts)    1,459,200
Right-of-use asset ([CU1,459,200/CU1,800,000] x CU1,000,000)  810,667  
Gain on sale (CU800,000 x [(CU1,800,000 – CU1,459,200)/CU1,800,000])   151,467

The total gain or loss on the building is CU800,000 (the sale price of CU1,800,000 less SellCo’s carrying value of the
building at the time of the transaction of CU1,000,000).

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 Example 8
Sale and Leaseback – Solution (cont’d)

Debit Credit
 Journal entry prepared by BuyCo  (CU) (CU)
Cash       1,800,000 
Buildings 1,800,000

BuyCo classifies the lease as an operating lease taking into account, among other things, that the present value of
the lease payments is 19% less than the fair value of the building.

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 Presentation and disclosures

Disclosure objective: to enable users of financial statements to assess the effect leases
have on the financial position, financial performance and cash flows of the lessee.
Lessees Lessors
• Breakdown of lease expense • Carrying amount of • Finance leases: selling profit − nature of leasing activities
(including depreciation, ROU assets by class or loss, finance income, − how the risk associated
interest, expense for short- of underlying asset lease income on VLPs, with any rights retained
changes in the net in the underlying asset is
term or low value leases, • Additional information, if investment, maturity managed
variable lease payments not relevant (e.g. extension and analysis
included in lease liabilities) termination options, variable − table of quantitative
• Operating leases:
• Total lease cash outflows lease payments (VLPs), disclosures.
lease income,
• Additions to ROU assets residual value guarantees) IAS 16 requirements,
• Gains or losses from sale • Single location; table of maturity analysis
and leasebacks quantitative disclosures. • Additional information
necessary to meet the
• Maturity analysis of disclosure objectives,
lease liabilities including but not limited to:

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 Application Insights

Balance Sheet presentation of ROU assets

• A lessee is required to present ROU assets separately from other assets, either
on the face of the B/S or in the notes. “If a lessee does not present ROU assets
separately in the SoFP, the lessee shall: (a) include ROU assets within the same
line item as that within which the corresponding underlying assets would be
presented if they were owned…” (IFRS 16.47)
• ROU assets are intangible by nature
• Can an entity that is leasing property (a tangible asset) classify the ROU asset as
an intangible asset on the face of the B/S?

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 Agenda
IFRS 16 - Leases

Identifying a lease

Accounting by lessees

Accounting by lessors

Effective date and Transition

Broader implications

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 Lessor accounting
What has changed? Finance
lease Operating
lease

Lessor accounting requirements are similar to IAS 17:

• the distinction between finance and operating leases is retained.
• the definitions of each type of lease, and the supporting indicators of a
finance lease, are substantially the same
• the basic accounting mechanics are similar, but with some different/more
explicit guidance in a few areas such as sub-leases.

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 Agenda
IFRS 16 - Leases

Identifying a lease

Accounting by lessees

Accounting by lessors

Effective date and Transition

Broader implications

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 Effective date and transition
Highlights / Introduction

Effective from 1 January 2019

• early application permitted if IFRS 15 is also applied

Lessees are permitted to choose between two transition methods

• full retrospective approach
Apply consistently to all leases
• modified retrospective approach

Lessors are not required to make any adjustments on transition

• except for intermediate lessors in a sub-lease

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 Transition
Overview

Identify population

Apply IAS 17 lease definition All or nothing Apply IFRS 16 lease definition
to existing contracts policy choice to existing contracts

All or nothing Modified retrospective –

Full retrospective policy choice cumulative catch up

No further transition
Transition reliefs available
reliefs available

Finance lease
Other leases
under IAS 17

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 Transition Modified retrospective approach

Lease liability

Lease liability Measurement

Measure at present value of remaining lease payments

discounted using incremental borrowing rate on date of initial application

Lease by lease Use of hindsight permitted

Discount rate policy choice e.g. lease term

Discount rate
Discount rate
for portfolio of
for each lease
similar leases

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 Transition Modified retrospective approach

Right of use asset

Right of Use Asset Measurement

Lease by lease
Retrospective carrying value ROU asset = lease liability
policy choice
Use discount rate Adjust by prepayments
at date of initial application or accrued lease payments
More complex but more accurate Easier but higher charges going forward

Initial direct costs

Include Lease by lease Exclude from ROU

in ROU asset policy choice asset

Impairment

Lease by lease Adjust ROU asset by amount of previously

IAS 36 applied at date of initial application
policy choice recognised onerous lease provisions

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 Example 9
Comparison of Transition methods – Facts

(Please refer to handouts)

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 Example 9
Comparison of Transition methods – Solution
Modified retrospective (retrospective carrying Modified retrospective
Full retrospective
Balance sheet value for ROU asset) (ROU asset = lease liability)

Jan 2018 Dec 2018 Dec 2019 Dec 2018 Jan 2019 Dec 2019 Dec 2018 Jan 2019 Dec 2019
Right-of-use asset 431 345 259 - 323 242 - 340 255
Lease liability (431) (358) (278) - (340) (269) - (340) (269)
Net assets - (13) (20) - (17) (27) - - (14)

Modified retrospective Modified retrospective

Profit and loss Full retrospective (retrospective carrying value for ROU asset) (ROU asset = lease liability)
Jan 2018 Dec 2018 Dec 2019 Dec 2018 Jan 2019 Dec 2019 Dec 2018 Jan 2019 Dec 2019
Lease expense - - (100) - (100) -
Depreciation (86) (86) - (81) - (85)
Finance costs (26) (21) - (29) - (29)
Profit (113) (107) (100) (110) (100) (114)

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 Agenda
IFRS 16 - Leases

Identifying a lease

Accounting by lessees

Accounting by lessors

Transition

Broader implications

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 A converged standard?
Comparing IFRS 16 with the new US Standard

• Project began as a joint effort with the US FASB

• Unfortunately, some different decisions made along the way
• Two of the more significant differences are that the US Standard:
- Divides leases into two types for lessees (financing and operating). Both are ‘on-
balance sheet’, but the expense profile for operating leases is generally ‘straight-line’
- Does not provide an exemption for low-value assets

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 Implications of IFRS 16 application

WIDER IMPLICATIONS
• Need to reassess “lease versus buy” decisions
• Staff training
• Impact on debt covenants
• Transformation of various business processes including
finance and accounting, IT, procurement, tax, treasury,
legal and operations
• Impact on business metrics and investors’
outlook (possibly share price)
• Education of stakeholders

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 More than an accounting change

Accounting and finance MD&A information

Employee incentives
Contract environment
Organisation Investor relations

Sales and operations

wide impact
Tax accounting
and methods

Training and
Information technology
communication

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 Data data data

Data integrity and access is going to be key

Paperwork Information Interest rate implicit Substitution

for all leases in the lease rights

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 Questions

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