IFRS 16 Leases

66 Pages·2016·0.66 MB·English

IFRS 16
Leases
A more transparent balance sheet
First Impressions
IFRS
January 2016
kpmg.com/ifrs
Contents
A more transparent balance sheet 1 7 Disclosures 45
7.1 General disclosure objective 45
1 IFRS 16 at a glance 2
7.2 Disclosures for lessees 46
1.1 Key facts 2
7.3 Disclosures for lessors 47
1.2 Key impacts 3
8 Effective date and transition 49
2 Overview 4
8.1 Effective date 49
3 Lease defnition 5 8.2 Lease defnition on transition 50
3.1 Overview 5 8.3 Lessee approach to transition 51
3.2 Identifed asset 6 8.3.1 Modifed retrospective approach –
3.3 Economic benefts 7 Measurement 51
3.4 Directing the right to use 9 8.3.2 Modifed retrospective approach –
3.5 Protective rights 11 Practical expedients for operating leases 52
3.6 Practical expedients 12 8.4 Lessor approach to transition 53
3.7 Lease and non-lease components 14 8.5 Sub-leases on transition 53
8.6 Sale-and-leaseback on transition 54
4 Lessee accounting 17
4.1 Lessee accounting model 17 9 Your next steps 55
4.2 Initial measurement of the lease liability 18
Appendix: Comparison with US GAAP 58
4.2.1 Overview 18
4.2.2 Lease term 19 About this publication 61
4.2.3 Lease payments 21
Keeping you informed 62
4.2.4 Discount rate 24
4.3 Initial measurement of the right-of-use asset 25
4.4 Subsequent measurement of the lease liability 27
4.4.1 Measurement basis 27
4.4.2 Reassessment of the lease liability 27
4.5 Subsequent measurement of the right-of-use
aset 29
4.5.1 Measurement basis 29
4.5.2 Depreciation of the right-of-use asset 30
4.5.3 Impairment of the right-of-use asset 31
4.6 Presentation 32
5 Lessor accounting 34
6 Other lease topics 37
6.1 Sale-and-leaseback transactions 37
6.2 Sub-leases 40
6.3 Investment property 41
6.4 Lease modifcations 42
6.4.1 Lessee 42
6.4.2 Lessor – Modifcations to a fnance lease 43
6.4.3 Lessor – Modifcations to an operating lease 43
A more transparent balance
sheet
hT e IAs’BS ne w leases standard reuq ires companies to
bring most leases onb- alance sheet, recognising ne w
assets and liabilities.
In aJ nuary 2016, the IA BS issued IFR S 16 Leases – realising its longs- tanding
goal o f bringing leases onb- alance sheet of r lessees. All companies that lease
maoj r assets of r use in their business iw ll see an increase in reported assets and
liabilities. hT is iw ll aef f ct a iw de variety o f sectors, rf om airlines that lease aircratf
to retailers that lease stores. hT e larger the lease portof lio, the greater the impact
on ek y reporting metrics.
oC mpanies are currently reuq ired to disclose details o f their ob-f f alance sheet
leases and many analysts use this inof rmation to aduj st published n� ancial
statements. hT e ek y change iw ll be the increase in transparency and comparability.
For the r� st time, analysts iw ll be able to see a companys’ onw assessment o f
its lease liabilities, calculated using a prescribed methodology that all companies
reporting under IFR S iw ll be reuq ired to of llo.w
hT e impacts are not limited to the balance sheet. hT ere are also changes in
accounting over the lief o f the lease. In particular, companies iw ll no w recognise
a rf ontl- oaded pattern o f epx ense of r most leases, even hw en they pay constant
annual rentals. And the standard introduces a star k dividing line betew en leases
and service contracts – leases iw ll be brought onb- alance sheet, hw ereas service
contracts iw ll remain ob-f f alance sheet.
The new standard takes effect in January 2019. Before that, companies will need
to gather signifcant additional data about their leases, and make new estimates
and calculations. The new requirements are less complex and less costly to
apply than the IASB’s earlier proposals. However, there will still be a compliance
cost. For some companies, a key challenge will be gathering the required data.
For others, more judgemental issues will dominate – e.g. identifying which
transactions contain leases.
hT is publication provides an overvie w o f the ne w standard and ho w it iw ll aef f ct
n� ancial statements. It includes eax mples and insights to help you assess the
potential impact on your business and to assess your readiness of r 201.9
Kimber Bascom
Ramon Jubels
Sylvie Leger
Brian O’Donovan
KPMG’s global IFRS leases leadership team
KPMG International Standards Group
© 2016 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
2 | First Impressions: IFRS 16 Leases
1 IFRS 16 at a glance
1.1 Key facts
Topic IFRS 16 US GAAP standard
Lessee – Single lease accounting – Dual lease accounting model
accounting model
model – Lease classifcation test
– No lease classifcation test based on IAS 17 Leases
classifcation criteria
– All leases on-balance sheet:
– All leases on-balance sheet:
- lessee recognises a right-
of-use (ROU) asset and - fnance leases treated as
lease liability the purchase of an asset
on a fnanced basis
- treated as the purchase
of an asset on a fnanced - operating leases generally
basis feature straight-line
Impact on lessee balance sheet recognition of total lease
expense
Lessor – Dual lease accounting model for lessors
accounting
– Lease classifcation test based on IAS 17 classifcation criteria
model
– Finance lease accounting model based on IAS 17 fnance
lease accounting, with recognition of net investment in lease
comprising lease receivable and residual asset
– Operating lease accounting model based on IAS 17 operating
lease accounting
Asset Liability Practical – Optional lessee exemption for short-term leases – i.e. leases
Companies with operating leases will expedients for which the lease term as determined under the new
appear to be more asset-rich, but also and standard is 12 months or less
more heavily indebted targeted
– Portfolio-level accounting permitted if it does not differ
reliefs
materially from applying the requirements to individual leases
Impact on lessee profit or loss
– Optional lessee exemption – No exemption for leases of
for leases of low-value items low-value items
– i.e. assets with a value of
USD 5,000 or less when
they are new – even if they
are material in aggregate
Effective – Accounting periods – Fiscal years beginning after
date beginning on or after 15 December 2018
1 January 2019
– Early adoption is permitted,
Depreciation Interest – Early adoption is permitted even before adoption of the
Cash rental payments if IFRS 15 Revenue from US version of the revenue
Contracts with Customers is standard
Total lease expense will be front-loaded also adopted
even when cash rentals are constant
© 2016 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
First Impressions: IFRS 16 Leases  3
1 IFRS 16 at a glance
1.2 Key impacts
Identiyf ing all lease agreements and etx racting lease data. Lessees will now
recognise most leases on-balance sheet. This may require a substantial effort to
identify all lease agreements and extract all relevant lease data necessary to apply
the standard. To apply the simplifed model for short-term leases and leases of low-
value items, a company will need to identify the lease and extract key lease terms.
(See Section 3.)
hC anges in ek y n� ancial metrics. Key fnancial metrics will be affected by
the recognition of new assets and liabilities, and differences in the timing and
classifcation of lease income/expense. This could impact debt covenants, tax
balances and a company’s ability to pay dividends. (See 4.1.)
eN w estimates and uj dgements. The standard introduces new estimates
and judgemental thresholds that affect the identifcation, classifcation and
measurement of lease transactions. Senior staff will need to be involved in these
decisions – both at lease commencement and at reporting dates as a result of the
continuous reassessment requirements. (See Sections 3 and 4.)
aB lance sheet volatility. The new standard introduces volatility to assets and
liabilities for lessees, due to the requirements to reassess certain key estimates
and judgements at each reporting date. This may impact a company’s ability to
accurately predict and forecast results. (See 4.4.2.)
hC anges in contract terms and business practices. To minimise the impact of
the standard, some companies may wish to reconsider certain contract terms and
business practices – e.g. changes in the structuring or pricing of a transaction,
including lease length and renewal options. The standard is therefore likely to
affect departments beyond fnancial reporting – including treasury, tax, legal,
procurement, real estate, budgeting, sales, internal audit and IT.
eN w systems and processes. Systems and process changes may be required
to capture the data necessary to comply with the new requirements, including
creating an inventory of all leases on transition. The complexity, judgement and
continuous reassessment requirements may require additional resources and
controls focused on monitoring lease activity throughout the life of leases.
oS me impacts cannot yet be uq antie� d. Companies won’t have the full picture
until other accounting and regulatory bodies have responded. For example, the
new accounting could prompt changes in the tax treatment of leases. And a key
A question for the fnancial sector is how the prudential regulators will treat the new
assets and liabilities for regulatory capital purposes. (See 4.3.)
rT ansition considerations. A key early decision is how to make the transition to
the new standard. For many companies, the choice of transition method and which
practical expedients to apply will have a major impact on the cost of implementing
the standard and the comparability of trend data in the years after transition. (See
Accounting Section 8.)
Change
oC mmunication iw th staek holders iw ll reuq ire careuf l consideration. Investors
and other stakeholders will want to understand the standard’s impact on the
business. Areas of interest may include the effect on fnancial results, the costs of
implementation and any proposed changes to business practices.
oY ul’ l get a ef el of r the challenge ahead by asik ng a ef w simple uq estions.
eS( e eS ction.9� )
© 2016 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
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4 | First Impressions: IFRS 16 Leases
2 Overview
The following diagram illustrates how key elements of the standard are explained
throughout this publication. The corresponding section numbers are in brackets.
Determine when to apply the standard
Identify the lease (3.1–5)
Choose whether to apply the practical expedients (3.6)
Separate lease and non-lease components (3.7)
Apply the lease accounting models
Lessees Lessors
Overview of lessee accounting (4.1) Lessor accounting model ( 5S) e c t i o n
Initial measurement (4.2–3)
Subsequent measurement (4.4–5)
Presentation (4.6)
Apply other relevant guidance
Sale and leaseback (6.1)
Sub- leases (6.2)
Investment property (6.3)
Lease modifications (6.4)
Prepare the necessary disclosures (Section 7)
Prepare for transition
Choose your transition options (Section 8)
Assess your readiness (Section 9)

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First Impressions : IFR S 16 Leases � 5
3 Lease den� ition
3 Lease definition
Lease den� ition is the ne w ono/ b-f f alance sheet test of r lessees –
and a ek y area o f uj dgement in applying the standard.
3.1 Overview
IFRS 16.9 A company assesses at inception o f a contract hw ether that contract is, or
contains, a lease. A contract is, or contains, a lease i f the contract conveys the
right to control the use o f an identie� d asset of r a period o f time in ecx hange
of rc� onsideration.
hT e ek y elements o f the den� ition are thereof re as f ollosw .
No
Identified asset? (3.2)
Yes
Lessee obtains the No
Contract does
economic benefits? (3.3)
not contain a lease
Yes
No
Lessee directs the use? (3.4)
Yes
Contract is or contains a lease

oH ew ver , a lessee is not reuq ired to apply the lessee accounting model to leases
that uq aliyf of r certain practical epx edients s( ee .3 6.)
KPMG insight – Lease defnition is the new on/off-balance sheet
test
IFR S 16 eliminates the current operatingn�/ ance lease dual accounting model
of r lessees. Instead, there is a single, onb- alance sheet accounting model,
similar to current n� ance lease accounting. hT e uq estion o f hw ether a contract
contains a lease determines hw ether the arrangement is recognised on - or o-f f
balance sheet a( s a service contract.)
© 2016 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
6 | First Impressions: IFRS 16 Leases
KPMG insight – Lease defnition is superfcially similar to the
current defnition, but some details change
On a frst read, the lease defnition seems consistent with current guidance.
However, IFRS 16 contains additional application guidance and illustrative
examples on how to apply the defnition – and there are differences from
current practice.
A number of arrangements that are currently accounted for as leases may
fall outside the new defnition. For example, an arrangement may be a lease
under current guidance because the lessee obtains all of an asset’s output but
does not pay a fxed or market price for each unit of output. Under IFRS 16, it
is also necessary to consider whether the lessee has control over the use of
the underlying asset. Such an arrangement would be a lease only if the lessee
controls the use of the underlying asset.
3.2 Identifed asset
IFRS 16.B13–B20 A contract contains a lease only if it relates to an identifed asset. An asset can be
either explicitly specifed in a contract or implicitly specifed at the time it is made
available for use by the lessee.
However, even if an asset is specifed, a lessee does not control the use of an
identifed asset if the lessor has a substantive right to substitute the asset for an
alternative asset during the lease term. A lessor’s substitution right is ‘substantive’
if the lessor:
– has the practical ability to substitute the asset; and
– would beneft economically from exercising its right to substitute the asset.
A company assesses whether substitution rights are substantive at inception of
the contract. At that time, a company considers all of the facts and circumstances
– but not future events that are not likely to occur.
A capacity portion of an asset can be an identifed asset if it is physically distinct –
e.g. a foor of a building. In addition, a capacity portion that is not physically distinct
is also an identifed asset if it represents substantially all of the capacity of the
entire asset. For example, a capacity portion of a fbre-optic cable:
– is an identifed asset if it represents substantially all of the capacity of the cable;
and
– is not an identifed asset if it represents only part of the capacity of the cable.
Example 1 – Substantive substitution right
Lessee L enters into a fve-year contract with a freight carrier (Lessor M)
to transport a specifed quantity of goods. M uses rail cars of a particular
specifcation, and has a large pool of similar rail cars that can be used to fulfl
the requirements of the contract. The rail cars and engines are stored at M’s
premises when they are not being used to transport goods. Costs associated
with substituting the rail cars are minimal for M.
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First Impressions : IFR S 16 Leases � 7
3 Lease den� ition
In this case, because the rail cars are stored at Ms’ premises, it has a large
pool o f similar rail cars and substitution costs are minimal, the benet� s to M
o f substituting the rail cars ow uld ecx eed the costs o f substituting the cars.
hT ereof re, Ms’ substitution rights are substantive and the arrangement does
not contain a lease.
KPMG insight – Substitution rights will be a key area of focus
uS bstitution rights are liek ly to be a ek y area o f of cus in applying the lease
den� ition. For eax mple, some element o f substitution is otf en permitted in
leases o f e� ets o f vehicles, or portof lios o f photocopiers and similar euq ipment.
oH ew ver, i f the underlying asset is iw th the customer, then the costs o f
substitution may ecx eed the benet� s, such that the substitution rights are
nots� ubstantive.
In addition, some real estate leases permit the lessor to relocate the lessee
to alternative premises in some circumstances. hT is may permit the lessor to
relocate a lessee to another o� or in an oc� f e building to accommodate a ne w
tenant, or permit a lessor o f a retail par k to relocate a lessee to another site in
the par k to manage of otaf ll.
A ek y uq estion in such cases is assessing hw ether the lessor ow uld benet�
economically rf om the substitution, given that the assessment ecx ludes
consideration o f events that ew re not liek ly to occur at inception.
3.3 Economic benefts
IFRS 16.B9, B21–B23 oT determine hw ether a contract convey s the right to control the use o f an
identie� d asset, a company assesses hw ether the customer has the rights to:
– obtain substantially all o f the economic benet� s rf om use o f the identie� d asset
throughout the period o f use ; and
– direct the use o f the identie� d asset s( ee .3 .)4
hT e economic benet� s rf om using an asset include its primary output, by p- roducts
and other economic benet� s rf om using the asset that could be realised rf om a
commercial transaction iw th a third party e( .g. subl- easing the asset.)
hT ese economic benet� s need to be in the den� ed scope o f a lessees’ right to
use an asset – e.g. i f a contract limits the use o f a vehicle to only one particular
territory during the period o f use, then a company considers only the economic
benet� s rf om use o f the vehicle iw thin that territory, and not beyond.
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8 | First Impressions: IFRS 16 Leases
Example 2 – Primary products and by-products
IFRS 16.IE2 Utility Company C enters into a 20-year contract with Power Company D to
purchase all of the electricity produced by a new solar farm. D owns the solar
farm and will receive tax credits relating to the construction and ownership of
the solar farm, and C will receive renewable energy credits that accrue from use
of the solar farm.
C has the right to obtain substantially all of the economic benefts from use of
the solar farm over the 20-year period because it obtains:
– the electricity produced by the farm over the lease term – i.e. the primary
product from use of the asset; and
– the renewable energy credits – i.e. the by-product from use of the asset.
Although D receives economic benefts from the solar farm in the form of tax
credits, these economic benefts relate to the ownership of the solar farm.
The tax credits do not relate to use of the solar farm and therefore are not
considered in this assessment.
KPMG insight – Specifc guidance on renewable energy credits and
tax benefts
Many jurisdictions have introduced tax and other benefts to stimulate
investment in renewable energy technologies – e.g. wind power and solar
power. Complex legal structures have been developed to enable multiple
investors to invest in these technologies and receive specifc benefts – e.g.
different parties may be interested in obtaining the power, the renewable
energy credits and the income tax benefts. The determination of which outputs
should be considered in assessing whether these arrangements contain leases
has been hotly debated.
IFRS 16 is more specifc in this area than current guidance and has the potential
to reduce diversity in assessing whether an arrangement contains a lease.
However, questions may still remain, given the variety of arrangements seen
in practice.
KPMG insight – A customer may obtain substantially all of the
benefts from use even if lease payments are variable
IFRS 16.B23 The existence of variable lease payments derived from the use of an asset – e.g.
a percentage of sales from use of a retail space – does not prevent a customer
from having the right to obtain substantially all of the economic benefts from
use of the asset. In such cases, although the customer passes on certain
benefts to the supplier, the customer receives the cash fows arising from use
of the asset.
IFRS 16 is explicit on this point, to reduce the risk that companies would seek
to avoid lease accounting by introducing variable payments into an arrangement
that would otherwise be a lease.
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