IFRS Newsletter: Leases, Issue 18, October 2015 - KPMG

14 Pages·2015·1.35 MB·English

IFR S LSWEN RETE Issue 18, October 2015
LEASES
The IASB is pushing to
fnalise its new leases
standard and has
selected an effective
date of 2019. 
Kimber Bascom,
KPMG’s global IFRS leasing
standards leader
PREPARING FOR 2019
This edition of IFRS Newsletter: Leases provides an overview of
the IASB discussions of the leases project in October 2015.
In its fnal public meeting on the leases project, the IASB agreed on the effective date of
the new standard and cleared fve sweep issues identifed during the drafting process.
The IASB decided that IFRS 16 Leases will be effective for accounting periods beginning
on or after 1 January 2019. Early adoption will be permitted, provided the company has
adopted IFRS 15 Revenue from Contracts with Customers. The IASB expects that its new
leases standard will be ready for publication in December 2015.
The FASB will discuss the effective date of its version of the standard in November 2015.
Highlights
2019 effective date
l    The IASB agreed on a 2019 effective date for the new leases standard.
Defnition of a lease
l    The Boards have devoted more discussion and outreach to the on/off-balance sheet test than
to any other area of the standard. However, many stakeholders remain concerned about the
new defnition.
Sweep issues
l    The IASB clarifed the lease modifcation requirements and also resolved four other sweep issues
arising from the external review draft process.
Are you ready for the new standard?
l    What do you need to do to get ready for 2019? Our checklist asks 10 key questions to help you prepare
for implementation.
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CURRENT STATUS OF THE PROPOSALS
What’s new?
The 2013 proposals …
hT e ek y decision this month aw s that the IFR S version o f the
hT e oB ards have been ow rik ng toaw rds a converged standard
ne w leases standard iw ll be eef f ctive in 201.9 aB sed on the
that ow uld bring most leases onb- alance sheet of r lessees.
hT is oj int proej ct aw s intended to replace the current lease IAs’BS onw outreach, this date is liek ly to be preef rred more
accounting reuq irements under IFR S and UG�S AAP . In addition, by preparers than users o f n� ancial statements.
there ow uld be signic� ant conseuq ential amendments h
T is marsk the end o f redeliberations on the proposals
to IA04 �S Investment Property. In May 201,3 the oB ards
included in the 201 3 .DE hT ose redeliberations have seen
published a revised epx osure dratf t( he 201 3 ,)DE hw ich
signic� ant changes to the 201 3 proposals – in particular:
updated the proposals published in the 2010 epx osure dratf .
hT e 201 3 DE contains the of lloiw ng ek y proposals, all o f hw ich • simplic� ations in many areas – including ne w practical
have been redeliberated by the oB ards in 201 4 and 2015. epx edients and transition reliesf ;
Lease identifcation • a oj int decision by the oB ards to abandon the lessor
accounting proposals – the ne w standards iw ll retain many
A l‘ ease ’ ow uld be a contract that conveys the right to
use an identie� d asset of r a period o f time in ecx hange of r ek y aspects o f the current lessor accounting model ; and
consideration. hT e identic� ation criteria ow uld be based on • disagreement over the lessee accounting model – the IFR S
rights to control the use o f identie� d assets. A contract ow uld
standard iw ll ef ature a single lessee accounting model, hw ile
convey these rights i f the customer could both direct the use
the U S GAAP version iw ll ef ature a dual model, including
o f the asset and derive substantially all o f the benet� s rf om
they T pe B model in hw ich the RUO asset is measured as a
its use. I f a single contract contains multiple lease ando/ r
nonl- ease components, then the company ow uld generally balancing g� ure to achieve straightl- ine epx ense.
be reuq ired to account separately of r each component. It no w seems certain that the oB ards iw ll achieve one ek y
obej ctive o f the leases proej ct – more leases are coming on-
Lease classifcation
balance sheet of rl� essees. oH ew ver, the ne w leases standard
hT e proposals ow uld introduce ne w lease classic� ation tests, remains highly controversial.
resulting in a d‘ ual model ’ of r both lessees and lessors. For
yT peA� leases – most leases in hw ich the underlying asset is hT e oB ards have made signic� ant conceptual compromises
not property i( .e. not land ando/ r a building ) – interest income/ to n� alise the proej ct. hT ese include the ecx eption of r leases
epx ense ow uld be recognised, similar to n� ance leases o f lov- w alue items in the IFR S version o f the standard, and the
today. tS raightl- ine incomee/ px ense recognition ow uld be balancing g� ure lessee model in the U S GAAP version o f the
preserved of ry T pe B leases – most property leases – similar standard.
to operating leases today.
nO e ek y application issue stands out above all others – the
Lessee accounting den� ition o f a lease. hT is is the ne w ono/ b-f f alance sheet test.
hT e oB ards have devoted more discussion and outreach to this
A lessee ow uld recognise a righto- u-f se R( UO ) asset
topic than to any other area o f the standard. oH ew ver, many
r( epresenting the right to use the underlying asset ) and a
lease liability r( epresenting the obligation to maek lease staek holders remain concerned about the ne w den� ition.
payments.) hT e lease liability ow uld be amortised using At the time o f rw iting, ew epx ect that this iw ll be our last leases
the eef f ctive interest rate method under both models. For
nesw letter beof re the ne w standard is published. eW plan an
yT peA� leases, the RUO asset ow uld generally be amortised
etx ensive range o f publications and guidance to accompany the
on a straightl- ine basis. oH ew ver, of ry T pe B leases the
ne w standard, hw ich iw ll be available rf om pk mg.comi/ rf s.
lessee ow uld subseuq ently measure the RUO asset as a
balancing g� ure to achieve a straightl- ine prol� e o f total lease
epx ense e( cx luding any contingent rentals ) consisting o f both Contents
amortisation and interest epx ense.
Lessor accounting
For yT pe A leases, the lessor ow uld derecognise the
underlying asset and recognise a lease receivable and
residual asset. For yT pe B leases, the lessor ow uld continue
to recognise the underlying asset and recognise lease
payments as income.
Short-term leases
Leases iw th a maix mum contractual term, including reneaw l
options, o f 12m� onths or less ow uld be eex mpt.
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THE NEW STANDARD AT A GLANCE
A fundamental Topic IASB decisions FASB decisions
overhaul in lessee
• iS ngle lease accounting model • uD al lease accounting model
accounting
from 2019. • oN lease classic� ation test • Lease classic� ation test based on
IA S 1 7 Leases classic� ation criteria
• All leases onb- alance sheet:
• All leases onb- alance sheet:
– lessee ow uld recognise a
righto- u-f se R( UO ) asset and – lessee ow uld recognise a RUO
Lessee leasel� iability asset and lease liability
accounting
model – treated as the purchase o f an – yT pe A n�( ance ) leases treated
asset on a n� anced basis as the purchase o f an asset on a
n� anced basis
– yT pe B o( perating ) leases
ow uld generally have straight-
line recognition o f total lease
epx ense
• uD al lease accounting model of r lessors
• Lease classic� ation test based on IA S 1 7 classic� ation criteria
Lessor • yT pe A n�( ance ) accounting model based on IA S 1 7 n� ance lease
accounting accounting iw th recognition o f net investment in lease comprising lease
model receivable and residual asset
• yT pe B o( perating ) accounting model based on IA S 1 7 operating lease
accounting
• Payments of r optional – e.g. reneaw l – periods and purchase options
included in lease accounting i f it is reasonably certain that the lessee iw ll
eex rcise those options, consistent iw th the high threshold in current GAAP
Lease term
and purchase • Lessees to reassess reneaw l and purchase options i f there is a signic� ant
options event or change in circumstances that is iw thin the control o f the lessee –
e.g. construction o f signic� ant leasehold improvements
• oN reassessment o f reneaw l and purchase options by lessors
• pO tional lessee eex mption of r shortt- erm leases – i.e. leases of r hw ich the
lease term as determined under the revised proposals is 12 months or less
• Portof liol- evel accounting permitted i f it does not dief f r materially rf om
Practical
applying the reuq irements to individual leases
expedients
and targeted • pO tional lessee eex mption of r • oN eex mption of r smallt- icek t
reliefs smallt- icek t leases – i.e. leases o f leases
assets iw th a value o f U5$S ,000 or
less hw en ne w – even i f material in
aggregate
• Accounting periods beginning on • oT be discussed in oN vember
or atf er 1 aJ nuary 2019
Effective date
• aE rly adoption permitted i f IFR S 15
also adopted
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EFFECTIVE DATE
The IASB agreed What’s the issue?
that its new
When will companies be required to apply the new leases standard?
leases standard
will be effective hT e 201 3 DE did not include a proposed eef f ctive date. Respondents to the 201 3 DE that chose to
in 2019. comment on the eef f ctive date generally said that a signic� ant period o f time ow uld be reuq ired
betew en publication o f the ne w standard and its eef f ctive date, due to the costs and compleix ty o f
applying the 201 3 proposals.
iS nce then, the IA BS believes that it has simplie� d its lease proposals and introduced ne w practical
epx edients and transition reliesf to ease the burden o f implementation.
In the cO tober IA BS meeting, the IA BS sta f f reported that recent outreach on the eef f ctive date
of und that a maoj rity o f companies:
• considered that they ow uld need tow to three years to implement the ne w standard of lloiw ng
publication – though some argued of r an eef f ctive date as late as 2020 or 2021 ; and
• ow uld preef r to adopt the ne w leases standard atf er IFR S 15, though some aw nted the option
to adopt both the ne w revenue and leases standards at the same time.
In contrast, users o f n� ancial statements generally aw nted companies to apply the IAs’BS ne w
standards on n� ancial instruments, leases and revenue at the same time – i.e. rf om 201.8
What’s new?
At its cO tober meeting, the IA BS agreed that companies iw ll be :
• reuq ired to apply the ne w standard of r annual periods beginning on or atf er 1 aJ nuary 201 ;9 and
• permitted to early adopt, provided that they also adopt IFR S 15.
hT e FA BS has not yet discussed the eef f ctive date o f its version o f the standard.
What are the implications?
Many companies iw ll be pleased that the IA BS has been inu� enced more by ef edbac k rf om
preparers than rf om users. oH ew ver, it is clear that the closing years o f this decade iw ll see a
period o f maoj r accounting change of r companies. hT e IAs’BS ne w n� ancial instruments and
revenue standards iw ll taek eef f ct in 201,8 of lloew d by leases one year later.
I f the IA BS meets its target to publish the leases standard by the end o f 2015, then most
companies iw ll have three years to prepare of r implementation. A ek y early decision iw ll be the
transition approach selected, as this iw ll aef f ct hw ether a company restates the comparatives in
the r� st n� ancial statements in hw ich it applies the ne w leases standard. hT is iw ll in turn inu� ence
the scope and timing o f a companys’ implementation proej ct.
Most companies iw ll have leases in place today that iw ll run to 201 9 or later. And of r many
companies, 201 9 iw ll arrive all too soon. uO r simple checlk ist on page 8 iw ll help you begin to thin k
about ho w ready you are to adopt the ne w leases standard.
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LEASE MODIFICATIONS
The IASB What’s the issue?
clarifed the lease
When is a lease modifcation treated as a new lease?
modifcation
requirements. hT e 201 3 DE contained only limited guidance on lease modic� ations. uD ring redeliberations, the
IA BS agreed to epx and the guidance in this area.
hT e etx ernal revie w dratf o f the ne w standard stated that a lease modic� ation ow uld be treated as
a separate new lease i:f
• the lease modic� ation increases the scope o f the lease – of r eax mple, by adding the right to use
one or more underlying assets, or etx ending the contractual lease term ; and
• the consideration of r the lease increases by an amount commensurate iw th the standa- lone
price of r that increase.
Revieew rs ew re concerned about the potential dief f rence in treatment o f etx ensions to the term
o f a lease arising rf om :
• a lease modic� ation – hw ich the company ow uld account of r as a ne w separate lease rf om the
date on hw ich the ne w lease commences ; and
• reassessment o f an eix sting etx ension option – hw ich the company ow uld account of r as a
continuation o f the original lease.
What’s new?A
At its cO tober meeting, the IA BS agreed that a lessee a( nd a lessor holding a n� ance lease ) should
treat a lease modic� ation as a separate ne w lease only i :f
• the modic� ation increases the scope o f the lease by adding the right to use one or more
underlying assets ; and
• the increase in consideration is commensurate iw th the increase in scope.
What are the implications?
Many companies iw ll ew lcome the introduction – of r the r� st time in IFR S – o f detailed guidance
on accounting of r lease modic� ations. hT is has been a signic� ant practice issue of r some years,
iw th lease modic� ations becoming common in changing economic circumstances.
hT is decision eliminates potential inconsistencies in accounting of r economically similar
transactions. Lessees, and lessors that hold n� ance leases, ow uld treat a lease modic� ation that
etx ends the lease term as the continuation o f the eix sting lease. hT ereof re, any increase in lease
assets and liabilities ow uld be recognised at the date that the modie� d terms and conditions
area� greed.
hT e IA BS and FA BS versions o f the standard are no w converged in this area.
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OTHER SWEEP ISSUES RESOLVED
The IASB also What’s the issue?
discussed four
What other issues remain outstanding on the leases project?
other sweep
issues, bringing hT e IA BS sta f f assessed that it aw s only necessary of r the IA BS to debate v� e sew ep issues
public standard- arising rf om the etx ernal revie w dratf process. In addition to lease modic� ations, the IA BS
considered the of lloiw ng sew ep issues.
setting on the
leases project to • Reassessment of the discount rate for foating interest rate leases: Revieew rs uq estioned hw y
a close. the etx ernal revie w dratf did not reuq ire a lessee to update the discount rate applied hw en lease
payments are revised based on an inde x or rate.
• Costs associated with returning an underlying asset at the end of a lease: Revieew rs noted that
such costs ew re not specic� ally addressed in the etx ernal revie w dratf .
• The treatment of short-term leases and leases of low-value assets in a business combination:
Revieew rs uq estioned hw ether it aw s necessary of r an acuq irer to recognise assets and
liabilities of r such leases i f the recognition eex mptions are elected.
• Leases that are part of a disposal group that is held for sale or a discontinued operation:
Revieew rs uq estioned hw ether a lessee should be reuq ired to provide the disclosures in the
ne w leases standard of r such leases.
What’s new?
At its cO tober meeting, the IA BS agreed the of lloiw ng.
• A lessee should update the discount rate of r a o� ating interest rate lease hw enever the lease
payments are updated because o f a change in the interest rate used to determine those payments.
• A lessee should account of r restoration obligations associated iw th a lease in accordance iw th
IA S 73 Provisions, Contingent Liabilities and Contingent Assets – i.e. a lessee ow uld :
– include an initial estimate o f costs to be incur red in the initial measurement o f the RUO
asset ; and
– account f or any changes in the obligation as an aduj stment to the carrying amount o f the
RUO asset in accordance iw th IFRI C 1 Changes in Existing Decommissioning, Restoration
and Similar Liabilities.
• hT e current reuq irement in IFR S 3 Business Combinations of r an acuq irer to recognise
assets and liabilities i f the terms o f an operating lease in hw ich the lessee is the acuq iree are
af vourable or unaf vourable should not be retained of r shortt- erm leases or leases o f lov- w alue
assets of r hw ich the recognition eex mptions are elected.
• A lessee should provide only the disclosures reuq ired by IFR S 5 Non-current Assets Held for
Sale and Discontinued Operations of r leases iw thin the scope o f that standard.
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What are the implications?
hT ese decisions clariyf a number o f practical reuq irements, including the interaction betew en the
ne w leases standard and other eix sting IFRsS .
Most signic� antly, the issues discussed by the IA BS in the cO tober meeting are the only issues that
the IA BS considers it necessary to debate in public beof re publishing the ne w leases standard. hT is
meeting brings to a close a long process o f standards- etting that began almost ten years ago. hT e
IA BS plans no uf rther discussions relating to the ne w leases standard beof re the standard is issued.
hT e IA BS epx ects that the ne w standard iw ll be ready of r publication in eD cember 2015.
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ARE YOU READY FOR THE NEW STANDARD?
What do you need Planning your implementation proej ct iw ll taek time and care. oH ew ver, it might be ow rth asik ng
to do to get ready yoursel f a ef w simple uq estions no w – uj st to get a ef el of r the scale o f the challenge ahead…
for 2019?
Topic Questions and comments
✔
Lease
defnition Do you know which of your transactions are, or contain, leases?
Will you elect to grandfather the lease defnition for existing
contracts on transition?
• In many cases, lease den� ition iw ll be obvious, and a transaction that is a
lease today iw ll be a lease in 201.9 oH ew ver, there are signic� ant changes
in lease den� ition that iw ll aef f ct many common transactions – e.g. poew r
purchase agreements and transport agreements.
• hT ere is also a big decision to be made on transition – iw ll you spend
the time and cost necessary to reassess your eix sting transactions and
thereby ecx lude some eix sting transactions rf om lease accounting, or
grandaf ther eix sting arrangements and apply the ne w den� ition only to
nea�w rrangements?
Lease data
Do you have a database of all of your leases?
Do you have the systems and processes necessary to calculate
lease assets and liabilities?
Are your current disclosures of operating lease commitments
complete and accurate?
• oS me companies have databases that capture all o f their lease data – but
this isnt’ true of r everyone. oN w is the time to begin to assess hw ether your
current systems have the inof rmation necessary to apply the nes�w tandard.
• hT e operating lease commitments note may not alaw ys be the top priority
in a busy reporting season. oN w is the time to chec k that it includes all the
leases that you iw ll soon be bringing onb- alance sheet, so that there are no
surprises on transition.
Debt Will application of the new standard impact your debt and other
covenants covenants?
• Many n� ancial agreements ef ature covenants that are applied on a rf‘ oez n
GAAP ’ basis – that is, a change in accounting policy ow nt’ aef f ct the
covenant test. uB t this isnt’ true in all cases.
• Given the scale o f accounting change – iw th ne w standards on n� ancial
instruments, leases and revenue to be applied in 2011-8 9 – its’ time to
doublec- hec,k to identiyf any covenants you may iw sh to renegotiate beof re
the standard becomes eef f ctive.
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Topic Questions and comments
✔
Sale-and- Do you understand the impact of the new standard on your sale-
leaseback and-leaseback transactions?
transactions
• Most companies and users nk o w that the ne w leases standard eliminates
salea- ndl- easebac k as an ob-f f alance sheet proposition.
• uB t theres’ more than one aw y in hw ich a salea- ndl- easebac k can come bac k
onb- alance sheet.
– I f the transaction is a true sale under IFR S 15, then it comes onb- alance
sheet liek a current salea- ndn�- ance leasebac k – i.e. iw th the liability
measured at cost.
– I f the transaction is not a sale under IFR S 15, then it comes on-
balance sheet as a n� ancing under IFR S ,9 hw ich may reuq ire ongoing
remeasurement at af ir value through prot� or loss.
Financial Do you understand the impact of the new standard on your
ratios fnancial ratios, KPIs etc?
Will optional exemptions, such as those for short-term leases
and leases of low-value items, have a material impact on your
fnancial statements?
• Most companies and users nk o w that the ne w standard brings more leases
onb- alance sheet, increasing gearing etc.
• uB t hw at about other eef f cts?
– eD tailed modelling may be reuq ired to predict the impact o f the rf ont-
loaded total lease epx ense in moving rf om operating lease accounting to
the RUO model.
– hT e geography o f the prot� and loss account iw ll change, as operating
lease epx ense is replaced by depreciation / amortisation o f the RUO asset
and interest epx ense.
– Will you reden� e nonG- AAP measures such as IBE ADT to ree� ct the ne w
lease model?
– oH w iw ll you present variable lease payments?
– oD you nk o w the impact the optional eex mptions iw ll have on your KPIs ?
aH ve you decided hw ich ones to elect?
Transition
options Have you thought about how to transition to the new standard?
• hT e ne w standard iw ll oef f r a iw de range o f transition options, ef aturing
many practical epx edients. nO e ek y uq estion is hw ether to apply
thes� tandard:
– retrospectively, hw ich may reuq ire additional cost and eof f rt ; or
– as a b‘ ig bang ’ on the date o f initial application, hw ich iw ll reuq ire less
historical inof rmation but may impact your trend data of r many years
toc� ome.
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SUMMARY OF PREVIOUS DISCUSSIONS
Meeting date Topics discussed IFRS Newsletter
• Lessee accounting model
• Lessor accounting model
• Lease term and purchase options
March 2014 Issue 14
• Lessee shortt- erm leases and smallt- icek t leases
iS gnic� antly, the oB ards reached a nonc- onverged solution to lessee accounting,
and decided not to maek signic� ant changes to current lessor accounting under
IA1�S .7
• Lease modic� ations and contract combinations
• aV riable lease payments
• Ins- ubstance ex� d payments
• iD scount rate
April 2014
iS gnic� antly, the oB ards decided ho w to identiyf and account of r contract
modic� ations. In addition, the oB ards rear� f med that only variable payments that
depend on an inde x or rate, or are ins- ubstance ex� d, should be included in the
initial measurement o f lease assets and liabilities ; hoew ver, they reached dief f rent
conclusions as to hw en lessees should reassess such payments.
• eD n� ition o f a lease
• eS parating lease and nonl- ease components
Issue 15
• Initial direct costs
May 2014
iS gnic� antly, the oB ards decided to retain the general principles rf om the 201 3
DE supporting the den� ition o f a lease based on the right to control the use o f an
identie� d asset. hT e oB ards instructed the sta f f to provide additional guidance to
clariyf hw ich decisions most signic� antly aef f ct the economic benet� s to be derived
rf om the asset.
• uS bl- eases
• Lessee balance sheet presentation
June 2014 • aC sh o� w presentation
iS gnic� antly, the oB ards decided that an intermediate lessor ow uld account of r a
head lease and a subl- ease as tow separate contracts, unless those contracts meet
the contract combination guidance.
• aS lea- ndl- easebac k transactions
• Lessor disclosure reuq irements
July 2014
iS gnic� antly, the oB ards rear� f med the overall approach to salea- ndl- easebac k
accounting, but dief f red on a number o f important application issues. In addition,
they decided to add ne w disclosure reuq irements of r lessors. Issue 16
• eD n� ition o f a lease
October 2014 iS gnic� antly, the oB ards agreed on uf rther claric� ations to the den� ition o f a lease,
but deef rred a vote on aspects o f the den� ition on hw ich they appeared to have
dief f rent initial viesw .
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