IASB - PowerPoint Presentation

Slide1

IASB Leases ProjectSlide2

Overview

Identify a lease

Lessee: how big the liability will be?Lessor accounting: what has changed?Other lease accounting issuesTransition provisionsWhat do you need to do to get ready for 2019?

AgendaSlide3

Objectives:

Require lessees to

recognise

all significant leases on-balance sheet

Eliminate arbitrary accounting distinctions for transactions that are economically similarReduce complexity in lease accountingDevelop converged lease accounting requirements

Overview – Project timeline

January2019

July 2006

Discussion Paper Issued

Second Exposure Draft Issued

Project added to Boards’ agendas

Final standard

e

xpected

Q4 2015

March 2009

May 2013

?

August 2010

First Exposure Draft Issued

Proposed effective date

Permission to Ballot

March 2015Slide4

Overview – IASB model

All significant leases on-balance sheet for lessees with expense recognition generally front-loaded, similar to current finance leases

ROU Model

Right to use underlying asset

and lease liabilityRight to use underlying assetLease payments

Operating

No derecognition of underlying asset

Finance

Lease Receivable

Residual Asset

Lessor

Finance or Operating Model

Lessee

‘Accelerated ROU’

ModelSlide5

Lessee accounting – P&L impactSlide6

Lessor

Generally consistent with current IAS 17

Right to use underlying asset

Lease payments

Operating

No derecognition of underlying asset

Finance

Lease Receivable

Residual Asset

Lessor

Finance or Operating Model

Lessee

Lease classification test based on IAS 17Slide7

IASB vs FASB standards – Converged?

Lease definition

Leases on balance sheet for lessees

Lessor accounting and lease classification

Lessee accounting model

Detailed measurement requirements

Exemption for leases of low value itemsSlide8

Overview

Identify a lease

Lessee: how big the liability will be?Lessor accounting: what has changed?Other lease accounting issuesTransition provisionsWhat do you need to do to get ready for 2019?

AgendaSlide9

Scope

Within

scope

Short-term leases (lease term ≤ 12 months)

Underlying assets of low value (≤ $5,000, when new)

Scope

with exceptions

Outside

scope

Contracts that meet the definition of a lease:

Leases of assets

Long leases of land

Sale-leasebacks

Sub-leases

In-substance purchases / sales

Leases of inventory

Leases of:

Intangibles (other than ROU assets in a sublease)

Natural resources and exploration

Biological assetsSlide10

Practical expedients

Leases with a lease term of

≤ 12 months may apply current operating lease accounting

If elected, the exemption is applied to all leases within that class of underlying asset

Still subject to qualitative and quantitative disclosuresExemption for leases of underlying assets that are individually low in value (e.g. ≤ $5,000US, when new) even if material in aggregateLeases may be accounted for off-balance sheet under IFRS, but on-balance sheet under U.S. GAAP

Aspects of the new standard may be applied at a portfolio level (e.g. determination of discount and lease term)

Must be a reasonable expectation that the portfolio approach is not materially different than application to individual leases

Short-term leases

Underlying assets of low value

Portfolio-level Slide11

Definition of a lease

Identified

asset

Control

over useA contract that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration. Definition focuses on control over the use of an identified asset.Customer has the right

to (throughout the period of use)

Obtain substantially all of the economic benefits from use

of the asset, andDirect the use of the

asset or direct others to operate it as customer wishes

Asset may be explicitly or implicitly specified in a contract;

Asset is physically distinct – applies to physically distinct portions but not e.g. capacity portionsSupplier does not have a substantive right to substitute

the assetSlide12

Definition of a lease

Right to direct

(including the right to change) how and for what purpose the asset is used throughout the period of use

The

relevant decisions about how and for what purpose the asset is used are predetermined and:The customer has the right to operate the asset, without the supplier having the right to change those operating instructions The customer designed the asset (or aspects of the asset) in a way that predetermines how and for what purpose the asset will be usedExamples of relevant decisions about how and for what purpose the asset is use: right to change the type of output produced, when, where, or whether it is produced

Customer rights to direct the useSlide13

Definition of a lease

Contractual provisions designed to protect supplier’s interest in the asset, its personnel, or ensure compliance with laws and regulations

Specify maximum amount of use, or when or where customer can use itRequire customer to notify a change in how or for what purpose asset is used

Require customer to follow particular operating practices

Do not, in isolation, prevent customer from having the right to direct the use of the assetSupplier protective rightsCustomer’s right tospecifyoutputCustomer’s right to specify quantity and type of goods or services provided by the asset is not, by itself, considered the right to direct the use of the assetSlide14

Overview

Identify a lease

Lessee: how big the liability will be?Lessor accounting: what has changed?Other lease accounting issuesTransition provisionsWhat do you need to do to get ready for 2019?

AgendaSlide15

Initial measurement – Lease liability

Discount

rate

6,7

PV of lease

payments over the lease term – includes:

Purchase

options

3

Fixed pay

ments1

Term

option

penalties

2

RV

guarantees4

Some

variable lease payments5

Fixed payments include in-substance fixed payments, less lease incentives

Only include the termination penalty if the lease term reflects the lessee exercising an option to terminate the lease

Only include the exercise price of a purchase option if lessee is reasonably certain

to exercise For RVGs:Lessee includes the amount expected to be payable

Lessor includes guaranteed amountOnly include VLPs based on an index or rate (e.g., CPI), or if in-substance fixed

A lessor is required to use the rate implicit in the lease. A lessee may use the incremental borrowing rate, if it cannot determine the lessor’s incremental borrowing rateNonpublic business entities may make an accounting policy election to use a risk-free discount rate (FASB only)Slide16

Lease termSlide17

Lease term

Contractual / Market

Level of rentals in any secondary period compared to market rates

Contingent payments

Renewal and purchase optionsCosts relating to the termination of the lease and the signing of a new replacement leaseReturning costs of the underlying assetAssetNature of item (specialised)LocationAvailability of suitable alternativesExistence of significant leasehold improvements

Consider

economic factors in estimating lease

termSlide18

Subsequent measurement – Lease liability

Reassessment of lease

term, purchase option and RVG

Relates

to future periodsReassessment of

variable lease

payments based on an index or rate

Relates

to current

period

Changes in carrying amount of lease liability due to:

Adjust right-of-use asset

Recognise in P&L

Amortised

cost using the

effective interest

method; no fair value optionSlide19

Reassessment of lease term and purchase o

ptions (lessee only)

Constructing significant leasehold improvements

Significantly modifying or

customising the underlying assetSubleasing the underlying asset for a period beyond the exercise date of an optionReassessment triggersMaking a business decision that is directly relevant to the lessee’s ability to exercise or not exercise an optionSlide20

Subsequent measurement – Discount rate

Lessees

remeasure the lease liability using revised discount rate when there is a change in lease payments due to:

A

change in the lease term; A change in assessment of whether the lessee is or is not reasonably certain to exercise a purchase option; orA lease modification.Lessors are not required to reassess the discount rate. Slide21

Initial measurement – ROU asset

ROU asset is initially measured as the sum of:

Lessee

also adjusts

the ROU asset for lease incentivesPV of lease payments

Initial direct costs

Prepaid lease paymentsSlide22

Subsequent measurement – ROU asset

Amortise over shorter of lease term or economic life, generally on a straight-line basis

Results in front loading of total lease expense

(amortisation expense on ROU asset + interest expense on lease liability)

ROU asset is subject to impairment testing under IAS 36 impairment IAS 40 applied if the leased property is investment propertySlide23

Impairment – ROU asset

Continue amortising ROU asset pre-impairment basis

At a minimum, must recognise expense from unwinding of the discount

ROU asset tested is for impairment in accordance with IAS 36. Amortisation following an impairment as follows:Slide24

Lease modifications – Lessee

Not at stand-alone price

At stand-alone price for increase

Change to the contractual terms and conditions

(excludes exercise of option included in original lease contract)

Separate lease

Adjust ROU asset

Adjust ROU / gain or loss

Decrease the scope

Increase in scope of lease by adding the ROU one or more underlying assets

All other lease modificationsSlide25

Overview

Identify a lease

Lessee: how bit the liability will be?Lessor accounting: what has changed?Other lease accounting issuesTransition provisions

What do you need to do to get ready for 2019?

AgendaSlide26

Lessor

Generally consistent with current IAS 17

Right to use underlying asset

Lease payments

Operating

No derecognition of underlying asset

Finance

Lease Receivable

Residual Asset

Lessor

Finance or Operating Model

LesseeSlide27

Lessor lease

c

lassification

t

estOwnership transfers at end of lease?

Bargain purchase option?

Finance Lease

Operating lease

Transfer substantially all risk and rewards of ownership?

No

No

No

Yes

Yes

Yes

Assessment criteria similar to current IAS 17 classification test

Lease classification test is not applicable for lesseesSlide28

Lease modifications – Lessor

Finance lease (at inception)

At stand-alone price for increase

Separate lease

Apply IFRS 9

Increase in scope of lease by adding ROU one or more underlying assets

All other contract modifications

Operating lease (at inception)

Change to the contractual terms and conditions

(excludes exercise of option included in original lease contract)Slide29

Overview

Identify a lease

Lessee: how bit the liability will be?Lessor accounting: what has changed?O

ther lease accounting issues

Transition provisionsWhat do you need to do to get ready for 2019?AgendaSlide30

Subleases

Intermediate lessor

A

ccounts for head lease and sublease as two separate contracts

Classifies the sublease based on the ROU asset arising from the head leaseRecognises lease assets and lease liabilities gross unless offset criteria metRecognises lease income and lease expense gross unless acting as agentSlide31

Sale-leaseback t

ransactions

Buyer-lessor

Seller- lessee

For a sale to occur, transaction must meet the requirements of a sale under the new revenue recognition standard

Leaseback

The leaseback is accounted for

using the lessee right-of-use model

The sale is

recognised

in accordance with applicable

GAAP

The purchase is

recognised

in accordance with applicable

GAAP

Sale

Each component of the transaction is assessed separately

Gain on sale is adjusted for off-market terms

If there is no sale, then both parties apply IFRS 9. Slide32

Overview

Identify a lease

Lessee: how bit the liability will be?Lessor accounting: what has changed?Other lease accounting issuesTransition provisions

What do you need to do to get ready for 2019?

AgendaSlide33

Effective date and early adoption

Effective

date

Accounting periods

beginning on or after 1 January 2019Early adoptionPermitted for entities that have adopted IFRS 15 Slide34

Lease definition – two options on transition

Core requirement

Apply the

new lease definition to all contracts

Practical expedient“Grandfather” the assessment of which existing contracts are, or contain, leases under IAS 17 and FRIC 4Apply the new lease definition to new contracts

ORSlide35

Lessees – two main transition options

Full

retrospective

Apply retrospectively

to each period presented in accordance with IAS 8Modified retrospectiveCumulative effect of applying new standard recognised in equity at beginning of current reporting periodOR

An accounting policy choice to be applied to all leasesSlide36

Lessee – modified retrospective approach for operating leases

Initial measurement of right-of-use asset =

Carrying amount as if standard had been in place at commencement dateOR

Lease liability adjusted for accrued prepaid lease payments

Right-of-use assetLease liabilityInitial measurement of lease liability = present value of remaining lease paymentsPractical expedients

Various optional practical expedients, including:

Apply a single discount rate to a portfolio of leases

Treat leases with a remaining term < 12 months as short-term leasesSlide37

Lessee – modified retrospective approach for finance leases

Initial measurement of right-of-use asset = carrying amount of lease asset under IAS 17

Right-of-use asset

Lease liability

Initial measurement of lease liability = carrying amount of lease liability under IAS 17Slide38

Other transition requirements

Reassess classification of subleases previously classified as operating leases under IAS 17

“New lease” accounting for any leases that are reclassified as finance leases

Subleases

LessorsNo adjustments on transition, other than as noted belowSale-leasebackNo reassessment of whether a sale occurredIf leaseback was a finance lease under IAS 17

Apply transition guidance for finance leases

Continue to amortise any gain over lease termIf leaseback was

an operating lease under IAS 17

Apply transition guidance for operating leases

Adjust ROU asset for deferred gains / lossesSlide39

Overview

Identify a lease

Lessee: how bit the liability will be?Lessor accounting: what has changed?Other lease accounting issuesTransition provisionsWhat do you need to do to get ready

for 2019?

AgendaSlide40

Next steps – Some key questions (1/3)

Topic

Questions and comments

Lease

DefinitionDo you know which of your transactions are, or contain, leases?Will you elect to grandfather the lease definition for existing contracts on transition?üü

Consider the

significant changes in lease definition that will affect many common transactions – e.g. power purchase agreements and transport agreements.

On transition – will you spend the time and cost necessary to reassess your existing transactions and thereby exclude some existing transactions from lease accounting, or grandfather existing arrangements and apply the new definition only to new arrangements?

Lease data

Do you have a database of all your leases?

Do

you have systems and processes necessary to calculate lease assets and liabilities?

Are your current disclosures of operating lease commitments complete and accurate?

ü

ü

ü

Now is the time to begin to assess whether your current systems have the information necessary to apply IFRS 16.Slide41

Next steps – Some key questions (2/3

)

Topic

Questions and comments

Lease data (cont’d)Now is the time to check that it includes all the leases that you will soon be bringing on-balance sheet, so that there are no surprises on transition.

Debt covenants

Will application of the new standard impact your debt and other covenants?

ü

If your financial agreements feature covenants are not applied

on a “frozen GAAP” basis, a change in accounting policy might affect your covenant test.

Given the scale of accounting changes to be applied in 2018-19 with new standards on Financial instruments, Revenue and Leases, you may wish to renegotiate some covenants before the standard becomes effective.

Sale-and-leaseback transactions

Do you understand the impact of the new standard on your sale-and-leaseback transactions?

ü

The new standard eliminates sale-and-leaseback as an off-balance sheet proposition

Sale-and-leaseback can come back on-balance

sheet on more than one way:

If true sale

under IFRS 15: same as current sale-and-finance-leaseback

If not a sale: financing under IFRS 9 which may require to measure at FVTPLSlide42

Next steps – Some key questions (3/3

)

Topic

Questions and comments

Financial ratiosDo you understand the impact of the new standard on your financial ratios?ü

Will optional exemptions such as those for short-term

leases and leases of low-value items have a material impact on your financial statements?

ü

The

new standard will bring more leases on-balance sheet, increasing the gearing, etc.

What other effects?

Modelling may be required to predict the impact of the front-loaded total expense

Geography of profit and loss will change: now depreciation and interest expense

How will you present variable lease payments?

What will be the impact of optional exemptions on your KPIs?

Transition options

Have

you thought about how to transition to the new standard?

ü

One key

question is whether to apply the standard

Retrospectively, which will require additional cost and effort; or

As a “big bang” on the date of initial application, which will require less historical information but may impact your trend date for many years to come