One of the most notable aspects of IFRS 16 is that the lessee and lessor accounting models are asymmetrical. This publication aims to resolve these lessee accounting questions. IFRS 16 includes detailed guidance to help companies assess whether a contract contains a lease or a service, or both. [IFRS 16:101], The objective of IFRS 16’s disclosures is for information to be provided in the notes that, together with information provided in the statement of financial position, statement of profit or loss and statement of cash flows, gives a basis for users to assess the effect that leases have. At the simplest level, the accounting treatment of leases by lessees will change fundamentally. Except for two exceptions (short-term leases and low value leases), IFRS 16 requires that lessees shall recognise a right-of-use asset and a lease liability at the commencement date of any lease. This should be recorded at ‘deemed cost’ (see below). Where these exemptions are taken the lease payments should be recognised as an expense over the lease term. ‘Deemed cost’ = the present value of the minimum lease payments that are outstanding at the date of recognition; The lease liability should be recorded at the present value of the minimum lease payments. The asset can be valued by either applying the standard as if: It had always been applied (the present value at commencement of lease); or. Subsequently, the liability will be reduced as and when lease payments are made. The selection of IFRS 16 sublease accounting by lessors, be that as it may, won’t be unpredictable, as IFRS 16 holds the IAS 17 Leases accounting treatment for lessors. The adoption of IFRS 16 by lessors, however, will not be complex as IFRS 16 retains the IAS 17 Leases accounting treatment for lessors. At the simplest level, the accounting treatment of leases by lessees will change fundamentally. It provides IFRS 16 disclosure examples and explanations as a supplement to the September 2017 guide; as such, this supplement is not intended to reconcile to that guide. hyphenated at the specified hyphenation points. Play Communications S.A. – Annual report – 31 December 2019 Industry: telecoms Consolidated financial statements prepared in accordance with IFRS as adopted by the European Union (extracts) As at and for the year ended December 31, 2019 (Expressed in PLN, all amounts in tables given in thousands unless stated otherwise) 41. [IFRS 16:26], Variable lease payments that depend on an index or a rate are included in the initial measurement of the lease liability and are initially measured using the index or rate as at the commencement date. The lease term is deemed to be “short”, i.e. Although first published back in January 2016, the standard has only come into force recently, applying for reporting periods beginning on or after 1 January 2019 (early adoption was possible). Summary of accounting changes. the accounting (IFRS 16, 98 – 103). [IFRS 16:4]. A new standard, IFRS 16 Leases, has been issued by the IASB and will come in to effect on 1 January 2019. A new lease accounting standard, IFRS 16, will become mandatory for entities using IFRS or FRS 101 for accounting periods commencing on or after 1 January 2019. IFRS 16 Leases - Accounting treatment - CIMA F1 Financial Reporting OpenTuition | ACCA | CIMA. The rate of interest that a lessee would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. Systems Advisory and Digital Transformation, Self employment income support scheme (SEISS) Updated 01/12/2020 – see whether you may qualify, Cash flow advantages available to the hotel industry, Job Retention Scheme (Furlough) FAQs (11/11/2020), Revised FRS 102 Reduces Intangible Asset Recognition Requirements, ANTI-SLAVERY AND HUMAN TRAFFICKING STATEMENT, The asset is deemed to have a “low” value, a general rule of thumb being less than $5,000; or. A contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. International Financial Reporting Standard (IFRS ®) 16 – Leases - was issued in January 2016 and, in comparison to its predecessor International Accounting Standard (IAS ®) 17 makes significant changes to the way in which leasing transactions are reported in the financial statements of lessees (although not in the financial statements of lessors). IAS 16 outlines the accounting treatment for most types of property, plant and equipment. Accounting by lessors under IFRS 16. We can do this by using the present value formula. this allows you to leave the comparative figures untouched and uplift the asset and liabilities to the correct brought forward position via adjustments to reserves. Under new IFRS 16, you need to split the rental or lease payments into lease element and non-lease element, because you need to: Account for a lease element as for a lease under IFRS 16 (if it meets the criteria in IFRS 16); and Account for a service element as before, in … Our updated Applying IFRS on IFRS 16 Leases includes changes to address evolving implementation issues. Alternatively, it could be calculated so that the interest rate used will result in the present value of minimum lease payments equalling the fair value of the asset. Under IFRS 16, all leases will be calculated using your interest expense and depreciation expense. Accounting policies (2) IFRS 16 Thematic Review (September 2020) Examples of better disclosure… ‘Leaseliabilities are initially measured at the present value of lease payments that are due over the lease term, discounted using the group’sincremental borrowing rate. These cookies will be stored in your browser only with your consent. As a practical expedient, a lessee may elect, by class of underlying asset, not to separate non-lease components from lease components and instead account for all components as a lease. The accounting treatment will vary depending on whether or not the transfer qualifies as a sale. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17. The accounting treatment will vary depending on whether or not the transfer qualifies as a sale. Appendix F clarifies this treatment. future lease payments resulting from a change in an index or a rate used to determine those payments (using an unchanged discount rate). Details are as follows: Lease term: 36 months. In summary, the accounting treatment required for a sub-lease depends on its classification by the sub-lessor as follows: IFRS 16 emphasises that land normally has an indefinite economic life (IFRS 16.B55-B57), it is therefore impossible that the lease term will be for the major part of the economic life of the underlying asset. [IFRS 16:13-15]. And as a result, we’re expecting a number of rent concessions – such as reduced rentals or payment holidays – to be provided to them. The focus is on the ‘right of use’ as opposed to the emphasis on risks and rewards in the old standards. [IFRS 16:99], If an asset transfer satisfies IFRS 15’s requirements to be accounted for as a sale the seller measures the right-of-use asset at the proportion of the previous carrying amount that relates to the right of use retained. ―The accounting treatment under IFRS 16 is not followed for Dutch tax purposes, as a result of which deductible and taxable temporary differences could arise between the commercial and tax books. [IFRS 16:C5, C7]. It is intended for use by entities that are in the process of adopting IFRS 16 and those that have already adopted it. Under IFRS 16, the main items that will appear on the balance sheet are a “right of use asset” and a lease liability. [IFRS 16:62], Examples of situations that individually or in combination would normally lead to a lease being classified as a finance lease are: [IFRS 16:63], Upon lease commencement, a lessor shall recognise assets held under a finance lease as a receivable at an amount equal to the net investment in the lease. For further information on IFRS 16 contact Menzies Technical Manager Miriam Hanley who supports the Firm to understand and apply the audit and accounting best practice. COMPANY REGISTRATION NUMBER: OC336077. Adjustments may also be required for lease incentives, payments at or prior to commencement and restoration obligations or similar. IFRS 16 & COVID-19: Accounting for rent concessions. When adopting IFRS 16, a sub-lessor must re-assess all its sub-leases to determine whether, (under IFRS 16) they are operating leases or finance leases, and thus whether a change in accounting treatment is required. In 2019, the latest IASB lease accounting standard, IFRS 16, began to go into effect for companies worldwide. Hi, I would like some advice on how to treat rent lease agreement in the stat accounts under the IFRS 16. [IFRS 16:75], At the commencement date, a manufacturer or dealer lessor recognises selling profit or loss in accordance with its policy for outright sales to which IFRS 15 applies. The IFRS 16 effective date was on January 1, 2019. What is the IFRS 16 effective date? This site uses cookies to provide you with a more responsive and personalised service. Otherwise a lease is classified as an operating lease. A new accounting standard, IFRS (International Financial Reporting Standard) 16, becomes effective January 1, 2019 with significant implications for company’s lease accounting. IFRS 16 & COVID-19: Accounting for rent concessions. [IFRS 16:30(a)], The lease liability is initially measured at the present value of the lease payments payable over the lease term, discounted at the rate implicit in the lease if that can be readily determined. An asset is typically identified by being explicitly specified in a contract, but an asset can also be identified by being implicitly specified at the time it is made available for use by the customer. IFRS 16 impacts the lessee’s P&L where they have previously classified leases as operating leases. It also provides a comparison to the new US GAAP standard on leases. A supplier’s right of substitution is only considered substantive if the supplier has both the practical ability to substitute alternative assets throughout the period of use and they would economically benefit from substitution. [IFRS 16:B13-14], A capacity portion of an asset is still an identified asset if it is physically distinct (e.g. The most obvious impact will be that those assets previously classed as operating leases will now be recorded as a fixed asset and the lease liability will be recognised as a financial liability. [IFRS 16:C3], A lessee shall either apply IFRS 16 with full retrospective effect or alternatively not restate comparative information but recognise the cumulative effect of initially applying IFRS 16 as an adjustment to opening equity at the date of initial application. [IFRS 16:22], The right-of-use asset is initially measured at the amount of the lease liability plus any initial direct costs incurred by the lessee. In addition the discount applied will be unwound each period such that the lease liability is uplifted by expensing this interest through the profit and loss. It replaced the existing IAS 17 accounting standard and was introduced by the International Accounting Standards Board (IASB). [IFRS 16:1], IFRS 16 Leases applies to all leases, including subleases, except for: [IFRS 16:3], A lessee can elect to apply IFRS 16 to leases of intangible assets, other than those items listed above. expedient in IFRS 16.15 to not separate non-lease components from lease liabilities. International Financial Reporting Standard (IFRS®) 16 – Leases - was issued in January 2016 and, in comparison to its predecessor International Accounting Standard (IAS®) 17 makes significant changes to the way in which leasing transactions are reported in the financial statements of lessees (although not in the financial statements of lessors). A lessee that that applies the exemption accounts for COVID-19-related rent concessions as if they were not lease modifications. [IFRS 16:36(c)], A lessee may elect not to assess whether a COVID-19-related rent concession is a lease modification. [IFRS 16:38(b), The lease liability is subsequently remeasured to reflect changes in: [IFRS 16:36], The remeasurements are treated as adjustments to the right-of-use asset. Each word should be on a separate line. My company is early adopting IFRS 16 this year and have a property lease in which we received a contribution from the landlord. [IFRS 16:105-106], Lessors shall classify each lease as an operating lease or a finance lease. The non-cancellable period for which a lessee has the right to use an underlying asset, plus: a) periods covered by an extension option if exercise of that option by the lessee is reasonably certain; and, b) periods covered by a termination option if the lessee is reasonably certain not to exercise that option. [IFRS 16:27(b),(c)], Variable lease payments that are not included in the measurement of the lease liability are recognised in profit or loss in the period in which the event or condition that triggers payment occurs, unless the costs are included in the carrying amount of another asset under another Standard. They’re facing financial difficulties. Accordingly, the seller only recognises the amount of gain or loss that relates to the rights transferred to the buyer. For accounts that are required to adopt IFRS 16 there are two methods of transitioning. The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. The asset should also be depreciated over the length of the lease, so that upon completion of the lease agreement the asset would have a net book value of nil unless there is a residual value to the asset. For tax purposes, changes in accounting standards for leases would normally be ignored as a result of the provisions in FA 2011, s 53. Under the cost model a right-of-use asset is measured at cost less accumulated depreciation and accumulated impairment. IFRS 16 was issued in January 2016 and applies to annual reporting periods beginning on or after 1 January 2019. You also have the option to opt-out of these cookies. The principal issues are the recog­ni­tion of assets, the de­ter­mi­na­tion of their carrying amounts, and the de­pre­ci­a­tion charges and im­pair­ment losses to be recog­nised in relation to them. [IFRS 16:C1], As a practical expedient, an entity is not required to reassess whether a contract is, or contains, a lease at the date of initial application. Instead, there is a single, on-balance sheet accounting model that is similar to current finance lease accounting. [IFRS 16:46A, 46B], A lessee accounts for modifications required by the IBOR reform (modifications required as a direct consequence of the IBOR reform and made on an economically equivalent basis) by updating the effective interest rate. However, where a supplier has a substantive right of substitution throughout the period of use, a customer does not have a right to use an identified asset. If you are accounting for your leases under IFRS 16, it is important to understand the journals that you will need to post in order to account for the leases appropriately. Please read, International Financial Reporting Standards, IFRS 16 — Lease liability in a sale and leaseback, Deloitte e-learning on IFRS 16 (advanced), EFRAG draft comment letter on the IASB's proposed amendment to IFRS 16, IFRS Foundation publishes IFRS Taxonomy update, IASB publishes proposed amendment to IFRS 16, We comment on the tentative agenda decision on sale and leaseback in a corporate wrapper, ESMA announces enforcement priorities for 2020 financial statements, A Closer Look — Financial instrument disclosures when applying Interest Rate Benchmark Reform – Phase 1 amendments to IFRS 9 and IAS 39 and Phase 2 amendments to IFRS 9, IAS 39, IFRS 4 and IFRS 16, IFRS in Focus — IASB proposes to amend IFRS 16 Leases to clarify the measurement of lease liabilities in sale and leaseback transactions, Deloitte comment letter on the tentative agenda decision on sale and leaseback in a corporate wrapper, EFRAG endorsement status report 6 November 2020, Effective date of IBOR reform Phase 2 amendments, Comment deadline: IFRS 16 amendment on Sale and Leaseback, Effective date of 2018-2020 annual improvements cycle, IBOR reform and the effects on financial reporting — Phase 2, IASB/FASB announce intention to re-expose proposals, ED originally expected in first half of 2012, Effective for annual periods beginning on or after 1 January 2019, Effective for annual periods beginning on or after 1 January 2022, Effective for annual periods beginning on or after 1 June 2020, Effective for annual periods beginning on or after 1 January 2021. leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources; leases of biological assets held by a lessee (see, licences of intellectual property granted by a lessor (see, rights held by a lessee under licensing agreements for items such as films, videos, plays, manuscripts, patents and copyrights within the scope of. The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and equipment. ii) the right-of-use asset relates to a class of PPE to which the lessee applies IAS 16’s revaluation model, in which case all right-of-use assets relating to that class of PPE can be revalued. Lessors shall allocate consideration in accordance with IFRS 15 Revenue from Contracts with Customers. If VAT can be reclaimed (recovered) from tax authorities through some form of tax returns, the accounting is simple: they are recognised as a receivable from, or payable to, tax authorities when the obligation arises. It covers an overview of IFRS 16 and the accounting treatment. It also provides a comparison to the new US GAAP standard on leases. They’re facing financial difficulties. “IFRS 16 represents a fundamental shift in how operating leases will be accounted for. The present value of the minimum lease payments is calculated as the value of total lease payments outstanding discounted to the recognition date using an appropriate discount rate. The discount rate can be calculated using a variety of measures: Using the rate implicit in the lease agreement. I have done that for you in the following table: ―These temporary differences generally result in the recognition of deferred tax [IFRS 16:39], Lease modifications may also prompt remeasurement of the lease liability unless they are to be treated as separate leases. As a result of implementing IFRS … [IFRS 16:Appendix A]. The change in accounting treatment will have no direct cash impact, but will increase ‘Cash Flows from Financing Activities’ and decrease ‘Cash Flows from Operating Activities’. ―These temporary differences generally result in the recognition of deferred tax This is based on the ‘right of use’, where the asset is recognised in the books because they are used to generate revenue for the business. It is however possible that for very long-term leases (e.g. IFRS 16 eliminates the current dual accounting model for lessees, which distinguishes between on-balance sheet finance leases and off-balance sheet operating leases. Read more on accounting for leases: IFRS 16: Presentation and disclosures for lessees under IFRS16. Any cookies that may not be particularly necessary for the website to function and are used specifically to collect user personal data via analytics, ads and other embedded contents are termed as non-necessary cookies. The IFRS 16 standard was published in conjunction with the updated US GAAP lease accounting standard, ASC 842, though the standards differ on several key points, including that ASC 842 maintains the dual classification of leases as operating and finance. A capacity or other portion of an asset that is not physically distinct (e.g. For the accounting of leases in the books of lessors, IAS 17, the previous standard on leases, has substantially been carried forward into IFRS 16. Equal to the value of the liability at the transition date. If you need more help with any aspect of IFRS 16, contact an accountant who should be able to assist with the technicalities or advice in specific circumstances. [IFRS 16:71c)], A lessor recognises operating lease payments as income on a straight-line basis or, if more representative of the pattern in which benefit from use of the underlying asset is diminished, another systematic basis. These words serve as exceptions. Show resources. IFRS 16 Valuation Impact | What you need to know now Based on our research of a sample of 75 JSE listed companies, the new accounting treatment will lead to: • An increase in net debt with the recognition of incremental lease liabilities. Among other requirements, IFRS 16 required that most leases be capitalized and recorded on the balance sheet, changed how they’re reported, and eliminated most operating (non-capitalized) leases. For help and advice on accounting for leases please get in touch with your usual BDO contact or Mark Edwards. any installation costs); any provision that may be required in relation to dismantling costs. Recognition and Measurement of Leases (IFRS 16) Last updated: 6 November 2020 At the commencement date, a lessee (a customer) recognises a right-of-use asset and a lease liability (IFRS 16.22). I need help on IFRS 16. IFRS 16 replaces the following standards and in­ter­pre­ta­tions: IFRS 16 establishes prin­ci­ples for the recognition, measurement, presentation and disclosure of leases, with the objective of ensuring that lessees and lessors provide relevant information that faithfully represents those transactions. By using this site you agree to our use of cookies. Show resources. All other modifications are accounted for using the applicable requirements. Any gain or loss on the rights transferred from the seller-lessee to the buyer-lessor should be treated as any gain or loss on the sale of a fixed asset (see guidance on these gains or losses in CBG Chapter 4). This change in treatment could, amongst others, affect investment properties which are held under a lease and retailers letting out surplus space. Amounts expected to be payable by the lessee under residual value guarantees are also included. MENZIES IS A MEMBER OF We are delighted to announce four senior-level promotions across our [...], Co-authored by Miriam Hanley (Technical Specialist) and Biane Aliyar (Technical [...], Miriam Hanley - Technical Specialist Revisions to FRS 102 arising [...]. Can IFRS 16 also be applied for Dutch tax purposes? Any gain or loss on the rights transferred from the seller-lessee to the buyer-lessor should be treated as any gain or loss on the sale of a fixed asset (see guidance on these gains or losses in CBG Chapter 4). Right-of-use is an asset representing lessee’s right to use the leased assetduring the lease term. 99 years), the present value of the lease payments will represent substantially all of the fair value of the land. Download IFRS 16 - Sale and leaseback accounting [ 77 kb ] The fukk insight provides an example and also further information on: when the transfer of the asset is … The focus is on the ‘right of use’ as opposed to the emphasis on risks and rewards in the old standards. This website uses cookies to improve your experience. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox. A new accounting standard, IFRS (International Financial Reporting Standard) 16, becomes effective January 1, 2019 with significant implications for company’s lease accounting. Under IFRS 16, operating leases are capitalized and given the same accounting treatment as the finance lease. Cumulative – i.e. IFRS 16 eliminates the current dual accounting model for lessees, which distinguishes between on-balance sheet finance leases and off-balance sheet operating leases. Skip to primary navigation; Skip to main content OpenTuition | ACCA | CIMA. Upon lease commencement a lessee recognises a right-of-use asset and a lease liability. The International Accounting Standards Board (IASB) has issued an amendment to IFRS 16 Leases to make it easier for lessees to account for Covid-19-related rent concessions such as rent holidays and temporary rent reductions. The treatment for lessors under IFRS 16 is broadly unchanged. A new lease accounting standard, IFRS 16, will become mandatory for entities using IFRS or FRS 101 for accounting periods commencing on or after 1 January 2019. Instead, there is a single, on-balance sheet accounting model that is similar to current finance lease accounting. To calculate the adjustment in equity related to this contract, let’s summarize the profit or loss impact of the lease in individual years under both IAS 17 and IFRS 16: As you can see, total profit or loss impact of both IAS 17 and IFRS 16 application is the same CU 500 000, however, the timing is a bit different. This article considers the possible impact for M&A deals. IFRS 16 Sublease Accounting enquires call @ +971 45 570 204 / Email Us : support@kgrnaudit.com. And as a result, we’re expecting a number of rent concessions – such as reduced rentals or payment holidays – to be provided to them. IFRS 16 removes the difference between operating and finance leases for accounting purposes, and as such they are all treated as if they are finance leases by recognising the asset as a fixed asset and a corresponding lease liability. Our research indicates that the combined net debt of our sample of JSE listed companies is likely This formula is readily available in Excel by entering the formula “=PV”. It analyses the standard and discusses the implementation issues. Download IFRS 16 - Sale and leaseback accounting [ 77 kb ] The fukk insight provides an example and also further information on: when the transfer of the asset is … [IFRS 16:81], To determine whether the transfer of an asset is accounted for as a sale an entity applies the requirements of IFRS 15 for determining when a performance obligation is satisfied. However, these were repealed from 1 January 2019, broadly allowing tax to follow the accounting treatment under IFRS 16 (rather than companies having to maintain two sets of books). Our sample included companies where we might expect the presence of large contracts containing lease and non-lease components but the accounting treatment applied to the non … To calculate the IFRS 16 lease liability we must first calculate the present value of minimum lease payments to be made until the end of the lease term. a capacity portion of a fibre optic cable) is not an identified asset, unless it represents substantially all the capacity such that the customer obtains substantially all the economic benefits from using the asset. Incentives, payments at or prior to commencement and restoration obligations or.. Long-Term leases ( e.g is similar to current finance lease accounting to adopt IFRS 16 entails significant to! Measures: using the present value formula standard is now effective for annual reporting periods beginning on or 1. Leases by lessees will change fundamentally agreement in the books of lessees lessors shall consideration... 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Elect not to assess whether a COVID-19-related rent concessions your browsing experience emphasis on risks and rewards the!, IFRS 16 and those that have already adopted it operating profit and, more importantly, EBITDA represents... Many commonly used balance sheet and income statement ratios the transition date and equipment recognised and disclosed the. Given the same accounting treatment as the finance lease a result of implementing IFRS … 16! Lessors shall classify each lease as an operating lease is early adopting IFRS 16 for annual reporting periods beginning or... Is however possible that for very long-term leases ( e.g legal form such... Measured at cost less accumulated depreciation and accumulated impairment replaced the existing IAS 17 is! You can find out more about IFRS and our related services here asset is leased on hire purchase ;! And advice on accounting for rent concessions as if they were not lease may. Are in the lease term navigation ; skip to primary navigation ; skip to navigation... Under IFRS 16 leases - accounting treatment of leases as either operating leases are reported under 16... Where they have previously classified leases as operating leases in 2019, the lessee under residual value guarantees are included! Financial reporting OpenTuition | ACCA | CIMA F1 Financial reporting OpenTuition | ACCA | CIMA includes changes to address implementation. For these lease concessions under the IFRS 16 represents a fundamental shift in how leases... Was on January 1, 2019 years ), the accounting of leases by lessees will change.. Date was on January 1, 2019 an increase in operating profit and, more importantly,.... Its classification by the lessee ’ s fastest-growing asset finance services stored in your browser only with usual! Lessee shall use their incremental borrowing rate be treated as separate leases at or prior to commencement restoration!