1. The impact on lessors is almost nil. ii) leases where the underlying asset has a low value when new (such as personal computers or small items of office furniture) – this election can be made on a lease-by-lease basis. In order to properly account for a lease, we need to understand how the lease is structured. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17. Following IFRS 16, paragraph 27 and ASC 842-10-15-35, it will reduce the lease liability and right-of-use asset value. In addition, IFRS 16 provides an overview of the accounting requirements for buyer-lessors … As IFRS 16 has withdrawn the concepts of operating leases and finance leases from lessee accounting, the accounting requirements that the seller-lessee must apply to a sale and leaseback are more straight forward. [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. A lessor is the owner of the asset and a lessee uses the leased asset by paying periodically to the lessor. The definition of initial direct costs for lessors is the same as for lessees and is discussed in sections on lessee accounting. IFRS 16 brings forward definitions of discount rates from the previous leases standard, but applying these old definitions in the new world of on-balance sheet lease accounting will be tough, especially for lessees. [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. Initial direct cost are included in the initial measurement of the net investment in the lease and reduce the amount of income recognised over the lease term (IFRS 16.69). Therefore, a manufacturer or dealer lessor recognises at the commencement date (IFRS 16.71): As noted earlier, the present value of the lease payments accruing to the lessor should be discounted at market rate if interest, not the stated interest quoted by the lessor in a lease contract. When a lease includes both land and buildings, a lessor should assess the classification of each element as a finance lease or an operating lease separately. Finance income is recognised by the lessor over the lease term using effective interest rate (IFRS 16.75). [IFRS 16:51, 89], An entity applies IFRS 16 for annual reporting periods beginning on or after 1 January 2019. [IFRS 16:9], Control is conveyed where the customer has both the right to direct the identified asset’s use and to obtain substantially all the economic benefits from that use. Initial direct costs are incremental costs of obtaining a lease that would not have been incurred if the lease had not been obtained (IFRS 16.Appendix A). Example: Accounting for a finance lease by a lessor. Specific to operating type leases, these include:  Amounts currently receivable (e.g. This is due to changing accounting standards to IFRS 16 in 2019 will require retrospective restatement to meet the requirement. Paragraphs IFRS 16.63-65 provide examples and indicators that individually or in combination would normally lead to a lease being classified as a finance lease. Key IFRS 16 Definition Inception date of lease: The earlier of lease agreement and the date of commitment by the parties. IFRS 16 is business as usual for lessors, but creates complexity in subleasing arrangements. 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. In addition, IFRS 16 provides an overview of the accounting requirements for buyer-lessors too. This classification is based on the extent to which the lease transfers the risks and rewards resulting from ownership of an underlying asset. IFRS 16. Main features Lessee accounting IN10 HKFRS 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. different types of concessions being agreed between lessors and … Otherwise a lease is classified as an operating lease. IAS 17 required both lessees and lessors to classify leases into finance leases and operating leases depending on whether there is transfer of risks and rewards and recognize liabilities only in case of finance leases. Intermediate lessors, however, face significant changes as a result of IFRS 16. We are releasing our in-depth application guidance on IFRS 16 Leases in manageable chunks, one chapter at a time. [IFRS 16:39], Lease modifications may also prompt remeasurement of the lease liability unless they are to be treated as separate leases. [IFRS 16:B13-14], A capacity portion of an asset is still an identified asset if it is physically distinct (e.g. Disclosure requirements for lessors are set out in paragraphs IFRS 16.89-97. A capacity or other portion of an asset that is not physically distinct (e.g. The Board has issued amendments to IFRS 16 (the amendments) to provide practical relief for lessees in accounting for rent concessions. When accounting for lease incentives in accordance with IFRS 16 ‘Leases’ from a lessee perspective, questions may arise in how to identify a lease incentive and when the accounting treatment changes depending on how the lease incentive is granted. In other words, changes to accounting do not create or reduce the demand for assets. The following information is relevant for this lease: All calculations presented in this example are available for download in an excel file. Risks include the possibilities of losses from idle capacity or technological obsolescence and of variations in return because of changing economic conditions. Initially, Lessor Derecognises the Underlying assets from its books and recognises the ‘Net Investment in Leases’ as new assets in IFRS 16 as well as US GAAP. Underlying asset subject to operating lease is depreciated under normal depreciation policy for similar assets of the lessor (IFRS 16.84). See paragraphs IFRS 16.BC266-BC267 for more discussion and Example 24 accompanying IFRS 16. In January 2016, the new standard about lease accounting IFRS 16 was issued and it introduced a few major changes. A modification that is not treated as a separate lease is accounted for as follows (IFRS 16.80): (a) if the lease would have been classified as an operating lease had the modification been in effect at the inception date, the lessor: (i) accounts for the lease modification as a new lease from the effective date of the modification; and. The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. For a lessor under an operating lease, IFRS 16 does not specify the accounting for variable payments that are not based on an index or rate and do not become in-substance fixed. An additional change for IFRS users is that, unlike US GAAP, all leases will be classified as finance leases. LESSORS. future lease payments resulting from a change in an index or a rate used to determine those payments (using an unchanged discount rate). Under current guidance and practice, there is not a lot of emphasis on the distinction between a service or an operating lease, as this often does not change the accounting treatment. As IFRS 16 has withdrawn the concepts of operating leases and finance leases from lessee accounting, the accounting requirements that the seller-lessee must apply to a sale and leaseback are more straight forward. The first effective dates for the international lease accounting standard, IFRS 16, were in January 2019. Main features Lessee accounting IN10 HKFRS 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. Under the standard’s previous requirements, lessees assess whether rent concessions are lease modifications and, if so, apply the specific guidance on … IAS 2, IAS 16, IAS 38) and accounts for the lease using lease requirements included in IFRS 16 (IFRS 16.100(b)). Adjustments may also be required for lease incentives, payments at or prior to commencement and restoration obligations or similar. the lease transfers ownership of the asset to the lessee by the end of the lease term, the lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than fair value at the date the option becomes exercisable that, at the inception of the lease, it is reasonably certain that the option will be exercised, the lease term is for the major part of the economic life of the asset, even if title is not transferred, at the inception of the lease, the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset, the leased assets are of a specialised nature such that only the lessee can use them without major modifications being made. While the IASB has retained IAS 17’s finance lease/operating lease distinction for lessors (and carried into IFRS 16 the related requirements virtually intact), the distinction is no longer relevant for lessees. However, IFRS 16 will require enhanced disclosure by lessors on their risk exposure. A lessor is the owner of the asset and a lessee uses the leased asset by paying periodically to the lessor. A lessor must classify each of its leases as either an operating lease or a finance lease (IFRS 16.61). Lessors (suppliers) should allocate the consideration in a contract to all lease and non-lease components using criteria for allocating the transaction price to performance obligations contained in IFRS 15. 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. Under IFRS 16, lessees will record a Right-of-Use Asset (similar to a Finance Lease) , and lessors will differentiate between a Finance Lease and an Operating Lease. IN9 IFRS 16 completes the IASB’s project to improve the financial reporting of leases. 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. A lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently. Variable lease payments that are not included in the measurement of the net investment in the lease are recognised in P/L as they are earned. 53 IFRS IN PRACTICE – IFRS 16 LEASES 9.3. BACKGROUND. Each one focuses on a particular aspect and includes explanations of the requirements and examples showing them in practice, to help you apply the new standard. At the commencement date, a manufacturer or dealer lessor recognises as an expense costs incurred in connection with obtaining a finance lease as they are mainly related to earning recognised selling profit. IFRS 16 substantially retains the lessor accounting requirements from IAS 17. From the IFRS Institute – August 28, 2020. 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. [IFRS 16:67], A lessor recognises finance income over the lease term of a finance lease, based on a pattern reflecting a constant periodic rate of return on the net investment. [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. The global pandemic has resulted in many. CU 100 of rent due for a particular month); and  Receivables that arise from the ‘smoothing’ of operating lease income. While the IFRS 16 sublease accounting for representing leases as illustrated above are the same old thing for lessors, they are progressively mind-boggling when applied by a lessor in a sublease course of action. The underlying asset is derecognised and any difference is immediately recognised in P/L as a gain/loss on disposal of an asset (or as revenue and costs of goods sold – see specific treatment for manufacturer/dealer lessors below). The reason is that IFRS 16 prescribes a single model of accounting for every lease for the lessees. Learn more about each of these technical accounting challenges and best practices for handling them. A finance lease of an asset by a manufacturer or dealer lessor is in substance equivalent to the profit or loss resulting from an outright sale of the underlying asset (IFRS 16.72). For a lessor under an operating lease, IFRS 16 does not specify the accounting for variable payments that are not based on an index or rate and do not become in-substance fixed. 99 years), the present value of the lease payments will represent substantially all of the fair value of the land. Key features of IFRS 16: IFRS 16 does not provide options. Rewards may be represented by the expectation of profitable operation over the asset’s economic life and of gain from appreciation in value or realisation of a residual value (IFRS 16.B53). Questions or comments? Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently. Such costs are excluded from the net investment in the lease (IFRS 16.74). Paragraphs 52 to 60 of IFRS 16 set out detailed requirements for lessees to meet this objective and paragraphs 90 to 97 set out the detailed requirements for lessors. IFRS 16 specifies how an IFRS reporter will recognise, measure, present and disclose leases. A lessee that that applies the exemption accounts for COVID-19-related rent concessions as if they were not lease modifications. Amounts expected to be payable by the lessee under residual value guarantees are also included. Initial direct costs incurred in obtaining an operating lease are added to the carrying amount of the underlying asset and recognised in P/L over the lease term on the same basis as the lease income (IFRS 16.83). [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. Some of the key points IFRS 16 requires: Application: IFRS 16 “Leases” is effective from 1 January 2019 with earlier adoption permitted. Lessors are still required to classify leases as either finance or operating, and the indicators used to make that distinction are again unchanged from IAS 17. At the commencement of the lease, the lessor recognises a lease receivable at an amount equal to the net investment in the lease (IFRS 16.67). [IFRS 16:100a)], If the fair value of the sale consideration does not equal the asset’s fair value, or if the lease payments are not market rates, the sales proceeds are adjusted to fair value, either by accounting for prepayments or additional financing. 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