• together with other assets as if they were owned, with disclosures of the balance
sheet line items that include right-of-use assets and their amounts.
Right-of-use assets that meet the definition of investment property are presented as
investment property.
Lease liabilities presented either:
• separately from other liabilities; or
• together with other liabilities with disclosure of the balance sheet line items that
include lease liabilities and their amounts.
Statement of
Lease-related depreciation and lease-related interest expense are presented separately (i.e.
profit or loss
lease-related depreciation and lease-related interest expense cannot be combined). Interest
expense on the lease liability is a component of finance costs.
Statement of cash flows
Cash payments for the principal portion of the lease liability are presented within financing
activities.
Cash payments for the interest portion of the lease liability are presented based on an
accounting policy election in accordance with IAS 7.
Lease payments for short-term leases and leases of low-value assets not recognised on the
balance sheet and variable lease payments not included in the lease liability are presented
within operating activities.
Non-cash activity (e.g. the initial recognition of the lease at commencement) is disclosed
as a supplemental non-cash item.
Leases (IFRS 16) 1741
5.8 Disclosure
5.8.1 Disclosure
objective
The objective of the disclosures is for lessees to disclose information in the notes that,
together with the information provided in the statement of financial position, statement
of profit or loss and statement of cash flows, gives a basis for users of financial
statements to assess the effect that leases have on the financial position, financial
performance and cash flows of the lessee. [IFRS 16.51].
A lessee discloses information about its leases for which it is a lessee in a single note or
separate section in its financial statements. However, a lessee need not duplicate
information that is already presented elsewhere in the financial statements, provided
that the information is incorporated by cross-reference in the single note or separate
section about leases. [IFRS 16.52].
5.8.2
Disclosures of assets, liabilities, expenses and cash flows
To meet the disclosure objective, IFRS 16 includes a number of required disclosures.
IFRS 16 paragraph 53 includes the following disclosure requirements for lessees, for the
reporting period:
(a) depreciation charge for right-of-use assets by class of underlying asset;
(b) interest expense on lease liabilities;
(c) the expense relating to short-term leases. This expense need not include the
expense relating to leases with a lease term of one month or less;
(d) the expense relating to leases of low-value assets. This expense does not include
the expense relating to short-term leases of low-value assets included in
paragraph (c) above;
(e) the expense relating to variable lease payments not included in the measurement
of lease liabilities;
(f) income from subleasing right-of-use assets;
(g) total cash outflow for leases;
(h) additions to right-of-use assets;
(i) gains or losses arising from sale and leaseback transactions; and
(j) the carrying amount of right-of-use assets at the end of the reporting period by
class of underlying asset. [IFRS 16.53].
A lessee provides the disclosures specified in paragraph 53, as shown above, in a tabular
format, unless another format is more appropriate. The amounts disclosed include costs
that a lessee has included in the carrying amount of another asset during the reporting
period. [IFRS 16.54].
A lessee discloses the amount of its lease commitments for short-term leases if the
portfolio of short-term leases to which it is committed at the end of the reporting period
is dissimilar to the portfolio of short-term leases to which the short-term lease expense
disclosed applying paragraph 53(c) above relates. [IFRS 16.55].
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If right-of-use assets meet the definition of investment property, a lessee applies the
disclosure requirements in IAS 40. In that case, a lessee is not required to provide the
disclosures in paragraph 53(a), (f), (h) or (j) above, for those right-of-use assets.
[IFRS 16.56].
If a lessee measures right-of-use assets at revalued amounts applying IAS 16, the lessee
discloses the information required by paragraph 77 of IAS 16 for those right-of-use
assets. [IFRS 16.57]. Those disclosures include the effective date of the revaluation,
whether an independent valuer was involved, the carrying amount of the class of asset
that would have been recognised under the cost model and the revaluation surplus.
These disclosures are discussed further in Chapter 18 at 8.2.
A lessee also discloses a maturity analysis of lease liabilities applying paragraphs 39 and
B11 of IFRS 7 – Financial Instruments: Disclosures – separately from the maturity
analyses of other financial liabilities. [IFRS 16.58]. The IASB indicated in the Basis for
Conclusions to IFRS 16 that because the lessee accounting model is based on the
premise that a lease liability is a financial liability, it is appropriate for lessees to apply
the same maturity analysis disclosure requirements to lease liabilities as to those applied
to other financial liabilities. [IFRS 16.BC222].
IFRS 16 requires disclosure of the total cash outflow for leases. [IFRS 16.53(g)].It does not
explicitly state that leases of low-value assets and short-term leases are excluded.
Therefore, we believe the cash outflows related to those leases should be included in
the disclosure.
5.8.3 Additional
disclosures
In addition to the disclosures described above, a lessee may need to disclose additional
qualitative and quantitative information about its leasing activities necessary to meet the
disclosure objective in 5.8.1. Specifically, additional information relating to variable
lease payments, extension options or termination options and residual value guarantees
that, depending on the circumstances, may be needed to satisfy the disclosure objective.
The additional information may also include, but is not limited to, information that helps
users of financial statements to assess:
(a) the nature of the lessee’s leasing activities;
(b) future cash outflows to which the lessee is potentially exposed that are not reflected
in the measurement of lease liabilities. This includes exposure arising from:
(i) variable lease payments;
(ii) extension options and termination options;
(iii) residual value guarantees; and
(iv) leases not yet commenced to which the lessee is committed;
(c) restrictions or covenants imposed by leases; and
(d) sale and leaseback transactions. [IFRS 16.59].
In determining whether additional information about leasing activities is necessary to
meet the disclosure objective, a lessee is required to consider:
Leases (IFRS 16) 1743
(a) whether that information is rel
evant to users of financial statements. A lessee shall
provide additional information specified in IFRS 16.59 only if that information is
expected to be relevant to users of financial statements. In this context, this is likely
to be the case if it helps those users to understand:
(i) the flexibility provided by leases. Leases may provide flexibility if, for
example, a lessee can reduce its exposure by exercising termination options
or renewing leases with favourable terms and conditions;
(ii) restrictions imposed by leases. Leases may impose restrictions, for example,
by requiring the lessee to maintain particular financial ratios;
(iii) sensitivity of reported information to key variables. Reported information
may be sensitive to, for example, future variable lease payments;
(iv) exposure to other risks arising from leases; and
(v) deviations from industry practice. Such deviations may include, for example,
unusual or unique lease terms and conditions that affect a lessee’s lease
portfolio; and
(b) whether that information is apparent from information either presented in the
primary financial statements or disclosed in the notes. A lessee need not duplicate
information that is already presented elsewhere in the financial statements.
[IFRS 16.B48].
Additional information relating to variable lease payments that, depending on the
circumstances, may be needed to satisfy the disclosure objective could include
information that helps users of financial statements to assess, for example:
(a) the lessee’s reasons for using variable lease payments and the prevalence of
those payments;
(b) the relative magnitude of variable lease payments to fixed payments;
(c) key variables upon which variable lease payments depend and how payments are
expected to vary in response to changes in those key variables; and
(d) other operational and financial effects of variable lease payments. [IFRS 16.B49].
Additional information relating to extension options or termination options that,
depending on the circumstances, may be needed to satisfy the disclosure objective
could include information that helps users of financial statements to assess, for example:
(a) the lessee’s reasons for using extension options or termination options and the
prevalence of those options;
(b) the relative magnitude of optional lease payments to lease payments;
(c) the prevalence of the exercise of options that were not included in the
measurement of lease liabilities; and
(d) other operational and financial effects of those options. [IFRS 16.B50].
Optional lease payments are payments made by a lessee to a lessor for the right to use
an underlying asset during periods covered by an option to extend or terminate a lease
that are not included in the lease term. [IFRS 16 Appendix A].
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Additional information relating to residual value guarantees that, depending on the
circumstances, may be needed to satisfy the disclosure objective could include
information that helps users of financial statements to assess, for example:
(a) the lessee’s reasons for providing residual value guarantees and the prevalence of
those guarantees;
(b) the magnitude of a lessee’s exposure to residual value risk;
(c) the nature of underlying assets for which those guarantees are provided; and
(d) other operational and financial effects of those guarantees. [IFRS 16.B51].
6 LESSOR
ACCOUNTING
IFRS 16 substantially carries forward the lessor accounting model in IAS 17. The significant
differences between the lessor accounting requirements in IFRS 16 and those in IAS 17 are
primarily a consequence of decisions reached about the lessee accounting model in
IFRS 16. IFRS 16 does change certain aspects of the lessor accounting model, including
changes to the accounting for subleases, initial direct costs and lessor disclosures.
6.1 Lease
classification
At inception date of the lease, a lessor classifies each of its leases as either an operating
lease or a finance lease. [IFRS 16.61]. The classification of leases under IFRS 16 is the same
as under IAS 17. A lease is classified as a finance lease if it transfers substantially all the
risks and rewards incidental to ownership of an underlying asset. A lease is classified as
an operating lease if it does not transfer substantially all the risks and rewards of
ownership of an underlying asset. [IFRS 16.62].
6.1.1
Criteria for lease classification
The classification of leases is based on the extent to which the lease transfers the risks
and rewards incidental to ownership of an underlying asset. Risks include the
possibilities of losses from idle capacity or technological obsolescence and of variations
in return because of changing economic conditions. Rewards may be represented by
the expectation of profitable operation over the underlying asset’s economic life and of
gain from appreciation in value or realisation of a residual value. [IFRS 16.B53].
Whether a lease is a finance lease or an operating lease depends on the substance of the
transaction rather than the form of the contract. Examples of situations that individually
or in combination would normally lead to a lease being classified as a finance lease are:
(a) the lease transfers ownership of the underlying asset to the lessee by the end of the
lease term;
(b) the lessee has the option to purchase the underlying asset at a price that is expected
to be sufficiently lower than the fair value at the date the option becomes
exercisable for it to be reasonably certain, at the inception date, that the option
will be exercised;
(c) the lease term is for the major part of the economic life of the underlying asset
even if title is not transferred;
Leases (IFRS 16) 1745
(d) at the inception date, the present value of the lease payments amounts to at least
substantially all of the fair value of the underlying asset; and
(e) the underlying asset is of such a specialised nature that only the lessee can use it
without major modifications. [IFRS 16.63].
Indicators of situations that individually or in combination could also lead to a lease
being classified as a finance lease are:
(a) if the lessee can cancel the lease, the lessor’s losses associated with the cancellation
are borne by the lessee;
(b) gains or losses from the fluctuation in the fair value of the residual accrue to the
lessee (for example, in the form of a rent rebate equalling most of the sales
proceeds at the end of the lease); and
(c) the lessee has the ability to continue the lease for a secondary period at a rent that
is substantially lower than market rent. [IFRS 16.64].
The examples and indicators above are not always conclusive. If it is clear from other
features that the lease does not transfer substantially all the risks and rewards incidental
to ownership of an underlying asset, the lease is classified as an operating lease. For
example, this may be the case if ownership of the underlying asset transfers at the end
of the lease for a variable payment equal to its then fair value, or if there are variable
lease payments, as
a result of which the lessor does not transfer substantially all such
risks and rewards. [IFRS 16.65].
In our view, other considerations that could be made in determining the economic
substance of the lease arrangement include the following:
(a) Are the lease rentals based on a market rate for use of the asset (which would
indicate an operating lease) or a financing rate for use of the funds, which would
be indicative of a finance lease?
(b) Is the existence of put and call options a feature of the lease? If so, are they
exercisable at a predetermined price or formula (indicating a finance lease) or are
they exercisable at the market price at the time the option is exercised (indicating
an operating lease)?
A lease contract may include terms and conditions to adjust the lease payments for
particular changes that occur between the inception date and the commencement date
(such as a change in the lessor’s cost of the underlying asset or a change in the lessor’s
cost of financing the lease). In that case, for the purposes of classifying the lease, the
effect of any such changes is deemed to have taken place at the inception date.
[IFRS 16.B54].
6.1.2
Lease classification test for land and buildings
When a lease includes both land and buildings elements, a lessor assesses the
classification of each element as a finance lease or an operating lease separately. In
determining whether the land element is an operating lease or a finance lease, an
important consideration is that land normally has an indefinite economic life.
[IFRS 16.B55].
1746 Chapter 24
Whenever necessary in order to classify and account for a lease of land and buildings, a
lessor allocates lease payments (including any lump-sum upfront payments) between
the land and the buildings elements in proportion to the relative fair values of the
leasehold interests in the land element and buildings element of the lease at the
inception date. If the lease payments cannot be allocated reliably between these two
elements, the entire lease is classified as a finance lease, unless it is clear that both
elements are operating leases, in which case the entire lease is classified as an operating
lease. [IFRS 16.B56].
For a lease of land and buildings in which the amount for the land element is immaterial
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 344
