International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards

by International GAAP 2019 (pdf)

  • 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].

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  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