International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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Lessor accounting for a modification to a finance lease that does not
result in a separate lease
For a modification to a finance lease that is not accounted for as a separate lease, a lessor
accounts for the modification as follows:
(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
(ii) measures the carrying amount of the underlying asset as the net investment
in the lease immediately before the effective date of the lease modification;
(b) otherwise, the lessor applies the requirements of IFRS 9. [IFRS 16.80].
6.4.3
Modification to an operating lease
A lessor accounts for a modification to an operating lease as a new lease from the
effective date of the modification, considering any prepaid or accrued lease payments
relating to the original lease as part of the lease payments for the new lease. [IFRS 16.87].
6.5
Other lessor matters
6.5.1 Portfolio
approach
IFRS 16 specifies the accounting for an individual lease. However, as a practical
expedient, an entity may apply it to a portfolio of leases with similar characteristics
if the entity reasonably expects that the effects on the financial statements of
applying IFRS 16 to the portfolio would not differ materially from applying it to the
individual leases within that portfolio. If accounting for a portfolio, an entity uses
estimates and assumptions that reflect the size and composition of the portfolio.
[IFRS 16.B1].
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A decision to use the portfolio approach would be similar to a decision some entities
make today to expense, rather than capitalise, certain assets when the accounting
difference is, and would continue to be, immaterial to the financial statements.
6.6 Presentation
Similar to IAS 17, IFRS 16 requires lessors to recognise assets held under a finance lease
in the statements of financial position and present them as a receivable at an amount
equal to the net investment in the lease. [IFRS 16.67]. In addition, lessors are required
under IFRS 16 to present underlying assets subject to operating leases according to the
nature of that asset in the statement of financial position. [IFRS 16.88].
The net investment in the lease is subject to the same considerations as other assets in
classification as current or non-current assets in the statement of financial position.
6.7 Disclosure
6.7.1 Disclosure
objective
The objective of the disclosures for lessors is 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 lessor. [IFRS 16.89].
6.7.2
Disclosures for all lessors
A lessor discloses the following amounts for the reporting period:
(a) for finance leases:
(i) selling
profit or loss;
(ii) finance income on the net investment in the lease; and
(iii) income relating to variable lease payments not included in the measurement
of the net investment in the lease;
(b) for operating leases, lease income, separately disclosing income relating to variable
lease payments that do not depend on an index or a rate. [IFRS 16.90].
The disclosures specified above are provided in a tabular format, unless another format
is more appropriate. [IFRS 16.91].
A lessor discloses additional qualitative and quantitative information about its leasing
activities necessary to meet the disclosure objective in 6.7.1 above. This additional
information includes, but is not limited to, information that helps users of financial
statements to assess:
Leases (IFRS 16) 1753
(a) the nature of the lessor’s leasing activities; and
(b) how the lessor manages the risk associated with any rights it retains in underlying
assets. In particular, a lessor discloses its risk management strategy for the rights it
retains in underlying assets, including any means by which the lessor reduces that
risk. Such means may include, for example, buy-back agreements, residual value
guarantees or variable lease payments for use in excess of specified limits.
[IFRS 16.92].
6.7.3
Disclosures for finance leases
A lessor provides a qualitative and quantitative explanation of the significant changes in
the carrying amount of the net investment in finance leases. [IFRS 16.93].
A lessor discloses a maturity analysis of the lease payments receivable, showing the
undiscounted lease payments to be received on an annual basis for a minimum of each
of the first five years and a total of the amounts for the remaining years. A lessor
reconciles the undiscounted lease payments to the net investment in the lease. The
reconciliation must identify the unearned finance income relating to the lease payments
receivable and any discounted unguaranteed residual value. [IFRS 16.94].
6.7.4
Disclosures for operating leases
For items of property, plant and equipment subject to an operating lease, a lessor applies
the disclosure requirements of IAS 16. In doing so, the lessor disaggregates each class of
property, plant and equipment into assets subject to operating leases and assets not
subject to operating leases. Therefore, a lessor provides the disclosures required by
IAS 16 for assets subject to an operating lease (by class of underlying asset) separately
from owned assets held and used by the lessor. [IFRS 16.95].
A lessor applies the disclosure requirements in IAS 36, IAS 38, IAS 40 and IAS 41 for
assets subject to operating leases. [IFRS 16.96].
A lessor discloses a maturity analysis of lease payments, showing the undiscounted lease
payments to be received on an annual basis for a minimum of each of the first five years
and a total of the amounts for the remaining years. [IFRS 16.97].
7 SUBLEASES
7.1 Definition
A sublease is a transaction for which an underlying asset is re-leased by a lessee
(‘intermediate lessor’) to a third party, and the lease (‘head lease’) between the head
lessor and lessee remains in effect. [IFRS 16 Appendix A].
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Lessees often enter into arrangements to sublease a leased asset to a third party while
the original lease contract is in effect. In these arrangements, one party acts as both the
lessee and lessor of the same underlying asset. The original lease is often referred to as
a head lease, the original lessee is often referred to as an intermediate lessor or sub-
lessor and the ultimate lessee is often referred to as the sublessee.
Lessor
Head lease
Original lessee/intermediate lessor
Sublease
Lessee/sublessee
In some cases, the sublease is a separate lease agreement. In other cases, a third party
assumes the original l
ease, but the original lessee remains the primary obligor under the
original lease.
7.2
Intermediate lessor accounting
If an underlying asset is re-leased by a lessee to a third party and the original lessee
retains the primary obligation under the original lease, the transaction is a sublease. That
is, the original lessee generally continues to account for the original lease (the head
lease) as a lessee and accounts for the sublease as the lessor (intermediate lessor).
The intermediate lessor classifies the sublease as a finance lease or an operating lease
as follows:
(a) if the head lease is a short-term lease and the entity, as a lessee, has applied the short-
term recognition exemption, the sublease is classified as an operating lease; or
(b) otherwise, the sublease is classified by reference to the right-of-use asset arising
from the head lease, rather than by reference to the underlying asset (for example,
the item of property, plant, or equipment that is the subject of the lease). [IFRS 16.B58].
Example 24.20: Classification of a sublease
Entity F (original lessee/intermediate lessor) leases a building for five years. The building has an economic life
of 30 years. Entity F subleases the building for four years. The sublease is classified with reference to the right-
of-use asset in the head lease (and not the underlying building). For example when assessing the useful life
criterion, the sublease term of four years is compared with five year right-of-use asset in the head lease and not
with 30-year economic life of the building, which may result in the sublease being classified as a finance lease.
The intermediate lessor accounts for the sublease as follows:
• if the sublease is classified as an operating lease, the original lessee continues to
account for the lease liability and right-of-use asset on the head lease like any other
lease. If the total remaining lease cost on the head lease exceeds the anticipated
sublease income, this may indicate that the right-of-use asset associated with the head
lease is impaired. A right-of-use asset is assessed for impairment under IAS 36; or
Leases (IFRS 16) 1755
• if the sublease is classified as a finance lease, the original lessee derecognises the
right-of-use asset on the head lease at the sublease commencement date and
continues to account for the original lease liability in accordance with the lessee
accounting model. The original lessee, as the sublessor, recognises a net
investment in the sublease and evaluates it for impairment.
In a sublease, if the interest rate implicit in the sublease cannot be readily determined,
an intermediate lessor may use the discount rate used for the head lease (adjusted for
any initial direct costs associated with the sublease) to measure the net investment in
the sublease. [IFRS 16.68].
If a lessee subleases, or expects to sublease an asset, the head lease does not qualify as
a lease of a low-value asset. [IFRS 16.B7].
When contracts are entered into at or near the same time with the same counterparty
(or related parties of the counterparties), an intermediate lessor is required to consider
the criteria for combining contracts (e.g. when the contracts are negotiated with the
same counterparty (or related parties of the counterparties) as a package with a single
commercial objective, or when the consideration to be paid in one contract depends on
the price or performance of the other contract). If the contracts are required to be
combined, the intermediate lessor accounts for the head lease and sublease as a single
combined transaction.
Example 24.21: Subleases (IFRS 16 Illustrative Examples 20 and 21)
IFRS 16 Example 20 – Sublease classified as a finance lease [IFRS 16.IE8]
Head lease – An intermediate lessor enters into a five-year lease for 5,000 square metres of office space (the
head lease) with Entity A (the head lessor).
Sublease – At the beginning of Year 3, the intermediate lessor subleases the 5,000 square metres of office
space for the remaining three years of the head lease to a sublessee.
The intermediate lessor classifies the sublease by reference to the right-of-use asset arising from the head
lease. The intermediate lessor classifies the sublease as a finance lease, having considered the requirements
in paragraphs 61-66 of IFRS 16.
When the intermediate lessor enters into the sublease, the intermediate lessor:
(a) derecognises the right-of-use asset relating to the head lease that it transfers to the sublessee and
recognises the net investment in the sublease;
(b) recognises any difference between the right-of-use asset and the net investment in the sublease in profit
or loss; and
(c) retains the lease liability relating to the head lease in its statement of financial position, which represents
the lease payments owed to the head lessor.
During the term of the sublease, the intermediate lessor recognises both finance income on the sublease and
interest expense on the head lease.
IFRS 16 Example 21 – Sublease classified as an operating lease [IFRS 16.IE8]
Head lease – An intermediate lessor enters into a five-year lease for 5,000 square metres of office space (the
head lease) with Entity A (the head lessor).
Sublease – At commencement of the head lease, the intermediate lessor subleases the 5,000 square metres of
office space for two years to a sublessee.
The intermediate lessor classifies the sublease by reference to the right-of-use asset arising from the head
lease. The intermediate lessor classifies the sublease as an operating lease, having considered the requirements
in paragraphs 61-66 of IFRS 16.
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When the intermediate lessor enters into the sublease, the intermediate lessor retains the lease liability and
the right-of-use asset relating to the head lease in its statement of financial position.
During the term of the sublease, the intermediate lessor:
(a) recognises a depreciation charge for the right-of-use asset and interest on the lease liability; and
(b) recognises lease income from the sublease.
7.3 Sublessee
accounting
A sublessee accounts for its lease in the same manner as any other lease under IFRS 16.
See 5 above.
7.4 Presentation
According to IAS 1, an entity cannot offset assets and liabilities or income and expenses,
unless required or permitted by an IFRS. [IAS 1.32]. Therefore, intermediate lessors are not
permitted to offset lease liabilities and lease assets that arise from a head lease and a
sublease, respectively, unless those liabilities and assets meet the requirements in IAS 1 for
offsetting. [IFRS 16.BC235]. Similarly, intermediate lessors are not permitted to offset
depreciation and interest expenses and lease income relating to a head lease and a sublease
of the same underlying asset, respectively, unless the requirements for offsetting in IAS 1 are
met. [IFRS 16.BC236]. For example, intermediate lessors apply the principal-agent provisions
requirements in IFRS 15 to determine whether sublease revenue needs to be presented on
a gross or net basis (i.e. reduced for head lease expenses). For example, intermediate lessors
apply the principal-agent provisions requirements in IFRS 15 to determine whether
&nbs
p; sublease revenue needs to be presented on a gross or net basis (i.e. reduced for head lease
expenses). We believe, intermediate lessors generally will not meet the principal-agent
provisions in IFRS 15 to present sublease income on a net basis and therefore will generally
present sublease revenue on a gross basis. See Chapter 28 at 5.4.
7.5 Disclosure
Intermediate lessors, like all lessors, are required to disclose qualitative and quantitative
information which 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 lessor.
8
SALE AND LEASEBACK TRANSACTIONS
A sale and leaseback transaction involves the transfer of an asset by an entity (the seller-
lessee) to another entity (the buyer-lessor) and the leaseback of the same asset by the
seller-lessee. Because IFRS 16 requires lessees to recognise most leases on the balance
sheet (i.e. all leases except for leases of low-value assets and short-term leases
depending on the lessee’s accounting policy election), sale and leaseback transactions
no longer provide lessees with a source of off-balance sheet financing.
If an entity (the seller-lessee) transfers an asset to another entity (the buyer-lessor) and
leases that asset back from the buyer-lessor, both the seller-lessee and the buyer-lessor
assess whether the transfer of the asset is a sale and account for it as described below.
[IFRS 16.98].
Leases (IFRS 16) 1757
8.1
Determining whether the transfer of an asset is a sale
An entity applies the requirements for determining when a performance obligation is
satisfied in IFRS 15 to determine whether the transfer of an asset is accounted for as a
sale of that asset. [IFRS 16.99]. If control of an underlying asset passes to the buyer-lessor,
the transaction is accounted for as a sale or purchase of the asset and a lease. If not, both
the seller-lessee and the buyer-lessor account for the transaction as a financing
transaction. See Chapter 28 at 8.3 for the requirements of IFRS 15.
Paragraph 38 of IFRS 15 includes the following indicators of the transfer of the control:
(a) the entity has a present right to payment for the asset – if a customer is presently
obliged to pay for an asset, then that may indicate that the customer has obtained