IASB Leases Project. Overview Identify a lease Lessee: how big the liability will be? Lessor...

IASB Leases Project

Overview

Identify a lease

Lessee: how big the liability will be?

Lessor accounting: what has changed?

Other lease accounting issues

Transition provisions

What do you need to do to get ready for 2019?

Agenda

3© 2015, KPMG AS, a Norwegian limited liability company and a member firm of the KPMG network of independent member firms affiliated with

KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Objectives:

Require lessees to recognise all significant leases on-balance sheet

Eliminate arbitrary accounting distinctions for transactions that are economically similar

Reduce complexity in lease accounting

Develop converged lease accounting requirements

Overview – Project timeline

JANUARY2019

JULY 2006

Discussion Paper Issued

Second Exposure Draft

Issued

Project added to Boards’ agendas

Final standard expected

Q4 2015 MARCH 2009

MAY 2013

?

AUGUST 2010

First Exposure Draft Issued

Proposed effective date

Permission to Ballot

MARCH 2015



Overview – IASB model

All significant leases on-balance sheet for lessees with expense recognition generally front-loaded, similar to current finance leases

ROU ModelRight to use

underlying asset and lease

liability

Right to use underlying

asset

Lease payments

Operating

No derecognition of underlying

asset

Finance

■ Lease Receivable

■ Residual Asset

Lessor Finance or Operating

Model

Lessee‘Accelerated ROU’

Model



Lessee accounting – P&L impact



Lessor

Generally consistent with current IAS 17


asset

Lease payments

Operating


asset

Finance


■ Residual Asset


Model Lessee

Lease classification test based on IAS 17



IASB vs FASB standards – Converged?

Lease definition

Leases on balance sheet for lessees

Lessor accounting and lease classification

Lessee accounting model

Detailed measurement requirements

Exemption for leases of low value items

Overview

Identify a lease






Agenda



Scope

Within scope

■ Short-term leases (lease term ≤ 12 months)

■ Underlying assets of low value (≤ $5,000, when new)

Scope with exceptions Outside scope

Contracts that meet the definition of a lease:

■ Leases of assets

■ Long leases of land

■ Sale-leasebacks

■ Sub-leases

■ In-substance purchases / sales

■ Leases of inventory

Leases of:

■ Intangibles (other than ROU assets in a sublease)

■ Natural resources and exploration

■ Biological assets



Practical expedients

■ Leases with a lease term of ≤ 12 months may apply current operating lease accounting

■ If elected, the exemption is applied to all leases within that class of underlying asset

■ Still subject to qualitative and quantitative disclosures

■ Exemption for leases of underlying assets that are individually low in value (e.g. ≤ $5,000US, when new) even if material in aggregate

■ Leases may be accounted for off-balance sheet under IFRS, but on-balance sheet under U.S. GAAP

■ Aspects of the new standard may be applied at a portfolio level (e.g. determination of discount and lease term)

■ Must be a reasonable expectation that the portfolio approach is not materially different than application to individual leases

Short-term leases

Underlying assets of low value

Portfolio-level



Definition of a lease

Identifiedasset

Controlover use

A contract that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.

Definition focuses on control over the use of an identified asset.

■ Customer has the right to (throughout the period of use)

– Obtain substantially all of the economic benefits from use of the asset, and

– Direct the use of the asset or direct others to operate it as customer wishes

■ Asset may be explicitly or implicitly specified in a contract;

■ Asset is physically distinct – applies to physically distinct portions but not e.g. capacity portions

■ Supplier does not have a substantive right to substitute the asset




■ Right to direct (including the right to change) how and for what purpose the asset is used throughout the period of use

■ The relevant decisions about how and for what purpose the asset is used are predetermined and:

– The customer has the right to operate the asset, without the supplier having the right to change those operating instructions

– The customer designed the asset (or aspects of the asset) in a way that predetermines how and for what purpose the asset will be used

Examples of relevant decisions about how and for what purpose the asset is use: right to change the type of output produced, when, where, or whether it is produced

Customer rights to direct the use




■ Contractual provisions designed to protect supplier’s interest in the asset, its personnel, or ensure compliance with laws and regulations

– Specify maximum amount of use, or when or where customer can use it

– Require customer to notify a change in how or for what purpose asset is used

– Require customer to follow particular operating practices

■ Do not, in isolation, prevent customer from having the right to direct the use of the asset

Supplier protective rights

Customer’s right tospecifyoutput

■ Customer’s right to specify quantity and type of goods or services provided by the asset is not, by itself, considered the right to direct the use of the asset

Overview

Identify a lease






Agenda



Initial measurement – Lease liability

Discount rate6,7

PV of lease payments over the lease term – includes:

Purchase options3

Fixed payments1

Term option penalties2

RV guarantees4

Some variable lease payments5

1. Fixed payments include in-substance fixed payments, less lease incentives2. Only include the termination penalty if the lease term reflects the lessee exercising an option to terminate the lease3. Only include the exercise price of a purchase option if lessee is reasonably certain to exercise 4. For RVGs:

a) Lessee includes the amount expected to be payableb) Lessor includes guaranteed amount

5. Only include VLPs based on an index or rate (e.g., CPI), or if in-substance fixed 6. A lessor is required to use the rate implicit in the lease. A lessee may use the incremental borrowing rate, if it cannot

determine the lessor’s incremental borrowing rate7. Nonpublic business entities may make an accounting policy election to use a risk-free discount rate (FASB only)



Non-

cancellable period

Optional renewal

periods if

lessee reasonably certain to exercise

Periods after optional

termination

date if

lessee reasonably certain not to exercise

Lease Term

Lease term



Lease term

Contractual / Market

■ Level of rentals in any secondary period compared to market rates

■ Contingent payments

■ Renewal and purchase options

■ Costs relating to the termination of the lease and the signing of a new replacement lease

■ Returning costs of the underlying asset

Asset

■ Nature of item (specialised)

■ Location

■ Availability of suitable alternatives

■ Existence of significant leasehold improvements

Consider economic factors in estimating lease term



Subsequent measurement – Lease liability

Reassessment of lease term, purchase option and RVG

Relates to future periods

Reassessment of variable lease payments based on an index or rate

Relates to current period

Changes in carrying amount of lease liability due to:

Adjust right-of-use asset Recognise in P&L

Amortised cost using the effective interest method; no fair value option



Reassessment of lease term and purchase options (lessee only)

Constructing significant leasehold improvements

Significantly modifying or customising the underlying asset

Subleasing the underlying asset for a period beyond the exercise date of an option

Reassessment triggers

Making a business decision that is directly relevant to the lessee’s ability to exercise or not exercise an option



Subsequent measurement – Discount rate

Lessees remeasure the lease liability using revised discount rate when there is a change in lease payments due to:

■ A change in the lease term;

■ A change in assessment of whether the lessee is or is not reasonably certain to exercise a purchase option; or

■ A lease modification.

Lessors are not required to reassess the discount rate.



Initial measurement – ROU asset

ROU asset is initially measured as the sum of:

Lessee also adjusts the ROU asset for lease incentives

PV of lease payments

Initial direct costs

Prepaid lease payments



Subsequent measurement – ROU asset

Amortise over shorter of lease term or economic life, generally on a straight-line basis

Results in front loading of total lease expense

(amortisation expense on ROU asset + interest expense on lease liability)

ROU asset is subject to impairment testing under IAS 36 impairment

IAS 40 applied if the leased property is investment property



Impairment – ROU asset

Continue amortising ROU asset pre-impairment basis

At a minimum, must recognise expense from unwinding of the discount

ROU asset tested is for impairment in accordance with IAS 36. Amortisation following an impairment as follows:



Lease modifications – Lessee

Not at stand-alone price

At stand-alone price for increase

Change to the contractual terms and conditions(excludes exercise of option included in original lease contract)

Separate lease Adjust ROU assetAdjust ROU / gain or loss

Decrease the scope

Increase in scope of lease by adding the ROU one or more underlying

assets

All other lease modifications

Overview

Identify a lease

Lessee: how bit the liability will be?





Agenda



Lessor

Generally consistent with current IAS 17


asset

Lease payments

Operating


asset

Finance


■ Residual Asset


Model Lessee



Lessor lease classification test

Ownership transfers at end of lease?

Bargain purchase option?Finance Lease

Operating lease

Transfer substantially all risk and rewards of ownership?

No

No

No

Yes

Yes

Yes

Assessment criteria similar to current IAS 17 classification test

Lease classification test is not applicable for lessees



Lease modifications – Lessor

Finance lease (at inception)

At stand-alone price for increase

Separate lease Apply IFRS 9

Increase in scope of lease by adding ROU

one or more underlying assets

All other contract modifications

Operating lease (at inception)

Change to the contractual terms and conditions(excludes exercise of option included in original lease contract)

Overview

Identify a lease






Agenda



Subleases

Intermediate lessor

■ Accounts for head lease and sublease as two separate contracts

■ Classifies the sublease based on the ROU asset arising from the head lease

■ Recognises lease assets and lease liabilities gross unless offset criteria met

■ Recognises lease income and lease expense gross unless acting as agent



Sale-leaseback transactions

Buyer-lessor

Seller- lessee

For a sale to occur, transaction must meet the requirements of a sale under the new revenue recognition standard

LeasebackThe leaseback is

accounted for using the lessee

right-of-use model

The sale is recognised in

accordance with applicable GAAP

The purchase is recognised in

accordance with applicable GAAPSale

Each component of the transaction

is assessed separately

Gain on sale is adjusted for off-

market terms

If there is no sale, then both parties apply IFRS 9.

Overview

Identify a lease






Agenda



Effective date and early adoption

Effective date

Accounting periods beginning on or after 1 January 2019

Early adoption

Permitted for entities that have adopted IFRS 15



Lease definition – two options on transition

Core requirement

Apply the new lease definition to all contracts

Practical expedient

“Grandfather” the assessment of which existing contracts are, or contain, leases under IAS 17 and FRIC 4

Apply the new lease definition to new contracts

OR



Lessees – two main transition options

Full retrospective

Apply retrospectively to each period presented in accordance with IAS 8

Modified retrospective

Cumulative effect of applying new standard recognised in equity at beginning of current reporting period

OR

An accounting policy choice to be applied to all leases



Lessee – modified retrospective approach for operating leases

■ Initial measurement of right-of-use asset =

– Carrying amount as if standard had been in place at commencement date

OR

– Lease liability adjusted for accrued prepaid lease payments

Right-of-use asset

Lease liability■ Initial measurement of lease liability = present value of

remaining lease payments

Practical expedients

■ Various optional practical expedients, including:

– Apply a single discount rate to a portfolio of leases

– Treat leases with a remaining term < 12 months as short-term leases



Lessee – modified retrospective approach for finance leases

■ Initial measurement of right-of-use asset = carrying amount of lease asset under IAS 17

Right-of-use asset

Lease liability■ Initial measurement of lease liability = carrying amount of

lease liability under IAS 17



Other transition requirements

■ Reassess classification of subleases previously classified as operating leases under IAS 17

■ “New lease” accounting for any leases that are reclassified as finance leases

Subleases

Lessors ■ No adjustments on transition, other than as noted below

Sale-leaseback

■ No reassessment of whether a sale occurred

■ If leaseback was a finance lease under IAS 17

– Apply transition guidance for finance leases

– Continue to amortise any gain over lease term

■ If leaseback was an operating lease under IAS 17

– Apply transition guidance for operating leases

– Adjust ROU asset for deferred gains / losses

Overview

Identify a lease






Agenda



Next steps – Some key questions (1/3)

Topic Questions and comments

Lease Definition

■ Do you know which of your transactions are, or contain, leases?

■ Will you elect to grandfather the lease definition for existing contracts on transition?

üü

Consider the significant changes in lease definition that will affect many common transactions – e.g. power purchase agreements and transport agreements.

On transition – will you spend the time and cost necessary to reassess your existing transactions and thereby exclude some existing transactions from lease accounting, or grandfather existing arrangements and apply the new definition only to new arrangements?

Lease data ■ Do you have a database of all your leases?

■ Do you have systems and processes necessary to calculate lease assets and liabilities?

■ Are your current disclosures of operating lease commitments complete and accurate?

üüü

Now is the time to begin to assess whether your current systems have the information necessary to apply IFRS 16.





Lease data (cont’d)

Now is the time to check that it includes all the leases that you will soon be bringing on-balance sheet, so that there are no surprises on transition.

Debt covenants ■ Will application of the new standard impact your debt and other covenants? ü

If your financial agreements feature covenants are not applied on a “frozen GAAP” basis, a change in accounting policy might affect your covenant test.

Given the scale of accounting changes to be applied in 2018-19 with new standards on Financial instruments, Revenue and Leases, you may wish to renegotiate some covenants before the standard becomes effective.

Sale-and-leaseback transactions

■ Do you understand the impact of the new standard on your sale-and-leaseback transactions? ü

The new standard eliminates sale-and-leaseback as an off-balance sheet proposition

Sale-and-leaseback can come back on-balance sheet on more than one way:

If true sale under IFRS 15: same as current sale-and-finance-leaseback

If not a sale: financing under IFRS 9 which may require to measure at FVTPL





Financial ratios ■ Do you understand the impact of the new standard on your financial ratios? ü

■ Will optional exemptions such as those for short-term leases and leases of low-value items have a material impact on your financial statements?

ü

The new standard will bring more leases on-balance sheet, increasing the gearing, etc.

What other effects?

Modelling may be required to predict the impact of the front-loaded total expense

Geography of profit and loss will change: now depreciation and interest expense

How will you present variable lease payments?

What will be the impact of optional exemptions on your KPIs?

Transition options

■ Have you thought about how to transition to the new standard? ü One key question is whether to apply the standard

Retrospectively, which will require additional cost and effort; or

As a “big bang” on the date of initial application, which will require less historical information but may impact your trend date for many years to come

IASB Leases Project. Overview Identify a lease Lessee: how big the liability will be? Lessor...

Documents

Transcript of IASB Leases Project. Overview Identify a lease Lessee: how big the liability will be? Lessor...