Lease accounting an update for IFRS adopters 16 May 2013 Download the slides to accompany the webinar ion.icaew.com/financialreporting/26828

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1 Lease accounting an update for IFRS adopters 16 May 2013 Download the slides to accompany the webinar ion./financialreporting/26828

2 Introduction Marianne Mau Technical Manager, Financial Reporting Faculty

3 Introduction Eddy James Technical Manager Financial Reporting Faculty Peter Hogarth Partner PwC

4 Ask a question Participate in today s webinar send us a question Audio problems

5 Downloading the slides ion./financialreporting/26828

6 Contents Where are we now? Lessee accounting Lessor accounting Questions

7 Where are we now? Mar 2009 Aug 2010 May 2013 Sep ? Discussion paper First exposure draft Second exposure draft * Comment period closes New standard * These slides were prepared before the IASB s latest exposure draft was published

8 Lessee accounting identifying a lease Where are we today? A lease conveys the right to use a specific asset for a period of time. Right to use right to operate asset; or right to control access to asset; or take most of output and price neither fixed nor market. Where might we be? A lease conveys the right to control the use of a specified asset for a period of time. Right to control use direct use of asset; and obtain benefits from that use.

9 Lessee accounting lessees Exposure draft Key concerns Redeliberations Second exposure draft All leases on balance sheet Initially measured at present value of lease payments Subsequently measured at amortised cost For operating leases rental expense replaced with amortisation expense and interest expense Model overly complex and difficult to apply in practice eg, requirements relating to contingent rentals and renewal options Front loading of costs on former operating leases Only include contingent lease payments that depend on an index or rate and lease payments for which the variability lacks commercial substance Only include rentals during renewal periods where there is a significant economic incentive to exercise the option A new dual model for lessee expense recognition May 2013 Effective date of new standard yet to be confirmed

10 Lessee accounting dual model Not all leases are the same 10-year airplane lease 3-year real estate lease Paying to acquire the plane plus financing costs Paying to use the lessor s asset

11 All leases on balance sheet Lessee accounting dual model Income statement Lessee consumes more than an insignificant portion of the leased asset Amortisation expense and interest expense Lessee does not consume more than an insignificant portion of the leased asset Straight-line lease expense

12 Lessee accounting dual model Income statement Leases of assets other than property unless: Lease term is insignificant relative to the economic life of asset Present value of lease payments is insignificant relative to fair value of asset Leases of property ie, land and/or buildings unless: Lease term is a major part of the economic life of asset Present value of lease payments is substantially all of the fair value of asset Lessee consumes more than an insignificant portion of the leased asset Lessee does not consume more than an insignificant portion of the leased asset Amortisation expense and interest expense Straight-line lease expense

13 Poll Do you think that recognising all leases on-balance sheet will change the way people view your accounts?

14 Lease accounting lessors Exposure draft Key concerns Redeliberations Second exposure draft Hybrid model with leases either being accounted for under the derecognition model or the performance obligation model depending on the circumstances Inconsistent with the introduction of a single model for lessees A new model is proposed under which lessors would use the same lease classification test as lessees to determine whether to apply the receivable and residual model or the operating lease model May 2013 Effective date of new standard yet to be confirmed

15 Lessee Lessor accounting dual model Amortisation expense and interest expense Straight-line lease expense Receivable and residual model Operating lease model Lessor

16 Lessor accounting dual model Model Balance sheet Income statement Receivable and residual Operating lease Recognise a lease receivable and a residual asset on lease commencement Measure the lease receivable initially at the present value of the lease payments and subsequently using the effective interest rate method Measure the residual asset as an allocation of the carrying amount of the underlying asset and subsequently accrete the gross residual asset to the estimated residual value at the end of the lease term Continue to recognise the underlying asset Recognise interest income over the lease term, resulting in an accelerated pattern of income recognition. If the fair value of the asset exceeds its carrying value, profit is recognised on the portion of the underlying asset conveyed to the lessee via a right-ofuse. Profit on portion of underlying asset retained by lessor (relating to the lessor s residual asset) is only recognised when residual asset is sold or re-leased. Recognise the lease payments on a straight-line basis over the lease term

17 Poll How do the latest proposals compare to the current requirements?

18 Any questions?

19 Ask a question Participate in today s webinar send us a question Click here to see questions

20 Questions Eddy James Technical Manager Financial Reporting Faculty Peter Hogarth Partner PwC

21 Future webinars and events Webinars 18 July IFRS update Further updates as and when new standards issued Events Autumn roadshow series 2 December IFRS conference December Information for Better Markets conference

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