CPA COMPETENCY MAP STUDY NOTES UPDATE TO DECEMBER 31, 2018

Transcription

1 CPA COMPETENCY MAP STUDY NOTES UPDATE TO DECEMBER 31, 2018 Please note that several of the updates relate to changes that are not effective until For 2019 PEP Module Exams and for the CFE, you are still responsible for changes to the CPA Canada Standards and Guidance Collection that occur after the cut-off date (usually December 31 st of prior year) or that have been issued but are not in effect, but it would be at a Level C expectation: Demonstrate retrieval and comprehension skills Be able to explain, describe and demonstrate knowledge that is low to moderate in complexity for a routine situation. However, CPA sometimes makes an exception for new accounting standards that are effective January 1 st of the current year to make them fully examinable at Level A. As of date of issuance of this update, CPA Canada has not yet released their technical update for * Two areas of significant changes with effective dates of January 1, 2019 are: IFRS 16, Leases Not-for-Profit Organizations o NPO 4433, Tangible Capital Assets Held by NPOs o NPO 4434, Intangible Assets Held by NPOs o NPO 4441, Collections Held by NPOs Full details on all of these new standards can be found in this update. *In January or February 2019, CPA Canada will post a technical update for the 2019 PEP Module Exams and the CFE on their website. Be sure to review that technical update for clarity as to what is examinable on the 2019 exams. 1

2 FINANCIAL REPORTING Accounts Receivable, page 46 of your notes, the reference to IAS 39 has been changed to IFRS 9 Borrowing Costs, page 49 of your notes, information added about amendments to IAS 23 effective on or after January 1, 2019, with earlier application permitted: The amendments clarify that an entity treats as general borrowings any borrowings made specifically to obtain a qualifying asset that remain outstanding when the asset is ready for its intended use or sale. Consolidations, page 54 of your notes, information added about amendments to IFRS 3 effective on or after January 1, 2019, with earlier application permitted: The amendments clarify that when an entity obtains control of a business that is a joint operation, it applies the requirements for a business combination achieved in stages, including remeasuring previously held interests in that business. Employee Benefits, page 68 of your notes, information added about amendments to IAS 19 effective on or after January 1, 2019, with earlier application permitted. The amendments clarify: That when a defined benefit plan amendment, curtailment or settlement occurs and an entity remeasures its net defined benefit liability or asset, the entity uses the updated assumptions from this remeasurement to determine current service cost and net interest for the remainder of the reporting period after the change to the plan; and The effect of a plan amendment, curtailment or settlement on the asset ceiling requirements Financial Instruments, IFRS 9 is effective January 1, Full details on IFRS 9 can be found in your notes on pages 94 to 104. IAS 39, Financial Instruments: Recognition and Measurement is no longer examinable; accordingly, you will disregard coverage of IAS 39 found on pages 80 to 83 of your notes. Please note that there has been no change in the ASPE Financial Instruments standards. Foreign Currency, page 109 of your notes, Foreign Currency Hedge Forward Contract, 4 th bullet, B/S date, a note has been added under the last bullet, Exchange gains/losses included in profit/loss : Exception: Forward contracts may be accounted for as a fair value hedge or a cash flow hedge. If it is accounted for as a cash flow hedge, exchange gains/losses are included in OCI. Income Taxes, page 127 of your notes, information added about amendments to IAS 12 effective on or after January 1, 2019, with earlier application permitted: The amendments clarify that an entity recognizes income tax consequences of dividends in profit or loss, other comprehensive income or equity, depending on where the entity recognized the originating transaction or event that generated the distributable profits giving rise to the dividend. Investment Property, page 139 of your notes, 2 nd bullet under Subsequent Measurement has been replaced with the following: Lessee with an operating lease classified as investment property must use fair value model. (As of January 1, 2019, no longer applicable with IFRS 16, Leases, which eliminates operating leases from lessee s perspective.) 2

3 FINANCIAL REPORTING (cont d) Investment Property, page 140 of your notes, 1 st bullet under Transfers has been replaced with the following (2 nd, 3 rd & 4 th bullets are unchanged): Transfers to / from investment property only made when there is a change in use. The entity must have taken observable actions to support such a change mgmt s intentions alone do not provide evidence of a change in use. Examples of evidence of a change in use include: Commencement of owner occupation or of development with a view to owner-occupation Commencement of development with a view to sale, for a transfer from investment property to inventories End of owner-occupation Inception of an operating lease to another party, for a transfer from inventories to investment property Investment in Associates, page 142 of your notes, 5 th bullet under Equity method reference to IAS 39 has been deleted Investment in Associates, page 142 of your notes, entire section under Impairment of an investment has been replaced with the following: Net impairment in an investment in an associate is impaired only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the net investment and that loss event has an impact on the estimated future cash flows that can be reliably estimated. It may not be just one event, but a combination of events. Here are loss events to look for: Significant fin l difficulty Breach of contract, such as default or delinquency in payments Concessions granted for economic or legal reasons relating to fin l difficulty, that would not otherwise be considered Probable that will enter bankruptcy or other fin l reorganization Disappearance of an active market for the net investment because of fin l difficulties Other points to consider: Losses expected as a result of future events, no matter how likely, are not recognized. Disappearance of an active market because equity or fin l instruments are no longer publicly traded is not evidence of impairment. Downgrade of credit rating or a decline in the fair value is not of itself, evidence of impairment, but may be considered in conjunction with other info. Goodwill, which forms part of the carrying amount of an investment in an associate, is not recognized separately, nor is it tested for impairment separately. If decide that the net investment (including goodwill) is impaired, use guidance in IAS 36, Impairment of Assets, to determine amount to recognize as an impairment loss. If investment subsequently recovers, can reverse impairment loss to the extent previously recorded. 3

4 FINANCIAL REPORTING (cont d) Investment in Associates, page 146 of your notes, 4 th bullet, reference to IAS 39 has been deleted Joint Arrangements, page 147 of your notes, information added about amendments to IFRS 11 effective on or after January 1, 2019, with earlier application permitted: The amendments clarify that when an entity obtains control of a business that is a joint operation, it does not remeasure previously held interests in that business. Joint Arrangements, page 149 of your notes, references to IAS 39 have been deleted Joint Arrangements, page 150 of your notes, entire section under Impairment has been replaced with the following: Net impairment in an investment in a joint arrangement is impaired only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the net investment and that loss event has an impact on the estimated future cash flows that can be reliably estimated. It may not be just one event, but a combination of events. Here are loss events to look for: Significant fin l difficulty Breach of contract, such as default or delinquency in payments Concessions granted for economic or legal reasons relating to fin l difficulty, that would not otherwise be considered Probable that will enter bankruptcy or other fin l reorganization Disappearance of an active market for the net investment because of fin l difficulties Other points to consider: Losses expected as a result of future events, no matter how likely, are not recognized. Disappearance of an active market because equity or fin l instruments are no longer publicly traded is not evidence of impairment. Downgrade of credit rating or a decline in the fair value is not of itself, evidence of impairment, but may be considered in conjunction with other info. Goodwill, which forms part of the carrying amount of an investment in a joint arrangement, is not recognized separately, nor is it tested for impairment separately. If decide that the net investment (including goodwill) is impaired, use guidance in IAS 36, Impairment of Assets, to determine amount to recognize as an impairment loss. If investment subsequently recovers, can reverse impairment loss to the extent previously recorded. Leases, pages 152 to 160 of your notes address standards in effect as of December 31, You can find full details on IFRS 16, which is effective January 1, 2019, in this update, starting on page 6. Notes Receivable, page 172 of your notes, the reference to IAS 39 has been changed to IFRS 9 Revenue from Contracts with Customers, IFRS 15 is effective January 1, Full details on IFRS 15 can be found in your notes on pages 204 to 219. The new standard supersedes the requirements in IAS 11, IAS 18, IFRIC 13, IFRIC 15, IFRIC 18 and SIC-31; accordingly, these standards are no longer examinable. For pages 190 to 203 of your notes, only the ASPE coverage, which remains unchanged, will be relevant. 4

5 FINANCIAL REPORTING (cont d) Share-Based Payment, page 221 of your notes Amendments were made to IFRS 2, which are effective January 1, 2018; accordingly, the entire page has been replaced with the following: Equity-Settled Share-Based Payment Transactions (cont d) Cancellation or settlement during vesting period: Recognize immediately the amount that otherwise would have been recognized for services received over the remainder of the vesting period. Payments made to the employee, debit to equity. If payment exceeds amount recorded in equity for transaction, excess gets recorded as an expense. Replacement equity instruments account for in same way as a modification. Obligation to withhold and remit an amount for an employee s tax obligation associated with a share-based payment won t impact classification as an entity-settled share-based payment transaction. Cash-Settled Share-Based Payment Transactions Transaction in which the entity acquires goods or services by incurring a liability for amounts that are based on the price (or value) of equity instruments (including shares or share options) of the entity or another group entity. Record transaction when goods or services received (debit to asset / expense; credit to liability) Measurement: fair value of the liability Until the liability is settled, remeasure the fair value of the liability at the end of each reporting period. Other side of entry is to revenue / expense on profit / loss. May be conditional upon satisfying certain vesting conditions (e.g., achieving a specified growth in profit or a specified increase in the entity s share price): Vesting conditions, other than market conditions, don t impact fair value estimate; instead, adjust # of awards included in measurement of liability Market conditions and non-vesting conditions: take into account when remeasuring FV at the end of each reporting period and at settlement date. Share-Based Payment Transactions with Cash Alternatives Compound financial instrument record debt and equity components separately. Measure fair value of debt component first; excess will be equity component. Not-for-Profit Organizations Tangible Capital Assets Held by NPOs (NPO 4431), page 237 of your notes address standards in effect as of December 31, You can find full details on NPO 4433, which is effective January 1, 2019, in this update, starting on page 24. Intangible Capital Assets Held by NPOs (NPO 4432), page 238 of your notes address standards in effect as of December 31, You can find full details on NPO 4434, which is effective January 1, 2019, in this update, starting on page 26. Collections Held by NPOs (NPO 4440), page 238 of your notes address standards in effect as of December 31, You can find full details on NPO 4441, which is effective January 1, 2019, in this update, starting on page 27. 5

6 LEASES IFRS 16, Effective January 1, 2019 IFRS 16, Leases, is a new standard that was issued by the IASB in June It is effective for annual periods beginning on or after January 1, It will supersede the requirements in IAS 17, IFRIC 4, SIC-15 and SIC-27. Material related to the standards for leases (both IFRS standards and ASPE) in effect at December 31, 2018 can be found on pages 152 to 160 of your notes. Scope Applies to all leases, including leases of right-of-use assets in a sublease, except for: Leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources Leases of biological assets (IAS 41) Service concession arrangements (IFRIC 12) License of intellectual property (IFRS 15) Rights held by a lessee under licensing agreements (IAS 38) for such items as motion picture films, video recordings, plays, manuscripts, patents and copyrights. (A lessee may, but is not required to, apply IFRS 16 to leases of intangible assets other than those specified.) Recognition Exemptions Lessee A lessee may elect not to apply IFRS 16 to either: Short-term leases; or Leases for which the underlying asset is of low value Short-term leases: At the commencement date, lease term of 12 months or less A lease that contains a purchase option would not qualify as a short-term lease Low value assets: Assessment based on value of the asset when it is new, regardless of the age of the asset being leased Assessment is performed on an absolute basis, regardless of whether those leases are material to the lessee. Accordingly, different lessees are expected to reach the same conclusion about whether a particular underlying asset is of low value. Underlying asset can be of low value only if: Lessee can benefit from use of the underlying asset on its own or together with other resources that are readily available to the lessee; and Underlying asset is not highly dependent on, or highly interrelated with, other assets. Other considerations if one of the exemptions is met and elect not to apply IFRS 16: Lease payments expensed on a straight-line basis over the lease term or another systematic basis. If there is a lease modification or a change in the lease term, consider the lease to be a new lease, which will require reassessment of exemption criteria. 6

7 LEASES (cont d) IFRS 16, Effective January 1, 2019 Lease term Begins on the commencement date (date on which lessor makes an underlying asset available for use by a lessee) and includes any rent-free periods Includes all of the following: Non-cancellable period when lessee has right to use an underlying asset Periods covered by an option to extend the lease if lessee is reasonably certain to exercise that option Periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option. Non-cancellable period A lease is no longer enforceable when the lessee and the lessor each has the right to terminate the lease without permission from the other party with no more than an insignificant penalty Only extension and termination options held by the lessee are considered when determining the lease term. If only the lessor has the right to terminate a lease, that doesn t impact the non-cancellable period. Factors to consider re. likelihood of lessee exercising or failing to exercise options: Contractual terms and conditions for the optional periods compared with market rates Significant leasehold improvements expected to have significant economic benefit to the lessee when options become exercisable Costs relating to the termination of the lease (e.g., negotiation costs, relocation costs, costs of identifying another underlying asset suitable for the lessee s needs, costs of integrating a new asset into the lessee s operations, termination penalties, costs associated with returning the underlying asset in a contractually specified condition or to a contractually specified location) Importance of underlying asset to lessee s operations (e.g., whether the underlying asset is a specialized asset, the location of the asset and the availability of suitable alternatives) Conditionality associated with exercising the option (i.e., when the option can be exercised only if one or more conditions are met) and the likelihood that those conditions will exist. A lessee needs to reassess whether it is reasonably certain to exercise an extension or termination option if there is a significant event or change in circumstances that: Is within the control of the lessee; and Affects whether the lessee is reasonably certain to exercise an option not previously included in its determination of the lease term, or not to exercise an option previously included in its determination of the lease term Revise the lease term if there is a change in the non-cancellable period of a lease. 7

8 LEASES (cont d) IFRS 16, Effective January 1, 2019 Portfolio Application IFRS 16 specifies the accounting for an individual lease. Practical expedient: May apply to a portfolio of leases with similar characteristics if effects on F/S don t vary materially from applying on an individual lease basis. If accounting for a portfolio, use estimates and assumptions that reflect the size and composition of the portfolio. Combination of Contracts Combine two or more contracts entered into, at or near the same time, with the same counterparty (or related parties of the counterparty), and account for as a single contract if one or more of the following criteria are met: Contracts are negotiated as a package with an overall commercial objective that cannot be understood without considering the contracts together Amount of consideration to be paid in one contract depends on the price or performance of the other contract Rights to use underlying assets conveyed in the contracts form a single lease component Identifying a Lease At the inception of a contract, assess whether the contract is, or contains, a lease. Does the contract convey the right to control the use of an identified asset for a period of time in exchange for consideration? Reassess whether a contract is, or contains, a lease only if the terms and conditions of the contract are changed. 8

9 LEASES (cont d) IFRS 16, Effective January 1, 2019 Identifying a Lease (cont d) Identified asset Usually it s explicitly specified in a contract; however, it could also be implicitly specified at the time that the asset is made available for use by the customer Customer doesn t have the right to use an identified asset if supplier has substantive right to substitute the asset throughout the period of use. Substantive right to substitute if both of the following conditions exist: Supplier has practical ability to substitute alternative assets throughout the period of use Supplier would benefit economically from exercise of its right to substitute the asset Other considerations: It s not a substantive right to substitute if supplier has right or obligation to substitute the asset only on or after either a particular date or the occurrence of a specified event Evaluation of whether a supplier s substitution right is substantive is based on facts and circumstances at inception of the contract and excludes consideration of future events that, at the inception of the contract, would not be considered likely to occur. Supplier s right or obligation to substitute the asset for repairs and maintenance or technical upgrade, doesn t stop the customer from having right to use an identified asset. Portion of assets o Still considered to be an identified asset if capacity portion is physically distinct (e.g., a floor of a building) o If capacity portion is not physically distinct, then it s not an identified asset unless it represents substantially all of the capacity of the asset. Right to control assess whether, throughout the period of use, the customer has both of the following (discussed in more detail in the material that follows): Right to substantially all of the economic benefits from use of the identified asset Right to direct the use of the identified asset Right to substantially all of the economic benefits from use Could be directly (e.g., by having exclusive use of the asset throughout the period of the contract) or indirectly (e.g., right to sub-lease the asset) Economic benefits include its primary output and by-products If the contract requires a customer to pay the supplier, or another party, a portion of the cash flows derived from use of an asset as consideration, those cash flows paid are still considered to be part of the economic benefits obtained from the use of the asset (i.e., customer pays a percentage of sales from use of leased retail space) In making assessment, consider the economic benefits that result from use of the asset within the defined scope of a customer s right to use the asset (e.g., particular territory, max. # of kms). 9

10 LEASES (cont d) IFRS 16, Effective January 1, 2019 Identifying a Lease (cont d) Right to direct the use - A customer has the right to direct the use of an identified asset throughout the period of use only if either: Customer has the right to direct how and for what purpose the asset is used throughout the period of use (discussed in more detail below); or The relevant decisions about how and for what purpose the asset is used are predetermined and: Customer has the right to operate the asset (or to direct others) throughout the period of use, without the supplier having the right to change those operating instructions; or Customer designed the asset (or specific aspects of the asset) in a way that predetermines how and for what purpose the asset will be used throughout the period of use How and for what purpose the asset is used for - consider the most relevant decision-making rights Decision-making rights are considered to be most relevant when they affect the economic benefits to be derived from use Likely to be different for different contracts, depending on the nature of the asset and the terms and conditions of the contract. Protective rights Terms and conditions designed to protect the supplier s interest in the asset, to protect its personnel, or to ensure the supplier s compliance with laws or regulations. Don t usually prevent the customer from having the right to direct the use of an asset Examples contract may specify: Max. amount of use of an asset or limit where or when the customer can use the asset Require a customer to follow particular operating practices Require a customer to inform the supplier of changes in how an asset will be used Let s go back to refresh as to the question we re trying to answer to determine if the contract is or contains a lease: Does the contract convey the right to control the use of an identified asset for a period of time in exchange for consideration? We ve already addressed right to control and identified asset, leaving period of time to be addressed: Could also be described in terms of the amount of use of an identified asset (e.g., number of production units produced) If customer has right to control for only a portion of the term of the contract, then lease is only for that portion of the term. 10

11 LEASES (cont d) IFRS 16, Effective January 1, 2019 Separating Components of a Contract Account for each lease component within a contract as a lease separately from non-lease components of the contract. Lessee Allocate consideration based on relative stand-alone prices. Relative stand-alone prices determined on the basis of the price the lessor, or a similar supplier, would charge separately for that component or a similar component. If that info isn t available, estimate using observable information. Non-lease component accounted for based on other applicable standard. Practical expedient: may elect, by class of underlying asset, to account for each lease component and any associated non-lease components as a single lease component. (Exception: election cannot be made for embedded derivatives) Lessor Allocate consideration by applying IFRS 15, Revenue from Contracts with Customers, using allocating the transaction price to performance obligations guidance Lessee - Recognition and Measurement Right-of-use asset initial measurement At the commencement date, measure the right-of-use asset at cost, comprising the following: Lease liability (see material that follows) Lease payments made at or before the commencement date, less any lease incentives received Initial direct costs Costs of dismantling, removing and restoring Lease incentives payments made by a lessor to a lessee associated with a lease, or the reimbursement or assumption by a lessor of costs of a lessee. Initial direct costs incurred by the lessee incremental costs of obtaining a lease that would not have been incurred if the lease had not been obtained. Costs of dismantling, removing and restoring include the following: An estimate of costs to be incurred by the lessee in dismantling and removing the underlying asset, restoring the site on which it is located or restoring the underlying asset to the condition required by the terms and conditions of the lease. Recognize costs when lessee incurs an obligation for those costs (based on IAS 37, Provisions, Contingent Liabilities and Contingent Assets). Exception: do not include any costs incurred to produce inventories (instead, will use IAS 2, Inventories, for those costs) Include costs incurred either at the commencement date or as a consequence of having used the underlying asset during a particular period. 11

12 LEASES (cont d) IFRS 16, Effective January 1, 2019 Lessee - Recognition and Measurement (cont d) Lease liability initial measurement At the commencement date, measure the lease liability at the present value of the lease payments, discounted using the interest rate implicit in the lease if that rate can be readily determined. If not, use the lessee s incremental borrowing rate. Lease payments include: Fixed payments less any lease incentive receivable Variable lease payments Residual value guarantees Exercise price of purchase options Termination penalties Fixed payments also include in-substance fixed payments. The form of these payments may contain variability, but in substance they are unavoidable. In-substance fixed payments exist, for example, if: Payments are structured as variable lease payments, but there is no genuine variability in those payments (no real economic substance). There is more than one set of payments that a lessee could make, but only one of those sets of payments is realistic; in which case, use the realistic payment option. There is more than one realistic set of payments that a lessee could make, but it must make at least one of those sets of payments. If so, then use the set of payments (discounted) that totals to the lowest amount. Variable lease payments are included if they depend on an index or a rate, initially measured using the index or rate as at the commencement date. For example, payments could be linked to a consumer price index, benchmark interest rate (such as LIBOR) or vary to reflect changes in market rental rates. Other types of variable lease payments would be recorded in profit / loss. Residual value guarantees A guarantee made to a lessor that the value (or part of the value) of an underlying asset at the end of a lease will be at least a specified amount. Include amounts expected to be payable by the lessee Exercise price of purchase options include if the lessee is reasonably certain to exercise that option (consistent with assessment related to lease term). Termination penalties include if the lease term reflects the lessee exercising an option to terminate the lease (consistent with assessment related to lease term). 12

13 LEASES (cont d) IFRS 16, Effective January 1, 2019 Lessee - Recognition and Measurement (cont d) Right-of-use asset subsequent measurement Subsequent measurement of the right-of-use asset using one of the following: Cost model If it s an investment property, fair value model from IAS 40, if used for its other investment properties May elect to use revaluation model from IAS 16, if right-of-use asset belongs to a class of property, plant and equipment to which the revaluation model is used Cost model lessee will measure right-of-use asset at cost: Less any accumulated depreciation** (use IAS 16) and any accumulated impairment losses (use IAS 36); and Adjusted for any remeasurement of the lease liability, including those related to lease modifications or to reflect revised in-substance fixed lease payments. ** Depreciation will usually be calculated over the lease term. Exceptions: If useful life is less than lease term, depreciate over useful life If lease transfers ownership of the underlying asset to the lessee by the end of the lease term or if there is a purchase option that the lessee is reasonably certain to exercise, depreciate over useful life. Lease liability subsequent measurement Subsequent measurement of the lease liability: Increase carrying amount for interest on lease liability (use same interest rate as used to discount lease liability) Reduce carrying amount for lease payments made Remeasure the carrying amount to reflect any reassessment, lease modifications or revised in-substance fixed lease payments Lessee will include in profit / loss: Interest on the lease liability (unless it is included in the carrying amount of an asset as required by another standard) Variable lease payments not included in the measurement of the lease liability in the period in which the event or condition that triggers those payments occurs 13

14 LEASES (cont d) IFRS 16, Effective January 1, 2019 Lessee - Recognition and Measurement (cont d) Remeasurement of Leases Right-of-use assets and lease liabilities are remeasured for each of the following: Change in lease term Change in the assessment of a purchase / termination option Change in expected payments for residual value guarantee Change in future lease payments (only if it affects cash flows) resulting from a change in an index or a rate used to determine those payments Usually the adjustment to the right-of-use asset is the same as for the lease liability, so there s no immediate impact on profit / loss. However, if the adjustment required to the lease liability is more than the carrying amount of the right-to-use asset, only bring the carrying amount of the right-to-use asset to zero with any excess recognized in profit / loss. Remeasurement adjustments are accounted for on a prospective basis. Change in lease term or purchase / termination options: Remeasure lease liability by discounting the revised lease payments, using a revised discount rate. (Use interest rate implicit in the lease for the remainder of the lease term, if that rate can be readily determinable. If not, use the lessee s incremental borrowing rate at the date of reassessment.) Change in residual value guarantee / change in index or rate affecting payments: Remeasure lease liability by discounting the revised lease payments, using the original discount rate Exception: If the change in lease payments results from a change in floating interest rates, use a revised discount rate that reflects those changes. 14

15 LEASES (cont d) IFRS 16, Effective January 1, 2019 Lessee - Recognition and Measurement (cont d) Lease modifications A lease modification is a change in the scope of a lease, or the condition for a lease, that was not part of the original terms and conditions of the lease. Lessee will account for a lease modification as a separate lease if both of the following are met: Modification increases the scope of the lease by adding the right to use one or more underlying assets; and Consideration for the lease increases by an amount commensurate with the stand-alone price of the increase If the lease modification doesn t meet criteria to be accounted for as a separate lease, at the effective date of the lease modification, lessee will: Allocate the consideration as if it were a separate component of the contract (discussed previously in this material) Determine the lease term of the modified lease Remeasure the lease liability by discounting the revised lease payments using a revised discount rate. The remeasurement of the right-of-use asset will be accounted for as follows: If the lease modification decreases the scope of the lease, decrease the carrying amount of the right-of-use asset to reflect the partial or full termination of the lease. Any resulting gain / loss on termination will be recognized in profit / loss. For all other lease modifications, make a corresponding adjustment to the right-of-use asset. 15

16 LEASES (cont d) IFRS 16, Effective January 1, 2019 Lessee - Presentation Statement of Financial Position - Presentation Right-of-use assets present separately or combine with property, plant and equipment with separate disclosure. Exception: If right-of-use asset meets definition of investment property, include with other investment property. Lease liabilities present separately or combine with other liabilities with separate disclosure Statement of Profit / Loss - Presentation Interest expense (included with other finance costs) Depreciation of right-of-use assets (can be included with other depreciation expense) Statement of Cash Flows - Presentation Cash payments for principal portion of lease liability; include in financing section Cash payments for interest portion of lease liability (use IAS 7) Short-term lease payments, payments for leases of low-value assets and variable lease payments (not included in measurement of the lease liability); include in operating section Lessee - Disclosure Qualitative disclosure required: Nature of the lessee s leasing activities Future cash flows the entity is potentially exposed to that are not included in the lease liability: Variable lease payments Extension options and termination options Residual value guarantees Leases not yet commenced to which the lessee is committed Restrictions or covenants imposed by leases Information about sale and leaseback transactions Quantitative disclosure required: Depreciation for right-of-use assets by class Interest expense on lease liabilities Lease expense for short-term leases (not required for leases with terms of one month or less) Lease expense for low-value assets (not required for leases with terms of one month or less) Variable lease payments expense (not included in measurement of lease liability) Income from subleasing right-of-use assets Total cash outflow for leases Additions to right-of-use assets Gains / losses arising from sale and leaseback transactions Carrying amount of right-of-use assets at the end of the reporting period by class 16

17 LEASES (cont d) IFRS 16, Effective January 1, 2019 Lessee Disclosure (cont d) Other disclosure requirements: Amount of short-term lease commitments, if the current expense is dissimilar to short-term lease commitments at the end of the reporting period If investment property, will also need to meet disclosure requirements of IAS 40 If using revaluation model, will also need to meet IAS 16 disclosure requirements Disclose maturity analysis of lease liabilities separately from the maturity analyses of other financial liabilities (see IFRS 7) If short-term or low-value lease exemptions used, disclose that fact Lessor Classification of Leases Finance lease a lease that transfers substantially all the risks and rewards incidental to ownership of an asset. Classify as a finance lease if any one of the following criteria is met: Transfer of ownership/bargain purchase option (BPO) Lease is for the major part of the economic life of the asset (judgment no quantitative guideline given under IFRS, ASPE uses 75%) Present value (PV) of lease payments amounts to substantially all of the fair value of the leased asset (judgment no quantitative guideline given under IFRS, ASPE uses 90%) Leased assets are of such a specialized nature that only the lessee can use them without major modifications Secondary factors to consider in determining whether it is a finance lease: If the lessee can cancel the lease, the lessor s losses associated with the cancellation are borne by the lessee Gains / losses from the fluctuation in the fair value of the residual accrue to the lessee Lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent Other Considerations: If the lease includes both land and building Assess each component separately o Lease payments will be allocated based on relative fair values o If value of land is immaterial to the lease, can treat the land and building as a single unit For land, consider that it normally has an indefinite economic life Sublease an underlying asset is re-leased by a lessee (intermediate lessor) to a third party but the lease (head lease) between the head lessor and lessee remains in effect. Intermediate lessor will assess whether the sublease is a finance or operating lease using above criteria, but only in the context of the right-of-use asset arising from the head lease, rather than by reference to the underlying asset If the head lease is short-term lease that lessee has used exemption for, than sublease will be classified as an operating lease. 17

18 LEASES (cont d) IFRS 16, Effective January 1, 2019 Lessor Recognition and Measurement At the commencement date, recognize finance leases as a receivable at an amount equal to the net investment in the lease on B/S PV of the following: Fixed payments less any lease incentives payable Variable lease payments that depend on an index or a rate Residual value guarantees Purchase options if lessee is reasonably certain to exercise that option Termination penalty payments if the lease term reflects the lessee exercising the termination option Initial direct costs (other than those incurred by manufacturer or dealer lessors) are included in the initial measurement Discount rate use interest rate implicit in lease. Manufacturer or dealer lessors Two types of income: profit / loss on sale of leased asset and finance income over the lease term. Sales revenue = lower of fair value of the asset or PV of lease payments (discounted using a market interest rate) Cost of sales = cost or carrying amount of leased asset less PV of the unguaranteed residual value Expense costs incurred in connection with obtaining finance lease Subsequent measurement Allocate payments between principal reduction of receivable and finance income Apply derecognition and impairment requirements of IFRS 9, including regularly reviewing estimated unguaranteed residual values. Operating Lease If it doesn t meet the criteria for a finance lease, must be an operating lease Leased assets present in B/S according to the nature of the asset and depreciate as usual Initial direct costs add to carrying amount of underlying asset (which will be subject to depreciation) Use IAS 36 to assess impairment Lease payments recognize as income on a straight-line basis over lease term, unless another systematic basis is more appropriate 18

19 LEASES (cont d) IFRS 16, Effective January 1, 2019 Lessor Recognition and Measurement (cont d) Lease modifications Lessor will account for a lease modification as a separate lease if both of the following are met: Modification increases the scope of the lease by adding the right to use one or more underlying assets; and Consideration for the lease increases by an amount commensurate with the stand-alone price of the increase If the lease modification doesn t meet criteria to be accounted for as a separate lease, at the effective date of the lease modification: If the lease would have been classified as an operating lease had the modifications been in effect at the inception date: Account for the lease modification as a new lease from the effective date of the modification; and Measure the carrying amount of the underlying asset as the net investment in the lease immediately before the effective date of the lease modification Otherwise, apply IFRS 9 Lessor Disclosure Nature of the lessor s leasing activities How the lessor manages the risk associated with any rights it retains in underlying assets, in particular its risk management strategy to reduce those risks (e.g., buy-back agreements, residual value guarantees or variable lease payments for use in excess of specified limits) Finance leases: Selling profit / loss Finance income on the net investment in finance leases Income relating to variable lease payments not included in the measurement of the net investment in finance leases Qualitative and quantitative explanation of the significant changes in the carrying amount of the net investment in finance leases Maturity analysis of lease payments receivable, showing the undiscounted lease payments to be received for each of the next five years and in total for remaining years. Reconciliation of undiscounted lease payments to the net investment in finance leases, including identification of unearned finance income and discounted unguaranteed residual value. 19

20 LEASES (cont d) IFRS 16, Effective January 1, 2019 Lessor Disclosure (cont d) Operating leases: For property, plant and equipment (PPE), subject to an operating lease, apply IAS 16 disclosure requirements, but must have separate disclosure for PPE subject to operating leases and other PPE. Apply disclosure requirements in IAS 36, IAS 38, IAS 40 and IAS 41 for assets subject to operating leases as appropriate. Maturity analysis of lease payments, showing the undiscounted lease payments to be received for each of the next five years and in total for remaining years Sale leaseback Seller-lessee transfers an asset to buyer-lessor and leases the asset back from the buyer-lessor (basically, sale of property with the purchaser leasing the property back to the seller) Apply IFRS 15 requirements to determine whether a performance obligation is satisfied to determine if there is a sale of the asset If transaction meets the requirements to be accounted for as a sale: Seller-lessee measures the right-of-use asset at the previous carrying amount and recognizes gain / loss Buyer-lessor accounts for purchase of the asset by applying the IFRS 16 lease standards If the fair value of the consideration for the sale of an asset does not equal the fair value of the asset or if the payments for the lease are not at market rates, adjustment required to measure sale proceeds at fair value Measurement on the basis of the more readily determinable of: o Difference between the fair value of the consideration for the sale and the fair value of the asset; and o Difference between the PV of the contractual payments for the lease and the PV of payments for the lease at market rates Accounting: o Any below-market terms, accounted for as a prepayment of lease payments o Any above-market terms, accounted for as additional financing provided by the buyer-lessor to the seller-lessee If transfer doesn t meet requirements to be accounted for as a sale of the asset: Seller-lessee will keep the transferred asset on its B/S and recognize a financial liability equal to the transfer proceeds. Buyer-lessor will not recognize the transferred asset on its B/S, but will recognize a financial asset equal to the transfer proceeds. Both parties will use IFRS 9 to account for the financial asset / liability. 20

21 LEASES (cont d) IFRS 16, Effective January 1, 2019 Leases Example Golden Company, a small public company, enters into a contract with a supplier on July 1, 20X1, for the use of manufacturing equipment. The following data are relevant to the contract: 1. The term of the non-cancellable contract is four years, with no renewal option. Payments of $55,000 are due on June 30 of each year with the first payment due on July 1, 20X1. 2. The fair value of the equipment on July 1, 20X1 is $235,000. The equipment has an economic life of six years with no salvage value. 3. At the end of the contract, Golden has the option to purchase the manufacturing equipment for $30,000, at which time the fair value is expected to be $40, Golden depreciates similar machinery it owns using the cost model on the straight-line basis. 5. Golden s incremental borrowing rate is 4% per year. The lessee is aware that the lessor used a rate of 5% in computing the lease payments. 6. Golden s year end is December 31. Required: a. Does this contract constitute a lease? b. If it is a lease, can Golden use one of the recognition exemptions to choose not to apply IFRS 16? c. Prepare the journal entries on Golden s books that relate to the lease agreement for 20X1 and 20X2. d. Assume that Golden is not a public company and is using ASPE. Indicate the type of lease Golden Company has entered into and what accounting treatment is applicable. Analyze all criteria. Leases Example Solution a) Does this contract constitute a lease? YES, based on following analysis There is an identified asset (manufacturing equipment) that Golden has the right to use. There s nothing to indicate that there are any substantive rights to substitute. Golden has a right to control the use of the identified asset supported by the following: o Golden has the right to substantially all of the economic benefits from use as they have exclusive use of the manufacturing equipment throughout the contract and will, therefore, derive all of the economic benefits from its use. o Golden has the right to direct the use of the asset as they have the right to direct how and for what purpose the manufacturing equipment is used throughout the period of use. Golden appears to have all the decision making rights related to the use of the asset as there s nothing to indicate otherwise. 21

22 LEASES (cont d) IFRS 16, Effective January 1, 2019 Leases Example Solution (cont d) b) This lease does not meet either of the conditions for exemption from IFRS 16: Short-term lease: lease term of 12 months or less. Golden doesn t meet this exemption since lease is for four years. As well, the lease contains a purchase option, which would disqualify it as a short-term lease. Leases for which the underlying asset is of low value. The manufacturing equipment has a fair value of $235,000, so it s clearly not of low value. c) Bargain purchase option since can purchase the manufacturing equipment for $30,000 when fair value will be $40,000. Golden is reasonably certain to exercise that option; therefore, it should be included in the initial measurement. Beginning of period payments N = 4 I/Y = 5% (rate implicit in lease) PMT = $55,000 FV = $30,000 Computer PV = $229,460 July 1/X1 Right-of-use asset 229,460 Lease liability 229,460 Lease liability 55,000 Cash 55,000 Dec 31/X1 Depreciation expense 19,122 Accumulated depreciation 19, ,460 / 6 x 6/12 (Use six-year useful life since BPO) Interest expense 4,362 Interest payable 4, ,460 55,000 = 174,460; 174,460 x 5% x 6/12 June 30/X2 Interest expense 4,361 Interest payable 4,362 Lease liability (plug) 46,277 Cash 55,000 Dec 31/X2 Depreciation expense 38,243 Accumulated depreciation 38, ,460 / 6 Interest expense 3,205 Interest payable 3,205 ($174,460 46,277) x 5% x 6/12 22

23 LEASES (cont d) IFRS 16, Effective January 1, 2019 Leases Example Solution (cont d) d) ASPE Lease would be considered to be a capital lease since: There is no transfer of ownership, but there is a bargain purchase option since Golden can purchase the manufacturing equipment for $30,000 when fair value will be $40,000. This alone is enough to consider it to be a capital lease, but the other criteria will be analyzed as required. Lease term over economic life = 4/6 = 67% which, by itself, does not qualify as being major part of economic life (ASPE guidance of 75%) PV of minimum lease payments amounts to substantially all of the FV of the leased asset (ASPE criteria of 90%) as calculated below. Beginning of period payments N = 4 I/Y = 4% (lower of rate implicit in lease and incremental borrowing rate) PMT = $55,000 FV = $30,000 Computer PV = $233,274 As a % of fair value = $233,274 / 235,000 = 99.3% July 1/X1 Leased equip. under capital lease 233,274 Lease liability 233,274 Lease liability 55,000 Cash 55,000 Dec 31/X1 Depreciation expense 19,440 Accumulated depreciation 19, ,274 / 6 x 6/12 (Use six-year useful life since BPO) Interest expense 3,565 Interest payable 3, ,274 55,000 = 178,274; 178,274 x 4% x 6/12 June 30/X2 Interest expense 3,566 Interest payable 3,565 Lease liability (plug) 47,869 Cash 55,000 Dec 31/X2 Depreciation expense 38,879 Accumulated depreciation 38, ,274 / 6 Interest expense 2,608 Interest payable 2,608 ($178,274 47,869) x 4% x 6/12 23

24 TANGIBLE CAPITAL ASSETS HELD BY NPOs NPO 4433, Effective January 1, 2019 In March 2018, this new standard was issued to replace Section It will be effective for fiscal years beginning on or after January 1, 2019 with earlier application permitted. It requires the application of ASPE 3061, Property, Plant and Equipment, and ASPE 3110, Asset Retirement Obligations. Many of the requirements from ASPE 3061 and 3110 were in the old Section 4431, so now the new Section 4433 will only provide guidance on issues that are unique to NPOs. Here is a summary of the key components of Section 4433: Contributed tangible capital asset record at fair value at date of contribution + all costs directly attributable to the acquisition Fair value may be estimated using market or appraisal values If fair value cannot be reasonably determined (very rare circumstance), record at nominal amount Certain works of art and historical treasures not required to amortize: If life is virtually unlimited May have cultural, aesthetic or historical value that is worth preserving perpetually Organization must have the technological and financial ability to continue to protect and preserve them Please note that if it s part of a collection, you ll use Section 4441 When conditions indicate that a tangible capital asset is impaired, write down to fair value or replacement cost. Write downs are not reversed Can choose to use fair value or replacement cost on an asset-by-asset basis Impairment indicated when the asset no longer contributes to an organization s ability to provide goods and services, or that the value of future economic benefits or service potential associated with the asset is less than its net carrying amount. Examples provided in the HB. Write down recorded in statement of operations Any corresponding unamortized deferred contributions related to the asset would be recognized as revenue, provided that all restrictions have been met Disclosure If there is an impairment, use disclosure requirements from ASPE 3063, Impairment of Long Lived Assets. Also need to disclose whether write-down was based on fair value or replacement cost Nature and amount of contributed tangible capital assets received in period Information about contributed tangible capital assets recognized at nominal value 24