Gearing up for change New IFRS on Leases

Gearing up for change New IFRS on Leases

In a nutshell The changes Lessee accounting Effective date: 1 January 2019 Limited changes to scope of IAS 17 Enhanced guidance on identifying a lease Lessor accounting IAS 17 IFRS 16 ~ IAS 17 IFRS 16 Operating lease vs Finance lease Right-of-use asset and Lease liability Operating lease vs Finance lease 2

In a nutshell Lessee accounting model Balance sheet Income Statement Cash flow statement Assets and liabilities Impact on gearing Recognise lease assets and liabilities on balance sheet. Initially measured at the present value of unavoidable lease payments. EBITDA Profit profile (lower in earlier years of lease) Operating cash inflows Financing cash outflows Repayment of principal: finance activities Repayment of interest: finance or operating activities (depends on accounting policy for interest). Some variable payments, payments from short-term leases and from assets of low value: operating activities

Scope IFRS 16 applies to all leases, except leases of (or rights to): licensing agreements for motion picture films, patents etc. Licenses of intellectual property by lessors Lessees choice: Intangible assets explore for (or use) minerals, oil, natural gas, etc. biological assets held by lessees Service Concession arrangements subsequent measurement of: Right-of-use assets of PPE measured at a revalued amount Investment property held by lessees under fair value model 4

Identifying a lease A decision tree Fulfilment of the contract depends on the use of an identified asset The contract conveys the right to control the use of the identified asset Identified asset? Yes Substantially all economic benefits? Yes How and for what purpose predetermined? No No Customer can operate the asset without the supplier having the right to change operating instructions? Or Customer designed asset to predetermine how and for what purpose the asset is used? Yes No Customer has right to direct how and for what purpose the asset is used throughout the period of use? Yes No Yes No Lease Not a lease Lease Not a lease 5

Measurement Initial measurement Cost of right-of-use asset Payments made less incentives received before commencement date Measurement of lease liability Payments made less incentives receivable after commencement date Discounted at: Rate implicit in the lease or Incremental borrowing rate Commencement date 6

Measurement Initial measurement Penalty for terminating (if reasonably certain) Expected residual value guarantee Estimated cost for dismantling restoring asset Fixed payments less incentives Exercise price of purchase option (reasonably certain) Variable payments (e.g. CPI/rate) Payments less incentives before commencement date Initial direct costs lease liability NPV = Lease liability Right-of-use asset 7

Recognition Exemptions Accounting policy choice: Apply IFRS 16 or straight-line the expense (if applying the exemption: Apply IAS 37 to assess onerous contracts) Short-term leases (12 months or less) Low-value leases A lease that contains a purchase option is not a short-term lease Assessment on an absolute basis Election by class of underlying asset Election on a lease-by-lease basis 8

Measurement Lessee: modifications Account for lease modification as a separate lease Account for lease modification by remeasuring the lease liability using the discount rate at that date Original lease Modification Modification increases scope Modification decreases scope Only when: Modification increases scope; and Consideration is commensurate to stand-alone price for increase in scope Corresponding adjustment to right-of-use asset Decrease right-of-use asset to reflect partial termination and gain/loss to reflect the decrease in scope 9

Sale and leaseback Lessee and lessor accounting Seller-lessee Transfer asset Lease asset Buyer-lessor If the lessee does not control (or obtain control) of the underlying asset before the asset is transferred to the lessor, it is not a sale and leaseback. Yes Sale of the asset? (performance obligation under IFRS 15) No Seller-lessee Buyer-lessor Seller-lessee Buyer-lessor Derecognise asset Recognise right-ofuse asset (proportion of previous carrying amount) Recognise lease liability Gain/loss on sale of rights transferred Recognise purchase of asset Apply lessor accounting Continue to recognise asset Recognise financial liability (IAS 39 / IFRS 9) Don t recognise asset Recognise financial asset (IAS 39 / IFRS 9) 10

Subleases Intermediate lessor accounting Head lease Sublease Head lease: IFRS 16 lessee model Right-of-use asset and lease liability Sublease: IFRS 16 lessor model Whether finance or operating lease determined whether reference to right of use asset, not underlying asset 11

Presentation and disclosure In the notes Investment property leases Revalued RoU assets (IAS 16) Lease liabilities Financial information Depreciation by class, interest expense Low-value or short-term lease expenses (not<1 month) Variable lease payments Income from subleases Total cash flow RoU asset: additions, carrying amount at end Gain or losses on sale and leasebacks Fact: low-value or short-term lease exemption Investment property leases Some IAS 40 disclosures Revalued RoU asset (IAS 16) Effective date of revaluation Whether independent valuation expert involved Lease liabilities Separate IFRS 7 maturity analysis Single note/ separate section Qualitative and quantitative disclosures Nature of leasing activities, Exposure to possible future cash outflows Restrictions or covenants Sale and leaseback transactions 12

Transition Approaches: Lessees Transition Full retrospective (as if always applied) Modified retrospective Do not restate comparatives (adjust opening retained earnings) Specific disclosure requirements 13

Effective date When will this impact accounts? December year-ends: Retrospective application with restatement December year-ends: Effective date 1 Jan 2017 1 Jan 2018 1 Jan 2019 1 Jul 2018 1 Jul 2019 June year-ends: Retrospective application with restatement 1 Jul 2020 June year-ends: Effective date Entities can elect to apply full retrospective approach or a modified retrospective approach with no restatement of comparatives 14

Transition (Previously operating leases) Lessees: Modified retrospective approach practical expedient low value assets lease term of less than 12 months of DIA portfolio of leases Practical expedients may use hindsight (e.g. lease term) onerous contracts initial direct costs 15

Transition Lessees: Disclosure If applying modified retrospective: Weighted average incremental borrowing rate Explain difference between IAS 17 commitment disclosed and lease liability recognised Use of practical expedient 16

Summary Key judgements, policy choices and exemptions Judgement, policy choice or exemption Topic Judgement: identifying a lease will sometimes require a significant amount of judgement based on the elements of the definition of a lease Judgement: determining whether it is reasonably certain whether an extension or termination option will be exercised Judgement: identifying the appropriate rate to discount the lease payments will require significant judgement Exemption: Short-term leases (by class of asset) or low-value leases (lease-by-lease basis) Identifying a lease Lease term Incremental borrowing rate Recognition 17

Summary Key judgements, policy choices and exemptions Judgement, policy choice or exemption Topic Policy choice: Full retrospective approach or modified retrospective approach, definition of a lease - choice to grandfather all or not, initial direct cost in measurement of RoU asset - choice lease by lease and other practical expedients on transition Transition Policy choice: Lessee may elect not to separate non-lease components from lease components by class of asset Policy choice: Lessee may, but is not required to, apply IFRS 16 to leases of intangible assets Components Scope 18

Wider business considerations Internal Finance and Tax Information and systems Business unit leaders, strategy managers and procurement managers Internal audit Legal advisors Human resources Acquisitions 19

Wider business considerations External Investors Impact on financial report, key ratios and disclosures Analysts Impact on financial report, ratio and disclosures Financiers Impact of covenants and debt renegotiations Cost of implementation Impact on business valuation and free cash multiples Ability to access desired information 20

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