FRS 116: LEASES Ng Eng Juan Professor and Head of Accountancy Program Singapore University of Social Sciences
Agenda: Introduction Impact of FRS 116 Definition of a lease Some salient points Conclusion
ISCA Implementation Roadmap Guidance for FRS 116 Leases
ED (2010) issued in 2010 ED (2013) issued in 2013 IFRS 16 issued in January 2016 FRS 116 issued on 30 June 2016 To supersede FRS 17, INT FRS 15, INT FRS 27, INT FRS 104 Effective date: 1 January 2019
Basic changes: To require lessee to capitalize all leases (except (i) short term leases and (ii) leases with low value underlying asset) FRS 17: purchase model FRS 116: right of use model No major changes for lessor
Agenda: Introduction Impact of FRS 116 Definition of a lease Some salient points Conclusion
IASB s study: Listed companies using either IFRS or US GAAP US$ 3.3 trillion of lease commitments Only 15% is recognized in balance sheets If all lease commitments are on-balance-sheet, total assets may increase >20% for some industries (eg airlines and retail)
B/S: Right-of-use asset, and Lease liability Increase in debt-asset ratio Debt covenant may be affected
P/L: Depreciation expense, and Interest expense Front loading of expenses initially Profit may be reduced in earlier years
CF: Principal payment: financing Interest payment: operating/financing Increase in operating cash flows
Agenda: Introduction Impact of FRS 116 Definition of a lease Some salient points Conclusion
Definition of lease: A contract that conveys the right to use an asset for a period of time in exchange for consideration Two important elements There is an identified asset; and Customer controls the use of the asset
There is an identified asset when: the asset is specified in the contract, and the supplier does not have a substantive right (practical ability and economic benefits) to substitute the asset throughout the period of use
Customer controls the use of the asset when the customer has the right to: obtain substantially all the economic benefits from the use of the asset throughout the period of use, and direct the use of the asset throughout the period
Is there is an identified asset for a capacity portion of an asset? Yes, if it is physically distinct a floor of a building? a capacity portion of fibre optic cable?
Who has the onus to show whether the supplier has a substantive substitution right? The onus is for the customer to produce evidence of the existence of supplier s SSR If the customer cannot readily determine whether supplier has SSR, it is presumed that the supplier does not have SSR
Does customer have the right to obtain substantially all the economic benefits from the use of the asset, if customer has to pay, say, 30% of revenue from use of asset to supplier? Yes (benefits is the gross amount)
Does customer has the right to direct the use of the asset in cases where the how and for what purpose the asset is used is predetermined? Yes, if the customer has right to operate the asset in a manner it determines (and supplier has no right to change), or if the customer designed the asset
Agenda: Introduction Impact of FRS 116 Definition of a lease Some salient points Conclusion
Upon inception of lease, lessee should recognise (i) right-of-use asset and (ii) lease liability = pv of lease payments discounted using the implicit rate (if known), or lessee s incremental borrowing rate
1. Variable lease payments: Depend on index: Use the index at commencement date Subsequent changes accounted for prospectively (flat yield curve concept)
1. Variable lease payments (cont): Linked to future performance or use of asset Not accounted for at commencement date (do not meet definition of liability) Any additional payment charged to P/L when incurred
2. Options to renew, purchase, terminate: Subject to reasonably certain criterion at commencement date (consider all facts and circumstances that creates an economic incentive)
3. Residual value guarantee: Only the amount expected to be payable by lessee is accounted for
4. For (i) short term leases and (ii) leases with low value underlying asset: Lessee may elect to recognise lease payments as expense (ie accounted for as operating lease)
4.1 Short term lease: A lease that, at the commencement date, has a lease term of 12 months or less (and does not contain a purchase option)
4.2 Leases with low value underlying asset Small items of office furniture or equipment (IFRS BC: assets with a value, when new, of approximately US$5,000 or less; not a bright line; an absolute figure, and not in terms of materiality) Not highly dependent on or highly interrelated to other underlying assets
Lessor : As per FRS 17 (ie operating leases and finance leases) same tests same accounting treatment enhanced disclosures
Additionally: Lease modifications Sub-lease Sales-type lease Sale and leaseback
Additionally: Presentation issues Disclosure issues Transitional issues
Agenda: Introduction Impact of FRS 116 Definition of a lease Some salient points Conclusion
Conclusion: Early preparation is crucial Communication with stakeholders, eg bank covenants, etc Lease-buy decision Terms of lease agreements Practical expediencies, judgement Accounting and IT system
For any enquiries, please contact ISCA s Corporate Reporting & Ethics (CoRE) Division @ core@isca.org.sg.
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