HKFRS 16 Leases Date 21 April 2017 Time 19:00 21:00 Venue Boys' and Girls' Clubs Association www.zhtraining.com Disclaimer The materials of this seminar are intended only to provide general information on the subject concerned and shall not be relied upon for technical advice. ZHONGHUI ANDA and the speakers take no responsibility for any errors or omissions in, or for the loss incurred by individuals or companies due to the use of, the materials of this seminar. No claims, actions or legal proceedings in connection with this seminar brought by any individuals or companies having reference to the materials of this seminar will be entertained by ZHONGHUI ANDA and the speakers. Any unauthorized audio and video recordings of this seminar without the consent of the speakers are strictly prohibited, and represent a copyright violation.
HKFRS 16 supersedes: HKAS 17 Leases ; HK(IFRIC) - Int 4 Determining whether an Arrangement contains a Lease ; HK(SIC) - Int 15 Operating Leases - Incentives ; and HK(SIC) - Int 27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. 3 HKAS 17 Finance leases or operating leases Lessees not recognise assets and liabilities for operating leases HKFRS 16 Single lease model for lessees Lessees recognise assets and liabilities for all leases (with limited exceptions) Finance and operating leases for lessors 4
Effective Date and Transitional Provision Annual periods beginning on or after 1 Jan 2019 Earlier application permitted if also apply HKFRS 15 Date of initial application is beginning of annual period first applies HKFRS 16 Not required to reassess whether lease at date of initial application Permitted to apply HKFRS 16 to contracts previously identified as leases Not to apply HKFRS 16 to contracts not previously identified as leases 5 2 transitional methods: retrospectively to each prior reporting period retrospectively with cumulative effect adjusted to retained earnings (or other component of equity) at date of initial application. Comparative information not restated 6
Summary of Requirements of HKFRS 16 7 Portfolio application May apply HKFRS 16 to portfolio of leases Similar characteristics Effects on financial statements not differ materially from applying to individual leases Use estimates and assumptions that reflect size and composition of portfolio 8
Combination of contracts Combine two or more contracts at or near same time with same counterparty (or related parties of counterparty) one or more of following criteria: contracts negotiated as package with overall commercial objective consideration depends on price or performance of other contract single lease component. 9 Identifying a lease Assess whether contract contains lease at contract inception Reassess only if terms and conditions of contract change Contract contains lease if contract conveys right to control use of identified asset for period of time in exchange for consideration i.e. throughout period of use, customer has both: right to obtain substantially all economic benefits from use of asset right to direct use of asset 10
Customer has right to direct use of identified asset only if either: customer has right to direct how and for what purpose asset used; or relevant decisions about how and for what purpose asset used are predetermined Period of time may be in terms of amount of use of asset e.g. production units 11 Separating contract components Account for each lease component separately from non-lease components unless applies practical expedient Separate lease component if both: lessee benefit from use of asset either on its own or together with other available resources underlying asset neither highly dependent on, nor highly interrelated with other assets Lessee allocate consideration to each lease component on basis of relative stand-alone price of lease component and aggregate stand-alone price of non-lease components 12
Relative stand-alone price determined on basis of price lessor or supplier would charge If observable stand-alone price not readily available, estimate by maximising use of observable information As practical expedient, lessee may elect, by class of underlying asset, not to separate associated non-lease components from lease components except for embedded derivatives within HKFRS 9 Lessor to allocate consideration to each performance obligation on relative stand-alone selling price basis 13 Lease term Lease term is non-cancellable period of lease, together with both: periods covered by option to extend lease if lessee reasonably certain to exercise that option; and periods covered by option to terminate lease if lessee reasonably certain not to exercise that option In assessing whether reasonably certain, consider all relevant facts and circumstances that create economic incentive Reassess whether reasonably certain upon occurrence of either significant event or change in circumstances within control of lessee and affects lessee 14
Lessee accounting 15 Right-of-use asset At commencement date, lessee initially measure right-of-use asset at cost comprising: amount of initial measurement of lease liability lease payments made less lease incentives received initial direct costs incurred estimate of costs in dismantling and removing asset, restoring the site or restoring asset to required condition Lessee subsequently measure right-of-use asset applying cost model unless fair value/revaluation model used 16
To apply cost model, right-of-use asset measured at cost: less accumulated depreciation and impairment losses; and adjusted for remeasurement of lease liability If lessee applies fair value model to investment property, that fair value model also applied to right-of-use assets that meet definition of investment property If lessee applies revaluation model for property, plant and equipment, may elect to apply that revaluation model to all rightof-use assets relate to that class of property, plant and equipment 17 Lease liability At commencement date, lessee initially measure lease liability at present value of lease payments not paid Lease payments discounted using interest rate implicit in lease If that rate cannot be readily determined, use incremental borrowing rate 18
Lease payments comprise: fixed payments (including in-substance fixed payments) less lease incentives receivable; variable lease payments that depend on index or rate, initially measured using index or rate at commencement date; amounts payable by lessee under residual value guarantees; exercise price of purchase option; and payments of penalties for terminating lease 19 Lessee subsequently measure lease liability by: increasing carrying amount to reflect interest; reducing carrying amount to reflect lease payments made; and remeasuring carrying amount to reflect reassessment or lease modifications, or revised in-substance fixed lease payments Interest is amount that produces constant periodic rate of interest on remaining balance of lease liability 20
Reassessment of lease liability Lessee remeasure lease liability to reflect changes to lease payments and recognise remeasurement amount as adjustment to right-of-use asset If carrying amount of asset is zero, reduction in measurement of lease liability recognised in profit or loss 21 Remeasure lease liability by discounting revised lease payments using revised discount rate for: change in lease term; or change in assessment of option to purchase asset Revised discount rate is interest rate implicit in lease for remainder of lease term If that rate cannot be readily determined, use incremental borrowing rate at date of reassessment 22
Remeasure lease liability by discounting revised lease payments using unchanged discount rate for: change in amounts under residual value guarantee; or change in future lease payments resulting from change in index or rate If change in lease payments results from change in floating interest rates, use revised discount rate that reflects changes in interest rate 23 Lease modifications Lessee account for lease modification as separate lease if both: modification increases scope of lease by adding right to use assets; and consideration for lease increases by amount commensurate with stand-alone price for increase in scope and appropriate adjustments 24
For other lease modifications, at effective date of lease modification lessee: allocate consideration on basis of relative stand-alone price of components; determine revised lease term; and remeasure lease liability by discounting revised lease payments using revised discount rate Revised discount rate is interest rate implicit in lease for remainder of lease term. If that rate cannot be readily determined, use incremental borrowing rate at effective date of lease modification 25 Account for remeasurement of lease liability by: decreasing carrying amount of right-of-use asset to reflect partial or full termination of lease that decrease scope of lease and recognise in profit or loss any resulting gain or loss; and making corresponding adjustment to right-of-use asset for all other cases. 26
Original 4 years lease of annual payment of $50,000 (paid at end of year). Interest rate is 6%. Cost of right-of-use asset is $173,256 (by discounting 4 annual payments of $50,000 using 6%). At end of year 2, NBV of asset is $86,628. Lease liability is $91,670 (by discounting 2 annual payments of $50,000 using 6%). At end of year 2, area reduced by half and annual payment reduced to $30,000. Revised interest rate is 5%. 27 Asset reduced by half i.e. $43,314. Liability reduced by half i.e. $45,835. Gain is $45,835 - $43,314 = $2,521. New liability is $55,782 (by discounting 2 annual payments of $30,000 using 5%). Addition to asset is $55,782 - $45,835 = $9,947. 28
Recognition exemption Lessee may elect not to apply above accounting requirements to: short-term leases; and leases for which underlying asset of low value. Short term lease is lease of 12 months or less at commencement date Lease contains purchase option is not short-term lease 29 Assessment of low value is performed on absolute basis and based on value of asset when new Assessment not affected by size, nature or circumstances of lessee Examples include tablet and personal computers, small items of office furniture and telephones (US$5,000 or less) 30
Asset can be of low value only if: lessee can benefit from use of asset on its own or together with other available resources; and underlying asset not highly dependent on, or interrelated with other assets If lessee subleases or expects to sublease asset, head lease not qualify as lease of low-value asset 31 When applying recognition exemption, lessee recognise lease payments as expense on either straight-line basis or another systematic basis For short-term leases, lessee consider lease to be new lease if: lease modification; or change in lease term. Election for short-term leases made by class of asset Election for leases of low value made on lease-by-lease basis 32
Presentation Lessee present in statement of financial position or in notes: right-of-use assets separately from other assets or include within the same line item of corresponding assets and disclose which line items lease liabilities separately from other liabilities or disclose which line items include those liabilities Right-of-use assets that meet definition of investment property presented in statement of financial position as investment property 33 Present interest expense on lease liability separately from depreciation charge for right-of-use asset In statement of cash flows, classify: cash payments for principal portion of lease liability within financing activities cash payments for interest portion of lease liability applying requirements in HKAS 7 for interest paid; and short-term lease payments, payments for leases of lowvalue assets and variable lease payments not included in measurement of lease liability within operating activities 34
Lessor accounting 35 Lease classification Lessor classify lease as operating lease or finance lease Lease is finance lease if transfers substantially all risks and rewards incidental to ownership of asset. Otherwise, it is operating lease Lease classification made at inception date and reassessed only if lease modification 36
Finance leases At commencement date, lessor recognise receivable equal to net investment in lease Use interest rate implicit in lease to measure net investment in lease 37 Lease payments included in measurement of net investment comprise: fixed payments (including in-substance fixed payments) less any lease incentives payable; variable lease payments that depend on index or rate, initially measured using index or rate at commencement date; residual value guarantees provided to lessor by lessee, a party related to lessee or third party unrelated to lessor; exercise price of purchase option; and payments of penalties for terminating lease 38
Lessor recognise finance income based on constant periodic rate of return on lessor s net investment in lease Lessor account for modification to finance lease as separate lease if both: modification increases scope of lease by adding right to use assets; and consideration increases by amount commensurate with stand-alone price for increase in scope and any appropriate adjustments 39 For other modifications to finance lease, lessor account for modification as follows: if lease would have been operating lease, lessor account for lease modification as new lease from effective date of modification and measure carrying amount of underlying asset as net investment in lease immediately before effective date of lease modification otherwise, apply requirements of HKFRS 9 40
Operating leases Lessor recognise lease payments as income on straight-line basis or another systematic basis Lessor account for modification as new lease from effective date of modification, considering prepaid or accrued lease payments relating to original lease as part of lease payments for new lease 41 42