IFRS 16 impacts the lessee’s P&L where they have previously classified leases as operating leases. [IFRS 16:30(a)], The lease liability is initially measured at the present value of the lease payments payable over the lease term, discounted at the rate implicit in the lease if that can be readily determined. COVID-19 has meant many lessees have been unable to fully utilise their leased assets. IFRS 16 Leases - Accounting treatment - CIMA F1 Financial Reporting OpenTuition | ACCA | CIMA. ‘Deemed cost’ = the present value of the minimum lease payments that are outstanding at the date of recognition; The lease liability should be recorded at the present value of the minimum lease payments. IFRS 16 & COVID-19: Accounting for rent concessions. As a practical expedient, a lessee may elect, by class of underlying asset, not to separate non-lease components from lease components and instead account for all components as a lease. [IFRS 16:46A, 46B], A lessee accounts for modifications required by the IBOR reform (modifications required as a direct consequence of the IBOR reform and made on an economically equivalent basis) by updating the effective interest rate. The standard is now effective for organizations with annual reporting periods beginning on or after that date. This website uses cookies to improve your experience. [IFRS 16:39], Lease modifications may also prompt remeasurement of the lease liability unless they are to be treated as separate leases. In summary, the accounting treatment required for a sub-lease depends on its classification by the sub-lessor as follows: Our research indicates that the combined net debt of our sample of JSE listed companies is likely It provides IFRS 16 disclosure examples and explanations as a supplement to the September 2017 guide; as such, this supplement is not intended to reconcile to that guide. Adjustments may also be required for lease incentives, payments at or prior to commencement and restoration obligations or similar. If the seller-lessee did not control the asset before it was transferred to the lessor, the whole transaction is not accounted for a sale and leaseback, but as a regular lease (IFRS 16.B45-B47). Show resources. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17. For help and advice on accounting for leases please get in touch with your usual BDO contact or Mark Edwards. Summary of accounting changes. Except for two exceptions (short-term leases and low value leases), IFRS 16 requires that lessees shall recognise a right-of-use asset and a lease liability at the commencement date of any lease. Under IFRS 16, ABC needs to recognize the right of use asset and the lease liability. Show resources. Cumulative – i.e. Accounting by lessors under IFRS 16. [IFRS 16:B13-14], A capacity portion of an asset is still an identified asset if it is physically distinct (e.g. The adoption of IFRS 16 by lessors, however, will not be complex as IFRS 16 retains the IAS 17 Leases accounting treatment for lessors. While the IASB has retained IAS 17’s finance lease/operating lease distinction for lessors (and carried into IFRS 16 the related requirements virtually intact), the … But with the right planning and execution, it also presents companies with the opportunity to derive real business value from insights into how effectively the company uses and manages its leased assets throughout the organization.” - Paul Feetham, Partner, Accounting Advisory Services, Toronto . There are some exemptions available if: ―The accounting treatment under IFRS 16 is not followed for Dutch tax purposes, as a result of which deductible and taxable temporary differences could arise between the commercial and tax books. The rate of interest that a lessee would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. It analyses the standard and discusses the implementation issues. If that rate cannot be readily determined, the lessee shall use their incremental borrowing rate. If VAT can be reclaimed (recovered) from tax authorities through some form of tax returns, the accounting is simple: they are recognised as a receivable from, or payable to, tax authorities when the obligation arises. [IFRS 16:99], If an asset transfer satisfies IFRS 15’s requirements to be accounted for as a sale the seller measures the right-of-use asset at the proportion of the previous carrying amount that relates to the right of use retained. This change will result in an increase in operating profit and, more importantly, EBITDA. Under IFRS 16, operating leases are capitalized and given the same accounting treatment as the finance lease. Skip to primary navigation; Skip to main content OpenTuition | ACCA | CIMA. A contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. But opting out of some of these cookies may have an effect on your browsing experience. [IFRS 16:4]. The International Accounting Standards Board (IASB) has issued an amendment to IFRS 16 Leases to make it easier for lessees to account for Covid-19-related rent concessions such as rent holidays and temporary rent reductions. The lease expense recognised under IAS 17 will now be recognised as depreciation of the right-of-use asset to be recognised on the balance sheet as well as an interest expense. At the simplest level, the accounting treatment of leases by lessees will change fundamentally. The adoption of IFRS 16 by lessors, however, will not be complex, as IFRS 16 retains the IAS 17 Leases accounting treatment for lessors. IFRS 16 is silent on the treatment of VAT, sales tax and similar taxes levied on lease payments (all those taxes will now be referred to as ‘VAT’). Property, plant and equipment is initially measured at its cost, subsequently measured either using a cost or revaluation model, and depreciated so that its depreciable amount is allocated on a systematic basis over its useful life. The non-cancellable period for which a lessee has the right to use an underlying asset, plus: a) periods covered by an extension option if exercise of that option by the lessee is reasonably certain; and, b) periods covered by a termination option if the lessee is reasonably certain not to exercise that option. Under current guidance and practice, there is not a lot of emphasis on the distinction between a service or an operating lease, as this often does not change the accounting treatment. This change in treatment could, amongst others, affect investment properties which are held under a lease and retailers letting out surplus space. It covers an overview of IFRS 16 and the accounting treatment. the lease term (using a revised discount rate); the assessment of a purchase option (using a revised discount rate); the amounts expected to be payable under residual value guarantees (using an unchanged discount rate); or. Alternatively, it could be calculated so that the interest rate used will result in the present value of minimum lease payments equalling the fair value of the asset. We also use third-party cookies that help us analyze and understand how you use this website. [IFRS 16:Appendix A]. IFRS 16 Sublease Accounting enquires call @ +971 45 570 204 / Email Us : support@kgrnaudit.com. ―The accounting treatment under IFRS 16 is not followed for Dutch tax purposes, as a result of which deductible and taxable temporary differences could arise between the commercial and tax books. IFRS 16 was issued in January 2016 and applies to annual reporting periods beginning on or after 1 January 2019. [IFRS 16:13-15]. If you have any questions or would like to speak to us about how we could help you, please contact Miriam Hanley by email mhanley@menzies.co.uk or by phone 01784 497100. These words serve as exceptions. Instead, there is a single, on-balance sheet accounting model that is similar to current finance lease accounting. Earlier application is permitted if IFRS 15 Revenue from Contracts with Customers has also been applied. The change in accounting treatment will have no direct cash impact, but will increase ‘Cash Flows from Financing Activities’ and decrease ‘Cash Flows from Operating Activities’. “IFRS 16 represents a fundamental shift in how operating leases will be accounted for. IFRS 16 specifies how an IFRS reporter will recognise, measure, present and disclose leases. 1. To calculate the adjustment in equity related to this contract, let’s summarize the profit or loss impact of the lease in individual years under both IAS 17 and IFRS 16: As you can see, total profit or loss impact of both IAS 17 and IFRS 16 application is the same CU 500 000, however, the timing is a bit different. There will be higher charges recognised in the first few periods with it gradually decreasing over the life of the asset as the interest charge decreases in line with the outstanding lease liability. Lease contribution: £3m. 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