IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. At the commencement date, a manufacturer or dealer lessor recognises as an expense costs incurred in connection with obtaining a finance lease as they are mainly related to earning recognised selling profit. When accounting for lease incentives in accordance with IFRS 16 ‘Leases’ from a lessee perspective, questions may arise in how to identify a lease incentive and when the accounting treatment changes depending on how the lease incentive is granted. LESSOR ACCOUNTING The accounting requirements in IFRS 16 for lessors are unchanged in most respects from IAS 17. [IFRS 16:71c)], A lessor recognises operating lease payments as income on a straight-line basis or, if more representative of the pattern in which benefit from use of the underlying asset is diminished, another systematic basis. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. See this example. IFRS 16 now replaces IAS 17 guidance in how entities should report leases. Lease classification is reassessed only if there is a lease modification. Therefore, the interest rate implicit in the lease is defined in such a way that the initial direct costs are included automatically in the net investment in the lease (IFRS 16.69). We also have sector-specific guidance. Paragraphs 52 to 60 of IFRS 16 set out detailed requirements for lessees to meet this objective and paragraphs 90 to 97 set out the detailed requirements for lessors. In addition, IFRS 16 provides an overview of the accounting requirements for buyer-lessors too. What makes a lease a finance lease to the lessor - the old concept discussed briefly In other words, changes to accounting do not create or reduce the demand for assets. A lessee shall either apply IFRS 16 with full ret­ro­spec­tive effect or al­ter­na­tively not restate com­par­a­tive in­for­ma­tion but recognise the cu­mu­la­tive effect of initially applying IFRS 16 as an ad­just­ment to opening equity at the date of initial ap­pli­ca­tion. [IFRS 16:9], Control is conveyed where the customer has both the right to direct the identified asset’s use and to obtain substantially all the economic benefits from that use. [IFRS 16:4]. Earlier application is permitted if IFRS 15 Revenue from Contracts with Customers has also been applied. Criteria for making such assessment are given in paragraph IFRS 16.79 and are the same as for lessees. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently. relief for lessees in accounting for rent concessions granted as a direct. Any reduction of this value impacts the income allocation over the remaining lease term and is recognised immediately as an adjustment to the value of net investment with a corresponding impact in P/L (IFRS 16.77). IASB believes that allocation based on fair values of the leasehold interests better reflects compensating the lessor for the benefits ‘used up’ during a lease (IFRS 16.BCZ245-BCZ247). As noted below, initial direct cost are included in the initial measurement of the net investment in the lease and reduce the amount of income recognised over the lease term. [IFRS 16:27(b),(c)], Variable lease payments that are not included in the measurement of the lease liability are recognised in profit or loss in the period in which the event or condition that triggers payment occurs, unless the costs are included in the carrying amount of another asset under another Standard. different types of concessions being agreed between lessors and … Under the cost model a right-of-use asset is measured at cost less accumulated depreciation and accumulated impairment. Variable lease payments that are not included in the measurement of the net investment in the lease are recognised in P/L as they are earned. Manufacturers or dealers often offer to customers the choice of either buying or leasing an asset. The impact on lessors is almost nil. [IFRS 16:67], A lessor recognises finance income over the lease term of a finance lease, based on a pattern reflecting a constant periodic rate of return on the net investment. IFRS 16 replaces the following standards and in­ter­pre­ta­tions: IFRS 16 establishes prin­ci­ples for the recognition, measurement, presentation and disclosure of leases, with the objective of ensuring that lessees and lessors provide relevant information that faithfully represents those transactions. IFRS 16 was issued in January 2016 and applies to annual reporting periods beginning on or after 1 January 2019. Appendix A). IFRS 16 Leases replaces IAS 17 Leases, the earlier lease accounting standard.IFRS 16 is effective for annual period beginning on or after 1 January 2019. Overview. Determine lease assets at 1 January 2019: However, IFRS 16 will require enhanced disclosure by lessors on their risk exposure. All other modifications are accounted for using the applicable requirements. IFRS 16 includes detailed guidance to help companies assess whether a contract contains a lease or a service, or both. Lease modifications are accounted for by the lessor as a new lease from the effective date of the modification, considering any prepaid or accrued lease payments relating to the original lease as part of the lease payments for the new lease (IFRS 16.87). Lessors (suppliers) should allocate the consideration in a contract to all lease and non-lease components using criteria for allocating the transaction price to performance obligations contained in IFRS 15. Intermediate lessors, however, face significant changes as a result of IFRS 16. [IFRS 16:1], IFRS 16 Leases applies to all leases, including subleases, except for: [IFRS 16:3], A lessee can elect to apply IFRS 16 to leases of intangible assets, other than those items listed above. A capacity or other portion of an asset that is not physically distinct (e.g. 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 distinction is no longer relevant for lessees. Slightly different criteria relate to residual value guarantees, as lessor includes only residual value guarantees provided to the lessor by the lessee, a party related to the lessee or a third party unrelated to the lessor that is financially capable of discharging the obligations under the guarantee. When a lease modification occurs, lessor should assess whether such a modification should be accounted for as a separate lease. For lessors, the changes introduced by IFRS 16 are not significant and, except in respect 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. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17. See more discussion on variable lease payments in the lessee accounting. IFRS 16 specifies how an IFRS reporter will recognise, measure, present and disclose leases. selling profit or loss (equal to the difference between revenue and the cost of sale) in accordance with its policy for outright sales to which IFRS 15 applies. [IFRS 16:B9]. any unguaranteed residual value accruing to the lessor. [IFRS 16:75], At the commencement date, a manufacturer or dealer lessor recognises selling profit or loss in accordance with its policy for outright sales to which IFRS 15 applies. Unlike for finance leases, manufacturer or dealer lessors do not recognise any selling profit on entering into an operating lease because it is not the equivalent of a sale (IFRS 16.86). The underlying asset is derecognised and any difference is immediately recognised in P/L as a gain/loss on disposal of an asset (or as revenue and costs of goods sold – see specific treatment for manufacturer/dealer lessors below). Lessor accounting 25 Sale and leaseback transactions 27 Transition 29 Appendix: -Disclosure requirements for lessees 31 -Disclosure ... For both, lessees and lessors IFRS 16 adds significant new, enhanced disclosure requirements. Initial direct cost are included in the initial measurement of the net investment in the lease and reduce the amount of income recognised over the lease term (IFRS 16.69). [IFRS 16:51, 89], An entity applies IFRS 16 for annual reporting periods beginning on or after 1 January 2019. A lessor is the owner of the asset and a lessee uses the leased asset by paying periodically to the lessor. 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. [IFRS 16:81], To determine whether the transfer of an asset is accounted for as a sale an entity applies the requirements of IFRS 15 for determining when a performance obligation is satisfied. IAS 17 required both lessees and lessors to classify leases into finance leases and operating leases depending on whether there is transfer of risks and rewards and recognize liabilities only in case of finance leases. Lease Modifications The accounting for lease modifications depends on whether the lease is classified as a finance lease or an operating lease from the lessor’s perspective immediately prior to the modification. In this case, we need to determine the present value of the leased asset in 2017 then depreciate it to determine the carrying value on 1 January 2019 when we start using IFRS 16. Consequently the proposed IFRS is not expected to impact on the majority of landlords. Excerpts from IFRS Standards come from the Official Journal of the European Union (© European Union, https://eur-lex.europa.eu). Lease accounting challenges How to succeed with adoption of the standards Companies are facing a variety of challenges as they implement the lease accounting standards, including ASC 842 and IFRS 16. Unguaranteed residual value accruing to the lessor is excluded from lease payments, but it is still added to the net investment in the lease (see below). For a lessor under an operating lease, IFRS 16 does not specify the accounting for variable payments that are not based on an index or rate and do not become in-substance fixed. Lease agreements where the lessor maintains ownership are considered operating leases. IFRS 16 Lessors’ accounting firms in dubai exercise will remain unchanged under the new standard but they may impact the business models due to changes in needs and behavior. 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 distinction is … Introduction and context setting. This guide is designed to help you understand the intricacies and impacts of the IFRS 16 and ASC 842 lease accounting standards. A lessor therefore continues to classify its leases as operating or finance leases and to account for these two types of leases differently. Although initially the two Boards intended to develop a converged … The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a … ii) the right-of-use asset relates to a class of PPE to which the lessee applies IAS 16’s revaluation model, in which case all right-of-use assets relating to that class of PPE can be revalued. An asset is typically identified by being explicitly specified in a contract, but an asset can also be identified by being implicitly specified at the time it is made available for use by the customer. This does not apply to manufacturer or dealer lessors. IFRS 16 is that the lessee and lessor accounting models are asymmetrical. Leases that transfer substantially all of the risks and rewards incidental to ownership of the underlying asset are finance leases. The new standard does not directly impact lessor accounting. The adoption of IFRS 16 by lessors, however, will not be complex as IFRS 16 retains the IAS 17 Leases accounting treatment for lessors. With the tools and insights you'll find here, you can accelerate your project, avoid the pitfalls and become compliant successfully. Risks include the possibilities of losses from idle capacity or technological obsolescence and of variations in return because of changing economic conditions. The Board has issued amendments to IFRS 16 (the amendments) to provide practical relief for lessees in accounting for rent concessions. This is an open-access Excel model of Accounting for Leases with IFRS 16 Right-of-Use model, useful for anyone who wants to work as an Accountant, Financial Analyst, or Finance Manager The analysis starts by determining if a A modification that is not treated as a separate lease is accounted for as follows (IFRS 16.80): (a) if the lease would have been classified as an operating lease had the modification been in effect at the inception date, the lessor: (i) accounts for the lease modification as a new lease from the effective date of the modification; and. IFRS 16 brings forward definitions of discount rates from the previous leases standard, but applying these old definitions in the new world of on-balance sheet lease accounting will be tough, especially for lessees. Once entered, they are only future lease payments resulting from a change in an index or a rate used to determine those payments (using an unchanged discount rate). 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:B13-14], A capacity portion of an asset is still an identified asset if it is physically distinct (e.g. 99 years), the present value of the lease payments will represent substantially all of the fair value of the land. In the May 2018 edition of Accounting Alert we noted that IFRS 16 Leases (“IFRS 16”), which comes into effect for financial reporting periods beginning on or after 1 January 2019, will fundamentally change the manner in which lessees account for leases. IAS 2, IAS 16, IAS 38) and accounts for the lease using lease requirements included in IFRS 16 (IFRS 16.100(b)). Under the standard’s previous requirements, lessees assess whether rent concessions are lease modifications and, if so, apply the specific guidance on … Classification of leases as operating or finance leases was carried forward from IAS 17 and therefore I won’t go into detail here. For official information concerning IFRS Standards, visit IFRS.org. Initial direct costs incurred in obtaining an operating lease are added to the carrying amount of the underlying asset and recognised in P/L over the lease term on the same basis as the lease income (IFRS 16.83). IFRS 16 specifies how an IFRS reporter will recognise, measure, present and disclose leases. Unguaranteed residual value accruing to the lessor is not included in lease payments but is added to the net investment in the lease. Under IFRS 16, lessees will record a Right-of-Use Asset (similar to a Finance Lease) , and lessors will differentiate between a Finance Lease and an Operating Lease. Account for a service element as before, in … IFRS 16 substantially carries forward the lessor accounting requirements of IAS 17. These words serve as exceptions. IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. When a lease includes both land and buildings, a lessor should assess the classification of each element as a finance lease or an operating lease separately. Initial direct costs are incremental costs of obtaining a lease that would not have been incurred if the lease had not been obtained (IFRS 16.Appendix A). Following IFRS 16, paragraph 27 and ASC 842-10-15-35, it will reduce the lease liability and right-of-use asset value. If that rate cannot be readily determined, the lessee shall use their incremental borrowing rate. a capacity portion of a fibre optic cable) is not an identified asset, unless it represents substantially all the capacity such that the customer obtains substantially all the economic benefits from using the asset. In general, a lease is classified as a finance lease if it transfers substantially all the risks and rewards from ownership of an asset. [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. future. The following information is relevant for this lease: All calculations presented in this example are available for download in an excel file. In January 2016, the new standard about lease accounting IFRS 16 was issued and it introduced a few major changes. This is approach is different from non-manufacturer/dealer lessors. Specific to operating type leases, these include:  Amounts currently receivable (e.g. Disclosure requirements for lessors are set out in paragraphs IFRS 16.89-97. 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