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. The effects of IFRS 16 on lessor accounting are discussed in Section 9 of the document. We also have sector-specific guidance. Once entered, they are only [IFRS 16:24], After lease commencement, a lessee shall measure the right-of-use asset using a cost model, unless: [IFRS 16:29, 34, 35], i) the right-of-use asset is an investment property and the lessee fair values its investment property under IAS 40; or. A lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently. From the IFRS Institute – August 28, 2020. 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. The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. Risks include the possibilities of losses from idle capacity or technological obsolescence and of variations in return because of changing economic conditions. [IFRS 16:36(c)], A lessee may elect not to assess whether a COVID-19-related rent concession is a lease modification. 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. annual lease payments of $20,000 are made at the end of each year, Entity A estimates the equipment to have fair value of $95,000 and carrying amount of $90,000, economic useful life of the equipment is 7 years and Entity A estimates the residual value of the equipment to be $25,000, of which $15,000 is guaranteed by Entity X. revenue equal to the fair value of the underlying asset, or, if lower, the present value of the lease payments accruing to the lessor, discounted using a market rate of interest; the cost of sale equal to the cost, or carrying amount if different, of the underlying asset less the present value of the unguaranteed residual value; and. Lessors shall allocate consideration in accordance with IFRS 15 Revenue from Contracts with Customers. 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. Main features Lessee accounting IN10 HKFRS 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. IFRS 16 is business as usual for lessors, but creates complexity in subleasing arrangements. the IASB lease accounting standard In 2019, the latest IASB lease accounting standard, IFRS 16, began to go into effect for companies worldwide. Background IFRS 16 supersedes IAS 17 Leases (and related Interpretations) and is effective from 1 January 2019. Key IFRS 16 Definition Inception date of lease: The earlier of lease agreement and the date of commitment by the parties. (b) otherwise, the lessor applies requirements of IFRS 9. IFRS 16 now replaces IAS 17 guidance in how entities should report leases. 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. 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. At the commencement of the lease, the lessor recognises a lease receivable at an amount equal to the net investment in the lease (IFRS 16.67). Criteria for making such assessment are given in paragraph IFRS 16.79 and are the same as for lessees. [IFRS 16:B13-14], A capacity portion of an asset is still an identified asset if it is physically distinct (e.g. [IFRS 16:26], Variable lease payments that depend on an index or a rate are included in the initial measurement of the lease liability and are initially measured using the index or rate as at the commencement date. See paragraphs IFRS 16.BC266-BC267 for more discussion and Example 24 accompanying IFRS 16. (ii) measures the carrying amount of the underlying asset as the net investment in the lease immediately before the effective date of the lease modification. While the IFRS 16 sublease accounting for representing leases as illustrated above are the same old thing for lessors, they are progressively mind-boggling when applied by a lessor in a sublease course of action. You can scroll tables presented below horizontally if they don’t fit your screen. In other words, IAS 16 or IAS 38 apply. IFRS 16 specifies how an IFRS reporter will recognise, measure, present and disclose leases. IFRS 16 emphasises that land normally has an indefinite economic life (IFRS 16.B55-B57), it is therefore impossible that the lease term will be for the major part of the economic life of the underlying asset. In other words, changes to accounting do not create or reduce the demand for assets. Determine lease assets at 1 January 2019: the lease transfers ownership of the asset to the lessee by the end of the lease term, the lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than fair value at the date the option becomes exercisable that, at the inception of the lease, it is reasonably certain that the option will be exercised, the lease term is for the major part of the economic life of the asset, even if title is not transferred, at the inception of the lease, the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset, the leased assets are of a specialised nature such that only the lessee can use them without major modifications being made. This is approach is different from non-manufacturer/dealer lessors. The standard primarily provides accounting treatment on leases for lessees. 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. ii) leases where the underlying asset has a low value when new (such as personal computers or small items of office furniture) – this election can be made on a lease-by-lease basis. Use at your own risk. Intermediate lessors, however, face significant changes as a result of IFRS 16. 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). 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. 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. 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. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox. IFRS 16, the new international accounting standard, also requires lessees to recognize a lease liability calculated as the present value of the expected lease payments and the related lease asset. If that rate cannot be readily determined, the lessee shall use their incremental borrowing rate. 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 … IFRS 16 substantially carries forward lessor accounting from IAS 17.12 The demand for assets changes only if there are changes to the economy, technology or the way companies operate their businesses. The following information is relevant for this lease: All calculations presented in this example are available for download in an excel file. IFRS 16 substantially retains the lessor accounting requirements from IAS 17. This does not apply to manufacturer or dealer lessors. A lessor recognises lease payments from operating leases as income on straight-line basis, unless another systematic basis is more representative of the pattern in which benefit from the use of the underlying asset is diminished (IFRS 16.81). CU 100 of rent due for a particular month); and  Receivables that arise from the ‘smoothing’ of operating lease income. IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. [IFRS 16:C3], 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. A capacity or other portion of an asset that is not physically distinct (e.g. Lessees (customers) don’t need to make a distinction between operating and finance leases as they account for all leases using one ‘right-of-use’ model. Leases that transfer substantially all of the risks and rewards incidental to ownership of the underlying asset are finance leases. On 28 May 2020, the IASB issued amendments to IFRS 16, which provide. When the transfer of the asset is a sale, the buyer-lessor accounts for the purchase of an asset according to applicable IFRS (e.g. IFRS 16 introduces a single lessee accounting model and requires a lessee to recognize assets (right-of-use) and liabilities for All leases with a term of more than 12 months (unless the underlying asset is of low value). [IFRS 16:100a)], If the fair value of the sale consideration does not equal the asset’s fair value, or if the lease payments are not market rates, the sales proceeds are adjusted to fair value, either by accounting for prepayments or additional financing. 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. relief for lessees in accounting for rent concessions granted as a direct. Changes in estimates or circumstances do not give rise to a new classification of a lease (IFRS 16.66). [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. Net investment in the lease is the sum of the following items discounted at the interest rate implicit in the lease (IFRS 16.Appendix A): Any initial direct costs are included in the net investment in the lease (with an exception of manufacturers or dealer lessors). Finance income is recognised by the lessor over the lease term using effective interest rate (IFRS 16.75). Let’s start with some basic definitions: The lessor is the entity that leases out their property to others, and lessee’s is the entity that leases the property for their use. 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. A lessor is the owner of the asset and a lessee uses the leased asset by paying periodically to the lessor. Intermediate lessors, however, face significant changes as a result of IFRS 16. This is due to changing accounting standards to IFRS 16 in 2019 will require retrospective restatement to meet the requirement. Therefore, a manufacturer or dealer lessor recognises at the commencement date (IFRS 16.71): As noted earlier, the present value of the lease payments accruing to the lessor should be discounted at market rate if interest, not the stated interest quoted by the lessor in a lease contract. First, Entity A calculates interest rate implicit in the lease as follows: The interest rate implicit in the lease is used to calculate the present values of lease payments and residual value: Accounting entries made be Entity A at the commencement of the lease are as follows (see how they are calculated in the excel file mentioned above): Each year, the net investment in the lease will be increased by interest income recognised in P\L and decreased by payments made by the lessee as follows: The $25,000 that is left on 31 December 20X5 corresponds to the residual value of the equipment. 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). An intermediate lessor shall classify the sublease as a finance lease or an operating lease as follows (IFRS 16.B58): See also Examples 20-21 accompanying IFRS 16 and discussion in paragraphs IFRS 16.BC232-BC236. This means that IFRS 16 requires a lease: To be classified as a finance lease if substantially all of the risks and rewards incidental to ownership of the leased asset have been transferred to the lessee 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). A lessor therefore continues to classify its leases as operating or finance leases and to account for these two types of leases differently. [IFRS 16:62], Examples of situations that individually or in combination would normally lead to a lease being classified as a finance lease are: [IFRS 16:63], Upon lease commencement, a lessor shall recognise assets held under a finance lease as a receivable at an amount equal to the net investment in the lease. As IFRS 16 has withdrawn the concepts of operating leases and finance leases from lessee accounting, the accounting requirements that the seller-lessee must apply to a sale and leaseback are more straight forward. In addition, IFRS 16 provides an overview of the accounting requirements for buyer-lessors … [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. hyphenated at the specified hyphenation points. The interest rate that yields a present value of (a) the lease payments and (b) the unguaranteed residual value equal to the sum of (i) the fair value of the underlying asset and (ii) any initial direct costs of the lessor. Estimated unguaranteed residual value should be reviewed ‘regularly’. The net investment in the lease is subject to derecognition and impairment requirements set out in IFRS 9 (IFRS 16.77). Lease classification is reassessed only if there is a lease modification. Long term leases: IFRS 16 classifies leases into two main types. IFRS 16 / ASC 842 Guide. See more discussion on variable lease payments in the lessee accounting. [IFRS 16:4]. Rewards may be represented by the expectation of profitable operation over the asset’s economic life and of gain from appreciation in value or realisation of a residual value (IFRS 16.B53). Questions or comments? LESSOR ACCOUNTING The accounting requirements in IFRS 16 for lessors are unchanged in most respects from IAS 17. Although initially the two Boards intended to develop a converged … 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. [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. Appendix A). The Board has issued amendments to IFRS 16 (the amendments) to provide practical relief for lessees in accounting for rent concessions. It instructs to follow a single model. 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 requires a middle lessor to order the sublease as a … LESSORS. [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. Please read, International Financial Reporting Standards, IFRS 16 — Lease liability in a sale and leaseback, Deloitte e-learning on IFRS 16 (advanced), EFRAG draft comment letter on the IASB's proposed amendment to IFRS 16, IFRS Foundation publishes IFRS Taxonomy update, IASB publishes proposed amendment to IFRS 16, We comment on the tentative agenda decision on sale and leaseback in a corporate wrapper, ESMA announces enforcement priorities for 2020 financial statements, A Closer Look — Financial instrument disclosures when applying Interest Rate Benchmark Reform – Phase 1 amendments to IFRS 9 and IAS 39 and Phase 2 amendments to IFRS 9, IAS 39, IFRS 4 and IFRS 16, IFRS in Focus — IASB proposes to amend IFRS 16 Leases to clarify the measurement of lease liabilities in sale and leaseback transactions, Deloitte comment letter on the tentative agenda decision on sale and leaseback in a corporate wrapper, EFRAG endorsement status report 6 November 2020, Effective date of IBOR reform Phase 2 amendments, Comment deadline: IFRS 16 amendment on Sale and Leaseback, Effective date of 2018-2020 annual improvements cycle, IBOR reform and the effects on financial reporting — Phase 2, IASB/FASB announce intention to re-expose proposals, ED originally expected in first half of 2012, Effective for annual periods beginning on or after 1 January 2019, Effective for annual periods beginning on or after 1 January 2022, Effective for annual periods beginning on or after 1 June 2020, Effective for annual periods beginning on or after 1 January 2021. leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources; leases of biological assets held by a lessee (see, licences of intellectual property granted by a lessor (see, rights held by a lessee under licensing agreements for items such as films, videos, plays, manuscripts, patents and copyrights within the scope of. Lease accounting is an important accounting section as it differs depending on the end user. Main features Lessee accounting IN10 HKFRS 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. Re: IFRS 16 - Lessor accounting Post by nauman » Mon Jul 13, 2020 8:55 am Nope, when it comes to other systematic basis you have to come up with an alternative systematic basis (same as if you are not following straight line depreciation you have to come up with an alternative). IFRS 16 substantially carries forward the lessor accounting requirements of IAS 17. IAS 2, IAS 16, IAS 38) and accounts for the lease using lease requirements included in IFRS 16 (IFRS 16.100(b)). IFRS 16 substantially carries forward the lessor accounting requirements of IAS 17. Adjustments may also be required for lease incentives, payments at or prior to commencement and restoration obligations or similar. On 1 January 20X1 Entity A (a lessor) enters into a 5 year equipment lease contract with Entity X (a lessee). Lease accounting was a joint project of the IASB and the US-standard setter (the FASB). Lease payments included in the measurement of the net investment in the lease are listed in paragraph IFRS 16.70 and generally mirror those included in the measurement of lease liability by the lessee. Instead of applying the recognition requirements of IFRS 16 described below, a lessee may elect to account for lease payments as an expense on a straight-line basis over the lease term or another systematic basis for the following two types of leases: i) leases with a lease term of 12 months or less and containing no purchase options – this election is made by class of underlying asset; and. The main driver between operating and finance leases for lessors under IFRS 16 is transfer of ownership. In response, IFRS 16 1 was amended in May 2020 to provide relief on the accounting for COVID-19 related rent concessions for lessees. 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. IFRS 16. Under the cost model a right-of-use asset is measured at cost less accumulated depreciation and accumulated impairment. Lease payments should be allocated between the land and the buildings elements in proportion to the relative fair values of the leasehold interests in the land element and buildings element of the lease at the inception date. In January 2016, the new standard about lease accounting IFRS 16 was issued and it introduced a few major changes. 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. UK tax. [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. Underlying asset subject to operating lease is depreciated under normal depreciation policy for similar assets of the lessor (IFRS 16.84). Consequently the proposed IFRS is not expected to impact on the majority of landlords. The new standard does not directly impact lessor accounting. All other modifications are accounted for using the applicable requirements. A lessor therefore continues to classify its leases as operating or finance leases and to account for these two types of leases differently. [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. A supplier’s right of substitution is only considered substantive if the supplier has both the practical ability to substitute alternative assets throughout the period of use and they would economically benefit from substitution. A lessor must classify each of its leases as either an operating lease or a finance lease (IFRS 16.61). Account for a service element as before, in … Interest rate implicit in the lease is discussed in a lessee accounting part of IFRS 16. [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. 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