IFRS 16 Leases presentation in cash flows – Complete easy read

25/03/2022 by 75385885

IFRS 16 Leases presentation in cash flows

Most changes from IAS 17/IFRIC 4 to IFRS 16 relate to lessees, the companies renting a car, office or warehouse.

At first, IFRS 16 has affected balance sheet and balance sheet-related ratios such as the debt/equity ratio. Aside from this, IFRS 16 also influenced the income statement, because an entity now has to recognise interest expense on the lease liability (obligation to make lease payments) and depreciation on the ‘right-of-use’ asset (that is, the asset that reflects the right to use the leased asset).

Due to this, for lease contracts previously classified as operating leases the total amount of expenses at the beginning of the lease period will be higher than under IAS 17. Another consequence of the changes in presentation is that EBIT and EBITDA will be higher for companies that have material operating leases.

IFRS 16 also changes the cash flow statement. Lease payments that relate to contracts that have previously been classified as operating leases are no longer presented as operating cash flows in full. Only the part of the lease payments that reflects interest on the lease liability can be presented as an operating cash flow (depending on the entity’s accounting policy regarding interest payments).

Cash payments for the principal portion of the lease liability are classified within financing activities. Payments for short-term leases, leases of low-value assets and variable lease payments not included in the measurement of the lease liability remain presented within operating activities.

Presentation and disclosures

In the statement of cash flows, lease payments are classified consistently with payments on other financial liabilities:

The part of the lease payment that represents cash payments for the principal portion of the lease liability is presented as a cash flow resulting from financing activities.
The part of the lease payment that represents interest portion of the lease liability is presented either as an operating cash flow or a cash flow resulting from financing activities (in accordance with the entity’s accounting policy regarding the presentation of interest payments).
Payments on short-term leases, for leases of low-value assets and variable lease payments not included in the measurement of the lease liability are presented as an operating cash flow.

A simple example to classify the movements in Right-of-use assets is as follows:

IFRS 16 Leases presentation in cash flows

A simple example to classify the movements in Lease liabilities is as follows:

IFRS 16 Leases presentation in cash flows

On the balance sheet, the right-of-use asset can be presented either separately or in the same line item in which the underlying asset would be presented. The lease liability can be presented either as a separate line item or together with other financial liabilities. If the right-of-use asset and the lease liability are not presented as separate line items, an entity discloses in the notes the carrying amount of those items and the line item in which they are included.

In the statement of profit or loss and other comprehensive income, the depreciation charge of the right-of-use asset is presented in the same line item/items in which similar expenses (such as depreciation of property, plant and equipment) are shown. The interest expense on the lease liability is presented as part of finance costs. However, the amount of interest expense on lease liabilities has to be disclosed in the notes.

IFRS 16 Leases presentation in cash flows IFRS 16 Leases presentation in cash flows IFRS 16 Leases presentation in cash flows IFRS 16 Leases presentation in cash flows IFRS 16 Leases presentation in cash flows IFRS 16 Leases presentation in cash flows IFRS 16 Leases presentation in cash flows IFRS 16 Leases presentation in cash flows IFRS 16 Leases presentation in cash flows IFRS 16 Leases presentation in cash flows IFRS 16 Leases presentation in cash flows IFRS 16 Leases presentation in cash flows

Capitalisation of expenditure – 1 Complete answer

15/09/2021 by 75385885

Capitalisation of expenditure

Capitalisation of expenditure is only possible when one of the following situations occur:

Capital expenditure (including equipment repairs and maintenance)
Recording lease contracts – Right-of-Use Assets
Capitalisation of borrowing costs
Capitalisation of cloud computing costs
Capitalisation of intangible assets
Capitalisation of internally capitalized intangible assets
Research & development costs
Prepaid expenses

Capital expenditure (including equipment repairs and maintenance)

The cost of an item of property, plant and equipment under IAS 16 Property, plant and equipment shall be recognised as an asset if, and only if:

it is probable that future economic benefits associated with the item will flow to the entity; and
the cost of the item can be measured reliably. (IAS 16.7)

Investment property

Certain properties which are used on rental are classified as an investment property in which case IAS 40 Investment property will apply. Only tangible items which have a useful life of more than one period are classified as property, plant and equipment as per IAS 16. But refer to the words “more than one period” as more than one accounting period of 12 months.

Also, an entity shall determine a threshold limit commensurate to its size for recognizing a tangible item as property, plant and equipment. For example, a tangible item of insignificant amount although satisfying the definition of property, plant and equipment may be expensed.

Initial recognition of indirect costs

Items of property, plant and equipment may be acquired for safety or environmental reasons. The acquisition of such property plant and equipment, although not directly increasing the future economic benefits of any particular existing item of property, plant and equipment, may be necessary for an entity to obtain the future economic benefits from its other assets.

Such items of property plant and equipment qualify for recognition as assets because they enable an entity to derive future economic benefits from related assets in excess of what could be derived had those items not been acquired.

Subsequent recognition of indirect costs

Disclosure non-financial assets and liabilities example

05/07/2021 by 75385885

Disclosure non-financial assets and liabilities example

The guidance for this disclosure example is provided here.

8 Non-financial assets and liabilities

This note provides information about the group’s non-financial assets and liabilities, including:

specific information about each type of non-financial asset and non-financial liability
- property, plant and equipment (note 8(a))
- leases (note 8(b))
- investment properties (note 8(c))
- intangible assets (note 8(d))
- deferred tax balances (note 8(e))
- inventories (note 8(f))
- other assets, including assets classified as held for sale (note 8(g))
- employee benefit obligations (note 8(h))
- provisions (note 8(i))
accounting policies
information about determining the fair value of the assets and liabilities, including judgements and estimation uncertainty involved (note 8(j)).

8(a) Property, plant and equipment

Amounts in CU’000	Freehold land	Buildings	Furniture, fittings and equipment	Machinery and vehicles	Assets under construction	Total
At 1 January 2019
Cost or fair value	11,350	28,050	27,510	70,860	–	137,770
Accumulated depreciation	–	–	-7,600	-37,025	–	-44,625
Net carrying amount	11,350	28,050	19,910	33,835	–	93,145

Movements in 2019
Exchange differences	–	–	-43	-150	–	-193
Revaluation surplus	2,700	3,140	–	–	–	5,840
Additions	2,874	1,490	2,940	4,198	3,100	14,602
Assets classified as held for sale and other disposals	-424	–	-525	-2,215	–	3,164
Depreciation charge	–	-1,540	-2,030	-4,580	–	8,150
Closing net carrying amount	16,500	31,140	20,252	31,088	3,100	102,080

At 31 December 2019
Cost or fair value	16,500	31,140	29,882	72,693	3,100	153,315
Accumulated depreciation	–	–	-9,630	-41,605	–	-51,235
Net carrying amount	16,500	31,140	20,252	31,088	3,100	102,080

Movements in 2020
Exchange differences	–	–	-230	-570	–	-800
Revaluation surplus	3,320	3,923	–	–	–	7,243
Acquisition of subsidiary	800	3,400	1,890	5,720	–	11,810
Additions	2,500	2,682	5,313	11,972	3,450	25,917
Assets classified as held for sale and other disposals	-550	–	-5,985	-1,680	–	-8,215
Transfers	–	–	950	2,150	-3,100	–
Depreciation charge	–	-1,750	-2,340	-4,380	–	-8,470
Impairment loss (ii)	–	-465	-30	-180	–	-675
Closing net carrying amount	22,570	38,930	19,820	44,120	3,450	128,890

At 31 December 2020
Cost or fair value	22,570	38,930	31,790	90,285	3,450	187,025
Accumulated depreciation	–	–	-11,970	-46,165	–	-58,135
Net carrying amount	22,570	38,930	19,820	44,120	3,450	128,890

(i) Non-current assets pledged as security

Refer to note 24 for information on non-current assets pledged as security by the group.

(ii) Impairment loss and compensation

The impairment loss relates to assets that were damaged by a fire – refer to note 4(b) for details. The whole amount was recognised as administrative expense in profit or loss, as there was no amount included in the asset revaluation surplus relating to the relevant assets. [IAS 36.130(a)]

Onerous

29/06/2021 by 75385885

This is an overview of the use of onerous in the IFRS Standards, the major Standard being IAS 37 (see below).

IAS 37: ‘Onerous Contracts – Cost of Fulfilling a Contract’

IAS 37 defines an onerous contract as one in which the unavoidable costs of meeting the entity’s obligations exceed the economic benefits to be received under that contract. If an entity has a contract that is onerous the present obligation under the contract should be recognized and measured as a provision. An onerous contract is one in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.

The amendment to IAS 37, that will become effective 1 January 2022, clarifies the meaning of ‘costs to fulfil a contract’. Contract costs Contract costs The amendment was part of some narrow-scope amendments issued by IASB in May 2020.

The amendment explains that the direct cost of fulfilling a contract comprises:

the incremental costs of fulfilling that contract (for example, direct labour and materials); and
an allocation of other costs that relate directly to fulfilling contracts (for example, an allocation of the depreciation charge for an item of PP&E used to fulfil the contract). (IAS 37.68A)

The amendment also clarifies that, before a separate provision for an onerous contract is established, an entity recognises any impairment loss that has occurred on assets used in fulfilling the contract, rather than on assets dedicated to that contract.

The amendment could result in the recognition of more onerous contract provisions, because previously some entities only included incremental costs in the costs to fulfil a contract.

M and A

01/06/2021 by 75385885

M and A or Mergers and Acquisitions

in IFRS language Business Combinations.

1 Identifying a business combination

IFRS 3 refers to a ‘business combination’ rather than more commonly used phrases such as takeover, acquisition or merger because the objective is to encompass all the transactions in which an acquirer obtains control over an acquiree no matter how the transaction is structured. A business combination is defined as a transaction or other event in which an acquirer (an investor entity) obtains control of one or more businesses.

An entity’s purchase of a controlling interest in another unrelated operating entity will usually be a business combination (see Simple case – Straightforward business combination below). However, a business combination (M and A) may be structured, and an entity may obtain control of that structure, in a variety of ways.

Examples of business combinations structurings	Examples of ways an entity may obtain control
A business becomes the subsidiary of an acquirer	The entity transfers cash, cash equivalents or other assets(including net assets that constitute a business)
Net assets of one or more businesses are legally merged with an acquirer	The entity incurs liabilities
One combining entity transfers its net assets, or its owners transfer their equity interests, to another combining entity or its owners	The entity issues shares
	The entity transfers more than one type of consideration, or
Two or more entities transfer their net assets, or the owners of those entities transfer their equity interests to a newly created entity, which in exchange issues shares, or	The entity does not transfer consideration and obtains control for example by contract alone Some examples of this: ‘dual listed companies’ or ‘stapled entity structures’ acquiree repurchases a sufficient number of its own shares for an existing shareholder to obtain control a condition in the shareholder agreement that prevents the majority shareholder exercising control of the entity has expired, or a call option over a controlling interest that becomes exercisable.
A group of former owners of one of the combining entities obtains control of the combined entity, i.e. former owners, as a group, retain control of the entity they previously owned.

Therefore, identifying a business combination transaction requires the determination of whether:

what is acquired constitutes a ‘business’ as defined in IFRS3, and
control has been obtained.

Lessee accounting under IFRS 16

26/05/202126/05/2021 by 75385885

Lessee accounting under IFRS 16

The key objective of IFRS 16 is to ensure that lessees recognise assets and liabilities for their major leases.

1. Lessee accounting model

A lessee applies a single lease accounting model under which it recognises all leases on-balance sheet, unless it elects to apply the recognition exemptions (see recognition exemptions for lessees in the link). A lessee recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make payments. [IFRS 16.22]

[IFRS 16.47, IFRS 16.49]

Sub-leases under IFRS 16

26/05/2021 by 75385885

Sub-leases under IFRS 16

The classification guidance in IFRS 16 means that many sub-leases are finance leases, impacting the financial position and financial performance of intermediate lessors.

A sub-lease is a transaction in which a lessee (or ‘intermediate lessor’) grants a right to use the underlying asset to a third party, and the lease (or ‘head lease’) between the original lessor and lessee remains in effect.

A company applies IFRS 16 to all leases of right-of-use assets in a sub-lease. The intermediate lessor accounts for the head lease and the sub-lease as two different contracts, applying both the lessee and lessor accounting requirements. [IFRS 16.3]

Sub-leases under IFRS 16

An intermediate lessor classifies the sub-lease as a finance lease or as an operating lease with reference to the right-of-use asset arising from the head lease. That is, the intermediate lessor treats the right-of-use asset as the underlying asset in the sub-lease, not the item of property, plant or equipment that it leases from the head lessor. [IFRS 16.B58]

Beware of COVID 19 Rent concessions IFRS accounting

14/02/2021 by 75385885

Beware of COVID 19 Rent concessions IFRS accounting

IFRS 16 amendments Corona Rent concessions provide relief to lessees in accounting for rent concessions.

IFRS 16 Rent concession amendments in a nutshell

The lessee perspective

The amendments to IFRS 16 add an optional practical expedient that allows lessees to bypass assessing whether a rent concession that meets the following criteria is a lease modification:

it is a direct consequence of COVID-19; Beware of COVID 19 Rent concessions IFRS accounting
the revised lease consideration is substantially the same as, or less than, the original lease consideration;
any reduction in the lease payments applies to payments originally due on or before June 30, 2021; and
there is no substantive change to the other terms and conditions of the lease.

Lessees who elect this practical expedient account for qualifying rent concessions in the same way as changes under IFRS 16 that are not lease modifications. The accounting will depend on the nature of the concession, but one outcome might be to recognize negative variable lease payments in the period in which the lessor agrees to an unconditional forgiveness of lease payments.

Lessees are required to apply the practical expedient consistently to similar leases and similar concessions. They must also disclose if they elected the practical expedient and for which concessions, as well as the amount recognized in profit and loss in the reporting period to reflect changes in lease payments that arise from rent concessions to which they have applied the practical expedient.

The amendments are effective for reporting periods beginning after June 1, 2020, with early application permitted.

Impairment of right-of-use assets

05/03/202020/05/2019 by 75385885

Impairment of right-of-use assets explains the lease assets now on the balance sheet and as a result also susceptible of impairment risks to be accounted for. Impairment of right-of-use assets Right-of-use asset is an asset that represents a lessee’s right to use an underlying asset for the lease term. Impairment of right-of-use assets Right-of-use A contract conveys the right to control the use of an identified asset if the customer has both the right to obtain substantially all of the economic benefits from use of the identified asset and the right to direct the use of the identified asset throughout the period of use/lease. Impairment of right-of-use assets The right-of-use asset is depreciated over the lease term The carrying amount … Read more

Financing activities

25/02/202027/02/2019 by 75385885

Financing activities – Activities that result in changes in the size and composition of the contributed capital and borrowings of the entity.