Focus on IFRS 16 Leases
– shows the difference between cases of entities involved in contracts containing a lease under IFRS 16 Leases and similar but different cases of entities involved in contracts NOT containing a lease under IFRS 16 Leases.
To start setting the stage, the definition of a lease: A contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.
However, the contract specifies that Customer cannot transport particular types of cargo (for example, explosives). If a particular car needs to be serviced or repaired, Supplier is required to substitute a car of the same type. Otherwise, and other than on default by Customer, Supplier cannot retrieve the cars during the five-year period.
The contract also requires Supplier to provide an engine and a driver when requested by Customer. Supplier keeps the engines at its premises and provides instructions to the driver detailing Customer’s requests to transport goods. Supplier can choose to use any one of a number of engines to fulfil each of Customer’s requests, and one engine could be used to transport not only Customer’s goods, but also the goods of other customers (ie if other customers require the transportation of goods to destinations close to the destination requested by Customer and within a similar timeframe, Supplier can choose to attach up to 100 rail cars to the engine).
summarises the process surrounding changes in lease contracts that identify as lease modification.
A lessee that chooses not to apply the practical expedient (IFRS 16 option for rent concessions arising directly from the COVID-19 pandemic that are not going to be accounted for as lease modifications), or agrees changes to its lease contracts that do not qualify for the practical expedient, assesses whether there is a lease modification.
A change in the scope of a lease, or the consideration for a lease, that was not part of the original terms and conditions meets the standard’s definition of a lease modification.
A lessee accounts for a lease modification as a separate lease if both of the following conditions exist:
For a modification that is not a separate lease, at the effective date of the modification the lessee accounts for it by remeasuring the lease liability using a discount rate determined at that date and:
summarises the accounting for lessor modifications that depends on – and may change – the lease classification.
Unlike IAS 17 Leases, the new standard provides detailed guidance on the lessor accounting for lease modifications, with separate guidance for modifications to finance leases and operating leases.
However, additional complexities arise for modifications of a finance lease receivable not accounted for as a separate lease for which, under paragraph 80(b) of IFRS 16, the lessor applies the requirements of IFRS 9 Financial Instruments. A number of issues arise due to differences in the basic concepts between IFRS 16 and IFRS 9.
The following diagram summarises the accounting for lease modifications by a lessor.
|Separate lease||Not a separate lease – Finance to operating||Not a separate lease – Finance to finance||Lessor modifications to operating expenses|
* A lessee reassessment of whether it is reasonably certain to exercise an option to extend, or not to exercise a termination option, included in the original lease contract is not a lease modification
The date on which to account for a lease modification is a key consideration – and may be earlier than you think.
Lease modifications are accounted for at the effective date of the lease modification. This is the date on which both parties agree to the lease modification. For modifications that are not accounted for as separate leases, the lease liability and right-of-use asset are remeasured at this date.
Complex application issues arise if the modification is agreed on one date but an additional right of use starts on a later date. This section illustrates some issues. IFRS 16 Effective date of a modification
The following diagram summarises the accounting for common scenarios in which a modification is agreed on one date but the change in the right of use or consideration happens at a different date. IFRS 16 Effective date of a modification
When a modification is accounted for as a separate new lease, it is accounted for in the same way as any other new lease.
IFRS 16 amendments Corona Rent concessions provide relief to lessees in accounting for rent concessions.
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:
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.
If an entity holds money on behalf of clients (‘client money’):
DEFINITION: Client money
“Client money” is used to describe a variety of arrangements in which the reporting entity holds funds on behalf of clients. Client money arrangements are often regulated and more specific definitions of the term are contained in some regulatory pronouncements. The guidance in this alert is not specific to any particular regulatory regime.
Entities may hold money on behalf of clients under many different contractual arrangements, for example:
Does a contract include a lease? is a game like type of thing, walk through a few questions and you have decided whether a contract includes a lease or not.
As from 1 January 2019, the lessee is required to recognise almost all lease contracts on the balance sheet. The distinction between operating lease and finance lease has almost vanished. The only optional exemptions are for certain short-term leases and leases of low-value assets. Does a contract include a lease
IFRS 16 defines a lease as a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.
This walk through decision model may … Read more