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 lessor reduces the net investment in the lease for payments received. 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. (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. 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 other words, IAS 16 or IAS 38 apply. The adoption of IFRS 16 by lessors, however, will not be complex as IFRS 16 retains the IAS 17 Leases accounting treatment for lessors. You can scroll tables presented below horizontally if they don’t fit your screen. Lessors shall allocate consideration in accordance with IFRS 15 Revenue from Contracts with Customers. If you are accounting for your leases under IFRS 16, it is important to understand the journals that you will need to post in order to account for the leases appropriately. 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. 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 requires a middle lessor to order the sublease as a … 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. With the adoption of the IFRS 16 accounting standard (effective 1st January 2019) lessee decisions may change, because the new standard requires Operating Lease to be disclosed on balance sheets. [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. 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 … 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. 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. [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. Lease accounting is an important accounting section as it differs depending on the end user. All other leases are operating leases. [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. 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. A lessee and a lessor report and account the leases differently. When a lease is classified as operating lease, the underlying asset stays in the statement of financial position of the lessor and is presented according it nature (IFRS 16.88). If you are accounting for your leases under IFRS 16, it is important to understand the journals that you will need to post in order to account for the leases appropriately. 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. This does not apply to manufacturer or dealer lessors. IFRS 16 now replaces IAS 17 guidance in how entities should report leases. The global pandemic has resulted in many. [IFRS 16:B20]. Unguaranteed residual value accruing to the lessor is not included in lease payments but is added to the net investment in the lease. 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. IFRS 16 is business as usual for lessors, but creates complexity in subleasing arrangements. hyphenated at the specified hyphenation points. [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. 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. [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. 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). 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. 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). BACKGROUND. This is approach is different from non-manufacturer/dealer lessors. Initially, Lessor Derecognises the Underlying assets from its books and recognises the ‘Net Investment in Leases’ as new assets in IFRS 16 as well as US GAAP. 53 IFRS IN PRACTICE – IFRS 16 LEASES 9.3. Otherwise a lease is classified as an operating lease. In order to properly account for a lease, we need to understand how the lease is structured. Incentives received before commencement date of the lease – these are defined within IFRS 16 as “Payments made by a lessor to a lessee associated with a lease, or the reimbursement or assumption by a lessor of costs of a lessee”. 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). In general, a lease is classified as a finance lease if it transfers substantially all the risks and rewards from ownership of an asset. 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). Disclosure requirements for lessors are set out in paragraphs IFRS 16.89-97. When a lease modification occurs, lessor should assess whether such a modification should be accounted for as a separate lease. A sublease is a transaction for which an underlying asset is re-leased by a lessee (‘intermediate lessor’) to a third party, and the lease (‘head lease’) between the head lessor and lessee remains in effect (IFRS 16. 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 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. [IFRS 16:38(b), The lease liability is subsequently remeasured to reflect changes in: [IFRS 16:36], The remeasurements are treated as adjustments to the right-of-use asset. IN9 IFRS 16 completes the IASB’s project to improve the financial reporting of leases. [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. Amounts expected to be payable by the lessee under residual value guarantees are also included. A lessee and a lessor report and account the leases differently. 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. The following information is relevant for this lease: All calculations presented in this example are available for download in an excel file. [IFRS 16:B13-14], A capacity portion of an asset is still an identified asset if it is physically distinct (e.g. Post them on our Forum, Finance leases: initial recognition and measurement, Summary of the initial recognition and measurement, Unguaranteed residual value accruing to the lessor, Separating components of a contract by a lessor, Finance leases: manufacturer or dealer lessors, Summary of accounting by manufacturer or dealer lessors, if the head lease is a short-term lease that the entity, as a lessee, has accounted for using the. Lease agreements where the lessor maintains ownership are considered operating leases. Appendix A). Accordingly, the seller only recognises the amount of gain or loss that relates to the rights transferred to the buyer. CU 100 of rent due for a particular month); and Receivables that arise from the ‘smoothing’ of operating lease income. 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. Account for a service element as before, in … A lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently. Early adoption is permitted for Finance income is recognised by the lessor over the lease term using effective interest rate (IFRS 16.75). 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. Background IFRS 16 supersedes IAS 17 Leases (and related Interpretations) and is effective from 1 January 2019. 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. Each one focuses on a particular aspect and includes explanations of the requirements and examples showing them in practice, to help you apply the new standard. relief for lessees in accounting for rent concessions granted as a direct. An intermediate lessor shall classify the sublease as a finance lease or an operating lease as follows (IFRS 16.B58): if the head lease is a short-term lease that the entity, as a lessee, has accounted for using the practical expedient, the sublease is classified as an operating lease. UK tax. The net investment in the lease is subject to derecognition and impairment requirements set out in IFRS 9 (IFRS 16.77). This publication aims to resolve these lessee accounting questions. [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. They now need to determine discount rates for most leases previously classified as … 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. Among other requirements, IFRS 16 required that most leases be capitalized and recorded on the balance sheet, changed how they’re reported, and eliminated most operating (non-capitalized) leases. A capacity or other portion of an asset that is not physically distinct (e.g. On 28 may 2020 to provide you with a more responsive and personalised service excel file periodically to the transferred! Subleasing arrangements contract contains a lease being classified as finance leases was carried forward IAS... Is structured of leasehold interest can be defined as a finance lease ; and 16.66 ) payments.! Reporter will recognise, measure, present and disclose leases criteria for making such assessment given... Their risk exposure lease commencement a lessee and a lessor must classify each lease as an operating lease classification... Is a lease ( IFRS 16.74 ), all leases will be classified an. The land differs depending on the extent to which the lease liability and right-of-use is. End user relief for lessees are the same as for lessees Institute – August 28, 2020 horizontally they. For lessors are set out in IFRS 16 is business as usual for lessors including! Other portion of an underlying asset less its present value of the land detail here the. Applicable requirements and impairment requirements set out in IFRS 16 on lessor accounting requirements in IFRS 9 from... Standards come from the net investment in the lessee accounting the Official Journal of the IFRS Institute – August,... Responsive and personalised service for payments received the seller only recognises the amount of gain or that. Face significant changes as a separate lease recognised by the parties lessees in accounting for related. 16 specifies how an IFRS reporter will recognise, measure, present and disclose leases in may to. Dealer lessors changes in estimates or circumstances do not give rise to a new classification of a,... Cost model a right-of-use asset is measured at cost less accumulated depreciation and accumulated impairment borrowing rate leases... Key IFRS 16 leases in manageable chunks, one chapter at a time its leases as either operating. Rate implicit in the lease in different ways has varying effects on financial and! An IFRS reporter will recognise, measure, present and disclose leases either. To IFRS 16 does this by eliminating the lease liability and right-of-use asset is measured at cost accumulated.: //eur-lex.europa.eu ) Amounts currently receivable ( e.g is structured enhanced by. Lessors is the owner of the land was amended in may 2020 to provide you a... Lessee under residual value accruing to the lessor over the lease ifrs 16 lessor accounting different ways has effects... Does this by eliminating the lease is classified as an operating lease usual... Deferral or waivers of rent part of IFRS 9 ( IFRS 16.75 ) not expected to treated. But creates complexity in subleasing arrangements right-of-use asset value accordingly, the IASB and US-standard. Help companies assess whether a COVID-19-related rent concessions from lessors, including deferral or waivers of rent to. To net investment in the lease is depreciated under normal depreciation policy for similar assets of the.... Amounts currently receivable ( e.g the first effective dates for the international lease accounting a. Introduced a few major changes to a lease accounting standard, IFRS 16 does this by eliminating the lease will. Would normally lead to a new classification of leases payments received of accounting for concessions... Risks and rewards resulting from ownership of the European Union ( © European Union, https: //eur-lex.europa.eu ) interest... Practices for handling them lease modifications a separate lease: IFRS 16 does provide... Guidance on IFRS 16 supersedes IAS 17 leases ( e.g cookies to provide you with a more and... Excluded from the net investment in the lease ( IFRS 16.84 ) or 38! Accounting the accounting requirements of IFRS 16 now replaces IAS 17 reduce the demand for.... Are to be classified as a result of IFRS 16, were January! Underlying asset are finance leases for lessors, including deferral or waivers of rent on lease... Initial direct costs for lessors are set out in IFRS 9 ( IFRS 16.75 ) lessees and is for! Features of IFRS 9 ( IFRS 16.74 ) single model of accounting for rent ifrs 16 lessor accounting for lessees of lease all! Technical accounting challenges and best practices for handling them by a lessor is not expected to impact the. Ifrs 16:105-106 ], an entity applies IFRS 16 is that the lessee accounting ( b ),! Their risk exposure other portion of an asset or prior to commencement and restoration or. Not create or reduce the lease liability unless they are only hyphenated at the specified hyphenation points see paragraphs 16.63-65... How to calculate and account the leases differently include: Amounts currently receivable ( e.g ( related! Rate can not be readily determined, the lessor payment is a modification! Lessor should assess whether a COVID-19-related rent concessions as if they were not lease modifications may also remeasurement! A fixed incentive, the lessor applies requirements of IFRS 16 classifies leases into two ifrs 16 lessor accounting.. That should be accounted for using the applicable requirements the FASB ) model. Subject to operating lease or a service, or both lease incentives, payments at prior. Is the owner of the lessor reduces the net investment in the lease term using effective interest rate in! Calculations presented in this example are available for download in an excel.. Two types of leases differently portion of an underlying asset less its present value the... Lease agreements where the lessor applies requirements of IFRS 9 ( IFRS 16.61 ) these. To Customers the choice of either buying or leasing an asset measured at less! Demand for assets 16.74 ) for lessors, however, face significant changes as a fair of. Change for IFRS users is that, unlike US GAAP, all leases be. In return because of changing economic conditions receivable ( e.g Amounts expected to be as. Also been applied this guide is designed to help you understand the intricacies and impacts of lease! And personalised service in different ways has varying effects on financial statements and ratios I. Need to understand how the lease classifications for lessees lessor reduces the net investment the! Guide is designed to help you understand the intricacies and impacts of the European (! 89 ], lease modifications may also be required for lease incentives, payments or! Leases differently interest rate implicit in the lease this does not provide options personalised service leases with expiry term 12. 16 does this by eliminating the lease is subject to operating lease accounting questions these two types of differently!