IASB Leases Project
Agenda
Overview
Identify a lease
Lessee: how big the liability will be?
Lessor accounting: what has changed?
Other lease accounting issues
Transition provisions
What do you need to do to get ready for 2019?
Overview – Project timeline
Objectives:

Require lessees to recognise all significant leases on-balance sheet

Eliminate arbitrary accounting distinctions for transactions that are economically similar

Reduce complexity in lease accounting

Develop converged lease accounting requirements
Project added to
Boards’ agendas
First Exposure
Draft Issued
Second
Exposure Draft
Issued
Discussion
Paper Issued
Final standard Proposed
expected
effective date
Permission to
Ballot
?
JULY
2006
MARCH
2009
AUGUST
2010
MAY
2013
© 2015, KPMG AS, a Norwegian limited liability company and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Q4 2015
MARCH
2015
JANUARY
2019
2
Overview – IASB model
Right to use
underlying
asset
Lessor
Finance or Operating
Model
Lessee
‘Accelerated ROU’
Model
Lease payments
Finance
■ Lease
Receivable
■ Residual Asset
Operating
No derecognition
of underlying
asset
ROU Model
Right to use
underlying asset
and lease
liability
All significant leases on-balance sheet for lessees with expense recognition
generally front-loaded, similar to current finance leases
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KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
3
Lessee accounting – P&L impact
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Lessor
Generally consistent with current IAS 17
Right to use
underlying
asset
Lessor
Finance or Operating
Model
Lessee
Lease payments
Finance
■ Lease
Receivable
■ Residual Asset
Operating
No derecognition
of underlying
asset
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KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Lease classification
test based on IAS 17
5
IASB vs FASB standards – Converged?
Lease definition
Leases on balance sheet for lessees
Lessor accounting and lease classification
Lessee accounting model
Detailed measurement requirements
Exemption for leases of low value items
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Agenda
Overview
Identify a lease
Lessee: how big the liability will be?
Lessor accounting: what has changed?
Other lease accounting issues
Transition provisions
What do you need to do to get ready for 2019?
Scope
Contracts that meet the definition of a lease:
Within scope
■ Leases of assets
■ Long leases of land
■ Sale-leasebacks
■ Sub-leases
■ In-substance
purchases / sales
Scope with exceptions
■ Short-term leases
(lease term ≤ 12
months)
■ Underlying assets of
low value (≤ $5,000,
when new)
Outside scope
Leases of:
■ Intangibles (other
than ROU assets
in a sublease)
■ Natural resources
and exploration
■ Biological assets
■ Leases of inventory
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Practical expedients
■ Leases with a lease term of ≤ 12 months may apply current
operating lease accounting
Short-term
leases
■ If elected, the exemption is applied to all leases within that class of
underlying asset
■ Still subject to qualitative and quantitative disclosures
Underlying
assets of low
value
■ Exemption for leases of underlying assets that are individually low
in value (e.g. ≤ $5,000US, when new) even if material in aggregate
■ Leases may be accounted for off-balance sheet under IFRS, but
on-balance sheet under U.S. GAAP
■ Aspects of the new standard may be applied at a portfolio level
(e.g. determination of discount and lease term)
Portfolio-level
■ Must be a reasonable expectation that the portfolio approach is not
materially different than application to individual leases
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Definition of a lease
A contract that conveys the right to use an asset (the underlying asset) for a
period of time in exchange for consideration.
Definition focuses on control over the use of an identified asset.
■ Asset may be explicitly or implicitly specified in a contract;
Identified
asset
■ Asset is physically distinct – applies to physically distinct
portions but not e.g. capacity portions
■ Supplier does not have a substantive right to substitute the
asset
■ Customer has the right to (throughout the period of use)
Control
over use
– Obtain substantially all of the economic benefits from use
of the asset, and
– Direct the use of the asset or direct others to operate it as
customer wishes
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Definition of a lease
■ Right to direct (including the right to change) how and for
what purpose the asset is used throughout the period of
use
■ The relevant decisions about how and for what purpose
the asset is used are predetermined and:
Customer rights
to direct the use
– The customer has the right to operate the asset,
without the supplier having the right to change those
operating instructions
– The customer designed the asset (or aspects of the
asset) in a way that predetermines how and for what
purpose the asset will be used
 Examples of relevant decisions about how and for what
purpose the asset is use: right to change the type of
output produced, when, where, or whether it is produced
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Definition of a lease
Customer’s
right to
specify
output
■ Customer’s right to specify quantity and type of goods or
services provided by the asset is not, by itself, considered
the right to direct the use of the asset
■ Contractual provisions designed to protect supplier’s
interest in the asset, its personnel, or ensure compliance
with laws and regulations
– Specify maximum amount of use, or when or where
customer can use it
Supplier
protective rights
– Require customer to notify a change in how or for what
purpose asset is used
– Require customer to follow particular operating
practices
■ Do not, in isolation, prevent customer from having the right
to direct the use of the asset
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KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Agenda
Overview
Identify a lease
Lessee: how big the liability will be?
Lessor accounting: what has changed?
Other lease accounting issues
Transition provisions
What do you need to do to get ready for 2019?
Initial measurement – Lease liability
PV of lease payments over the lease term – includes:
Fixed payments1
Term option
penalties2
RV guarantees4
Purchase options3
Some variable
lease payments5
Discount rate6,7
1.
2.
3.
4.
5.
6.
7.
Fixed payments include in-substance fixed payments, less lease incentives
Only include the termination penalty if the lease term reflects the lessee exercising an option to terminate the lease
Only include the exercise price of a purchase option if lessee is reasonably certain to exercise
For RVGs:
a) Lessee includes the amount expected to be payable
b) Lessor includes guaranteed amount
Only include VLPs based on an index or rate (e.g., CPI), or if in-substance fixed
A lessor is required to use the rate implicit in the lease. A lessee may use the incremental borrowing rate, if it cannot
determine the lessor’s incremental borrowing rate
Nonpublic business entities may make an accounting policy election to use a risk-free discount rate (FASB only)
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Lease term
Non-cancellable period
Optional renewal periods if lessee
reasonably certain to exercise
Lease
Term
Periods after optional termination
date if lessee reasonably certain
not to exercise
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Lease term
Consider economic factors in estimating lease term
Asset
Contractual / Market
■ Level of rentals in any secondary
period compared to market rates
■ Contingent payments
■ Renewal and purchase options
■ Costs relating to the termination of
the lease and the signing of a new
replacement lease
■ Nature of item (specialised)
■ Location
■ Availability of suitable alternatives
■ Existence of significant leasehold
improvements
■ Returning costs of the underlying
asset
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Subsequent measurement – Lease liability
Amortised cost using the effective interest method; no fair value option
Changes in carrying amount of lease liability due to:
Reassessment of lease term,
purchase option and RVG
Reassessment of variable lease payments
based on an index or rate
Relates to future
periods
Adjust right-of-use asset
Relates to current
period
Recognise in P&L
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Reassessment triggers
Reassessment of lease term and purchase options (lessee only)
Constructing significant leasehold improvements
Significantly modifying or customising the underlying asset
Making a business decision that is directly relevant to the lessee’s ability
to exercise or not exercise an option
Subleasing the underlying asset for a period beyond the exercise date of
an option
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Subsequent measurement – Discount rate
Lessees remeasure the lease liability using revised discount rate when
there is a change in lease payments due to:
■ A change in the lease term;
■ A change in assessment of whether the lessee is or is not reasonably
certain to exercise a purchase option; or
■ A lease modification.
Lessors are not required to reassess the discount rate.
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KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Initial measurement – ROU asset
ROU asset is initially measured as the sum of:
PV of lease
payments
Initial direct
costs
Prepaid lease
payments
Lessee also adjusts the ROU asset for lease incentives
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KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Subsequent measurement – ROU asset
Amortise over shorter of lease term or economic life, generally on a straight-line basis
Results in front loading of total lease expense
(amortisation expense on ROU asset + interest expense on lease liability)
ROU asset is subject to impairment testing under IAS 36 impairment
IAS 40 applied if the leased property is investment property
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KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Impairment – ROU asset
ROU asset tested is for impairment in accordance with IAS 36.
Amortisation following an impairment as follows:
Continue amortising ROU asset
pre-impairment basis
At a minimum, must recognise expense from unwinding of the discount
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KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Lease modifications – Lessee
Change to the contractual terms and conditions
(excludes exercise of option included in original lease contract)
Increase in scope of lease by adding
the ROU one or more underlying
assets
At stand-alone
price for increase
Separate lease
All other lease
modifications
Decrease the
scope
Not at standalone price
Adjust ROU asset
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Adjust ROU /
gain or loss
23
Agenda
Overview
Identify a lease
Lessee: how bit the liability will be?
Lessor accounting: what has changed?
Other lease accounting issues
Transition provisions
What do you need to do to get ready for 2019?
Lessor
Generally consistent with current IAS 17
Right to use
underlying
asset
Lessor
Finance or Operating
Model
Lessee
Lease payments
Finance
■ Lease
Receivable
■ Residual Asset
Operating
No derecognition
of underlying
asset
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KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
25
Lessor lease classification test
Ownership transfers at end of lease?
Yes
No
Bargain purchase option?
Yes
Finance
Lease
No
Transfer substantially all risk and rewards of ownership?
Yes
No
 Assessment criteria similar to
current IAS 17 classification test
Operating
lease
 Lease classification test is not
applicable for lessees
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KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Lease modifications – Lessor
Change to the contractual terms and conditions
(excludes exercise of option included in original lease contract)
Increase in scope of
lease by adding ROU
one or more underlying
assets
At stand-alone price for
increase
All other contract modifications
Operating lease
(at inception)
Separate lease
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Finance lease
(at inception)
Apply IFRS 9
27
Agenda
Overview
Identify a lease
Lessee: how bit the liability will be?
Lessor accounting: what has changed?
Other lease accounting issues
Transition provisions
What do you need to do to get ready for 2019?
Subleases
Intermediate lessor
■ Accounts for head lease and sublease
as two separate contracts
■ Classifies the sublease based on the
ROU asset arising from the head lease
■ Recognises lease assets and lease
liabilities gross unless offset criteria met
■ Recognises lease income and lease
expense gross unless acting as agent
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29
Sale-leaseback transactions
The sale is
recognised in
accordance with
applicable GAAP
For a sale to occur, transaction must
meet the requirements of a sale under
the new revenue recognition standard
Sale
Sellerlessee
The purchase is
recognised in
accordance with
applicable GAAP
Buyerlessor
Leaseback
The leaseback is
accounted for
using the lessee
right-of-use model
Gain on sale is
adjusted for offmarket terms
Each component
of the transaction
is assessed
separately
If there is no sale, then both parties apply IFRS 9.
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KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
30
Agenda
Overview
Identify a lease
Lessee: how bit the liability will be?
Lessor accounting: what has changed?
Other lease accounting issues
Transition provisions
What do you need to do to get ready for 2019?
Effective date and early adoption
Effective date
Accounting periods beginning on or after 1 January 2019
Early adoption
Permitted for entities that have adopted IFRS 15
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Lease definition – two options on transition
Core requirement
Apply the new lease definition to all contracts
OR
Practical expedient
“Grandfather” the assessment of which existing contracts are, or contain,
leases under IAS 17 and FRIC 4
Apply the new lease definition to new contracts
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Lessees – two main transition options
Full retrospective
Apply retrospectively to each period presented in accordance with IAS 8
OR
Modified retrospective
Cumulative effect of applying new standard recognised in equity at
beginning of current reporting period
An accounting policy choice to be applied to all leases
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KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Lessee – modified retrospective approach for operating leases
Lease liability
■ Initial measurement of lease liability = present value of
remaining lease payments
■ Initial measurement of right-of-use asset =
Right-of-use
asset
– Carrying amount as if standard had been in place at
commencement date
OR
– Lease liability adjusted for accrued prepaid lease
payments
■ Various optional practical expedients, including:
Practical
expedients
– Apply a single discount rate to a portfolio of leases
– Treat leases with a remaining term < 12 months as shortterm leases
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KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
35
Lessee – modified retrospective approach for finance leases
Lease liability
Right-of-use
asset
■ Initial measurement of lease liability = carrying amount of
lease liability under IAS 17
■ Initial measurement of right-of-use asset = carrying amount
of lease asset under IAS 17
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Other transition requirements
Lessors
Subleases
■ No adjustments on transition, other than as noted below
■ Reassess classification of subleases previously classified
as operating leases under IAS 17
■ “New lease” accounting for any leases that are reclassified
as finance leases
■ No reassessment of whether a sale occurred
■ If leaseback was a finance lease under IAS 17
– Apply transition guidance for finance leases
Sale-leaseback
– Continue to amortise any gain over lease term
■ If leaseback was an operating lease under IAS 17
– Apply transition guidance for operating leases
– Adjust ROU asset for deferred gains / losses
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KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
37
Agenda
Overview
Identify a lease
Lessee: how bit the liability will be?
Lessor accounting: what has changed?
Other lease accounting issues
Transition provisions
What do you need to do to get ready
for 2019?
Next steps – Some key questions (1/3)
Topic
Questions and comments
Lease
Definition
■ Do you know which of your transactions are, or contain, leases?
■ Will you elect to grandfather the lease definition for existing
contracts on transition?


 Consider the significant changes in lease definition that will affect many
common transactions – e.g. power purchase agreements and transport
agreements.
 On transition – will you spend the time and cost necessary to reassess your
existing transactions and thereby exclude some existing transactions from
lease accounting, or grandfather existing arrangements and apply the new
definition only to new arrangements?
Lease data
■ Do you have a database of all your leases?
■ Do you have systems and processes necessary to calculate lease
assets and liabilities?
■ Are your current disclosures of operating lease commitments
complete and accurate?



 Now is the time to begin to assess whether your current systems have the
information necessary to apply IFRS 16.
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Next steps – Some key questions (2/3)
Topic
Questions and comments
Lease data
(cont’d)
 Now is the time to check that it includes all the leases that you will soon be
bringing on-balance sheet, so that there are no surprises on transition.
Debt covenants
■ Will application of the new standard impact your debt and other
covenants?

 If your financial agreements feature covenants are not applied on a “frozen
GAAP” basis, a change in accounting policy might affect your covenant test.
 Given the scale of accounting changes to be applied in 2018-19 with new
standards on Financial instruments, Revenue and Leases, you may wish to
renegotiate some covenants before the standard becomes effective.
Sale-andleaseback
transactions
■ Do you understand the impact of the new standard on your saleand-leaseback transactions?

 The new standard eliminates sale-and-leaseback as an off-balance sheet
proposition
 Sale-and-leaseback can come back on-balance sheet on more than one way:
 If true sale under IFRS 15: same as current sale-and-finance-leaseback
 If not a sale: financing under IFRS 9 which may require to measure at FVTPL
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Next steps – Some key questions (3/3)
Topic
Questions and comments
Financial ratios
■ Do you understand the impact of the new standard on your financial
ratios?

■ Will optional exemptions such as those for short-term leases and
leases of low-value items have a material impact on your financial
statements?

 The new standard will bring more leases on-balance sheet, increasing the gearing,
etc.
 What other effects?
 Modelling may be required to predict the impact of the front-loaded total expense
 Geography of profit and loss will change: now depreciation and interest expense
 How will you present variable lease payments?
 What will be the impact of optional exemptions on your KPIs?
Transition
options
■ Have you thought about how to transition to the new standard?

 One key question is whether to apply the standard
 Retrospectively, which will require additional cost and effort; or
 As a “big bang” on the date of initial application, which will require less historical
information but may impact your trend date for many years to come
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KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
41