LEASE STANDARD IS CHANGING. BE INFORMED. LC Lilia Chiper, comptabilité & fiscalité www.lcomptable.com IFRS 16 LEASE STANDARD IS CHANGING. BE INFORMED.

Changes after applying IFRS 16 Will affect all financial ratios and performace metrics, like curent ratio, asset turnover, net income,EBITDA and operating cash flow. Rent expenses will be replaced with depreciation and interest expense Big compagnies that lease big assets, will be most affected IASB offers an exemption for low value assets (5 000$ and less) who meet this exemption, do not have to be recognized on the balance sheet. The cost may be considerable for compagnies that not have in-house lease system. A ‘’right of use’’ model replaces the ‘’risk and rewards model’’.

New model A new lease asset (representing the right to use the leased item for the lease term) and lease liability (representing the obligation to pay rentals ) are recognized for all leases, exempt the short term leases and low value leases. Leases should initially recognize a right of use asset and lease liability based on the discounted payments required under the lease, taking into account the lease term as determined under the new standard. Initial direct costs and restoration costs are also included. Lessor accounting does not change and lessors continue to reflect the underlying asset subject to the lease arrangement on the balance sheet for leasses classified as operating. For financial arrangements or sales, the balance sheet reflects a lease receivable and the lessor’s residual intereset, if any.

Lease – on/off balance sheet The new on / off balance sheet for leases is a key judgemental area. Supplier controls use of the asset for the period of use? If yes: The contract is a Service – off of the balance sheet Customer controls use of the asset for the period of use? If yes: The contract is a Lease –on the balance sheet

Identified asset Lease ? Is the asset specified in the contract? no Contracts does not contain a lease yes no Is the asset physically distinct or customer receive substantially of the capacity of that asset? yes yes There is an identified asset Does the supplier have substantive substitution right? no

Implications of IFRS 16 IFRS 16 allow lesses not to recognize assets and liabilities for leases with lease term of 12 months or less. Than a lessee recognises the lease payments in profit or loss on a straight-line basis over the lease term. The exemption is requiered to be applied by class of underlying assets. *** Any lease that contains a purchase option is not considered a short term lease. Under IFRS 16 needs to be separeted lease and non lease components.

Transition accounting The new leases can apply early new standard, but not before to apply IFRS 15 « Revenue from Contracts with Customers » We have two methods for transitions to a new standard: Full retrospective approach IFRS 16 requires to apply new standard to each prior reporting period. Entities needs to adjust equity at the begining of the earleast comparative period presented. Modified retrospective approach Under this approach leasee does not present comparative information. At the date of initial application of the new leases standard, lessees recognise the cumulative effect of the new standard as an ajustement to the opening balance of the equity.

Leases previosly classified as finance leases: The carrying amount of the right of use asset and lease liability at the date of initial application shall be the carrying amount of the lease asset and lease liability immediatly before the date maeasured under IAS 17. Lessees previosly classified as operating leases: Recognise a lease libility, measured at the present value (PV) of the remaining lease payments, discounted using the lessee’s incrimental borrowing rate at the date of initial application.

Example Customer enters into a contract with Supplier to store its products in a specified storage Warehouse 1. Customer has storage rights for 60% of the capacity of Warehouse 1. The contract provides Customer the right to use Rooms A,B within Warehouse 1. Supplier has no substantive right to substitute alternative space in place of Room A and B. It is a an idenified asset? Yes. Customer has control over the use of the identified asset? If yes, than Contract is a lease.

Industries to be affected by IFRS 16. Transport and logistics; Network services; Real estate and equipment lessors Others