IASB Leases Project

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? Agenda

2 © 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. 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 Overview – Project timeline J ANUARY 2019 J ULY 2006 Discussion Paper Issued Second Exposure Draft Issued Project added to Boards’ agendas Final standard expected Q M ARCH 2009 M AY 2013 ? A UGUST 2010 First Exposure Draft Issued Proposed effective date Permission to Ballot M ARCH 2015

3 © 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. Overview – IASB model All significant leases on-balance sheet for lessees with expense recognition generally front-loaded, similar to current finance leases ROU Model Right to use underlying asset and lease liability Right to use underlying asset Lease payments Operating No derecognition of underlying asset Finance ■Lease Receivable ■Residual Asset Lessor Finance or Operating Model Lessee ‘Accelerated ROU’ Model

4 © 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. Lessee accounting – P&L impact

5 © 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. Lessor Generally consistent with current IAS 17 Right to use underlying asset Lease payments Operating No derecognition of underlying asset Finance ■Lease Receivable ■Residual Asset Lessor Finance or Operating Model Lessee Lease classification test based on IAS 17

6 © 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. 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

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 ? Agenda

8 © 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. Scope Within scope ■Short-term leases (lease term ≤ 12 months) ■Underlying assets of low value (≤ $5,000, when new) ■Short-term leases (lease term ≤ 12 months) ■Underlying assets of low value (≤ $5,000, when new) Scope with exceptions Outside scope Contracts that meet the definition of a lease: Leases of: ■Intangibles (other than ROU assets in a sublease) ■Natural resources and exploration ■Biological assets Leases of: ■Intangibles (other than ROU assets in a sublease) ■Natural resources and exploration ■Biological assets

9 © 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. Practical expedients ■Leases with a lease term of ≤ 12 months may apply current operating lease accounting ■If elected, the exemption is applied to all leases within that class of underlying asset ■Still subject to qualitative and quantitative disclosures ■Leases with a lease term of ≤ 12 months may apply current operating lease accounting ■If elected, the exemption is applied to all leases within that class of underlying asset ■Still subject to qualitative and quantitative disclosures ■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 ■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) ■Must be a reasonable expectation that the portfolio approach is not materially different than application to individual leases ■Aspects of the new standard may be applied at a portfolio level (e.g. determination of discount and lease term) ■Must be a reasonable expectation that the portfolio approach is not materially different than application to individual leases Short-term leases Underlying assets of low value Portfolio-level

10 © 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. 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.

11 © 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. Definition of a lease

12 © 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. Definition of a lease

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? Agenda

14 © 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. Initial measurement – Lease liability Discount rate 6,7 PV of lease payments over the lease term – includes: Purchase options 3 Fixed pay ments 1 Term option penalties 2 RV guarantees 4 Some variable lease payments 5 1.Fixed payments include in-substance fixed payments, less lease incentives 2.Only include the termination penalty if the lease term reflects the lessee exercising an option to terminate the lease 3.Only include the exercise price of a purchase option if lessee is reasonably certain to exercise 4.For RVGs: a)Lessee includes the amount expected to be payable b)Lessor includes guaranteed amount 5.Only include VLPs based on an index or rate (e.g., CPI), or if in-substance fixed 6.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 7.Nonpublic business entities may make an accounting policy election to use a risk-free discount rate (FASB only)

15 © 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. Lease term

16 © 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. Lease term Consider economic factors in estimating lease term

17 © 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. Subsequent measurement – Lease liability Reassessment of lease term, purchase option and RVG Relates to future periods Reassessment of variable lease payments based on an index or rate Relates to current period Changes in carrying amount of lease liability due to: Adjust right-of-use assetRecognise in P&L Amortised cost using the effective interest method; no fair value option

18 © 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. Reassessment of lease term and purchase options (lessee only) Constructing significant leasehold improvements Significantly modifying or customising the underlying asset Subleasing the underlying asset for a period beyond the exercise date of an option Making a business decision that is directly relevant to the lessee’s ability to exercise or not exercise an option

19 © 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. 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.

20 © 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. Initial measurement – ROU asset ROU asset is initially measured as the sum of: Lessee also adjusts the ROU asset for lease incentives PV of lease payments Initial direct costs Prepaid lease payments

21 © 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. 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) 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

22 © 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. Impairment – ROU asset Continue amortising ROU asset pre-impairment basis At a minimum, must recognise expense from unwinding of the discount ROU asset tested is for impairment in accordance with IAS 36. Amortisation following an impairment as follows:

23 © 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. Lease modifications – Lessee Not at stand- alone price At stand-alone price for increase Change to the contractual terms and conditions (excludes exercise of option included in original lease contract) Separate lease Adjust ROU asset Adjust ROU / gain or loss Decrease the scope Increase in scope of lease by adding the ROU one or more underlying assets All other lease modifications

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? Agenda

25 © 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. Lessor Generally consistent with current IAS 17 Right to use underlying asset Lease payments Operating No derecognition of underlying asset Finance ■Lease Receivable ■Residual Asset Lessor Finance or Operating Model Lessee

26 © 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. Lessor lease classification test Ownership transfers at end of lease? Bargain purchase option? Finance Lease Operating lease Transfer substantially all risk and rewards of ownership? No Yes  Assessment criteria similar to current IAS 17 classification test  Lease classification test is not applicable for lessees

27 © 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. Lease modifications – Lessor Finance lease (at inception) At stand-alone price for increase Separate lease Apply IFRS 9 Increase in scope of lease by adding ROU one or more underlying assets All other contract modifications Operating lease (at inception) Change to the contractual terms and conditions (excludes exercise of option included in original lease contract)

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? Agenda

29 © 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. 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

30 © 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. Sale-leaseback transactions Buyer- lessor Seller- lessee For a sale to occur, transaction must meet the requirements of a sale under the new revenue recognition standard Leaseback The leaseback is accounted for using the lessee right-of-use model The sale is recognised in accordance with applicable GAAP The purchase is recognised in accordance with applicable GAAP Sale Each component of the transaction is assessed separately Gain on sale is adjusted for off- market terms If there is no sale, then both parties apply IFRS 9.

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? Agenda

32 © 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. 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

33 © 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. Lease definition – two options on transition Core requirement Apply the new lease definition to all contracts 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 OR

34 © 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. Lessees – two main transition options Full retrospective Apply retrospectively to each period presented in accordance with IAS 8 Modified retrospective Cumulative effect of applying new standard recognised in equity at beginning of current reporting period OR An accounting policy choice to be applied to all leases

35 © 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. Lessee – modified retrospective approach for operating leases

36 © 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. Lessee – modified retrospective approach for finance leases

37 © 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. Other transition requirements

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? Agenda

39 © 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. Next steps – Some key questions (1/3) TopicQuestions 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.

40 © 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. Next steps – Some key questions (2/3) TopicQuestions 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 with new standards on Financial instruments, Revenue and Leases, you may wish to renegotiate some covenants before the standard becomes effective. Sale-and- leaseback transactions ■Do you understand the impact of the new standard on your sale- and-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

41 © 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. Next steps – Some key questions (3/3) TopicQuestions 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