1. ICAJ IFRS workshop IFRS 16 – Leasing Presenter – Tricia- Ann Smith
ICAJ IFRS workshop IFRS 16 – Leasing Presenter – Tricia- Ann Smith DaSilva

2. The new lease standard – all started with a plane!
“One of my great ambitions before I die is to fly in an aircraft that is on an airline’s balance sheet.”
Sir David Tweedie Chairman of the IASB (25 April 2008)
“… approximately $1.25 trillion in non-cancelable future cash obligations committed under operating leases …. are not recognized on issuer balance sheets…”
SEC 2005
The Economist, Jan 21st 2012

3. IFRS 16 – and now it is flying?
January 2016: Final standard
Effective date: 1 January 2019 (earlier adoption in conjunction with IFRS 15 permitted)

4. What you need to know:
Lessees have to show a lease liability for almost every lease contract so there will be a huge impact on KPIs (eg. EBIT/EBITDA; debt to equity ratio)
Lessee has to identify each lease contract
Clients need to put in place systems and processes to capture information/determine measurement
Clients need to communicate the effect of the new standard to the outside world
… is not that far away!

5. What has changed?
Q1: “Under IFRS 16 lessees have to recognise a lease liability for every lease contract”
There are exemptions for short-term leases and leases of low-value assets
Yes No

6. Be aware of new disclosures!
What has changed?
Q2: “Under IFRS 16 lessor accounting stays substantially the same”
Yes
Be aware of new disclosures! No

7. They are taken into account if they are in substance fixed!
What has changed?
Q3: “Under IFRS 16 lease payments that are not based on an index or a rate are never part of the lease liability.”
They are taken into account if they are in substance fixed!
Yes No

8. Overview – what it’s all about!
Agenda
Overview – what it’s all about!
Definition of a lease
Lessee accounting

9. Line item in which underlying asset would be presented
Overview
Right-of- use asset
Lease liability
Lessee Balance sheet
Lessee recognises right- of-use asset and lease liability for almost all lease contracts
Exemptions for short- term leases and leases of low-value assets
Separate line item or
Line item in which underlying asset would be presented
Depreciation in accordance with IAS 16 (straight-line or another systematic basis)

10. Overview Lessee Income statement
Depreciation and amortisation
Depreciation expense on the right-of-use asset
Finance cost
Interest expense on the lease liability
Lessee recognises right- of-use asset and lease liability for almost all lease contracts
IAS 17 (operating lease)
IFRS 16

11. Depending on entities’ policy for interest payments
Overview
Lessee Statement of cash flows
Lessee recognises right- of-use asset and lease liability for almost all lease contracts
Cash flows from operating activities
Cash payments for the interest portion of the liability
Short-term lease payments
Payments for leases of low value assets
Variable lease payments not included in lease liability
Cash flows from financing activities
Depending on entities’ policy for interest payments
Cash payments for the principal portion of the liability
Cash payments for the interest portion of the liability

12. Overview Finance lease Lessee Operating lease
Lessor accounting stays substantially the same as under current guidance
Lease receivable
Balance sheet
Lessee
Operating lease
Leased asset
Balance sheet
Right-of- use asset
Lease liability
Balance sheet

13. Overview
Lessor accounting stays substantially the same as under current guidance
Lessee recognises right-of-use asset and lease liability for almost all lease contracts
Exemptions for short-term leases and leases of low- value assets
Enhanced disclosure requirements
Effective date 1 January 2019
Comprehensive guidance on the defintion of a lease
Huge impact on KPI (debt/equity ratio; EBIT/EBITDA/ operating cash flow)
Earlier application permitted (together with IFRS 15)

14. Overview – what it’s all about!
Agenda
Overview – what it’s all about!
Definition of a lease
Lessee accounting

15. Definition of a lease
Lessee is NOT required to reassess contracts entered into before date of initial application! 1 no
Is there an identified asset?
yes 2
Does the customer have the right to obtain substantially all of the economic benefits from the use of the asset throughout period of use ? no
yes 3
Who has the right to direct how and for what purpose the asset is used throughout the period of use ?
Customer
Predetermined
Supplier 3A no
Comment: In part the criteria as in the flowchart are shortened; flowchart has to be read together with the explanations on the previous slides.
yes
Customer
operates the asset or
has designed the asset?
Contract contains a lease
Contract does not contain a lease

16. Definition of a lease 1 Is there an identified asset?
yes
No identified asset if supplier has substantive right to substitute asset
Practical ability (right to substitute; assets are readily available)
Economic benefit
Identified asset can be specified explicitly (e.g. serial number) or implicitly XY
Contracts does not contain a lease

17. Definition of a lease Primary output and any by-products1
Is there an identified asset?
yes 2 no
Does the customer have the right to obtain substantially all of the economic benefits from the use of the asset throughout period of use ?
yes 3
Who has the right to direct how and for what purpose the asset is used throughout the period of use ?
Primary output and any by-products
Payments from third parties relating to use of asset (e.g renewable energy credit resulting from use of a solar farm)
Excludes: Benefits relating to ownership of asset
Contract does not contain a lease

18. Definition of a lease 3
Who has the right to direct how and for what purpose the asset is used throughout the period of use ?
Right to direct how and for what purpose asset is used throughout period of use
Protective rights of the supplier do not prevent the customer from having right to direct the use
Customer
Predetermined
Supplier 3A no
yes
Customer
operates the asset or
has designed the asset?
Contract contains a lease
Contract does not contain a lease

19. Questions
We will now review several scenarios and I want you to indicate based on the fact pattern whether the contract contains a lease

20. Concession space
Coffee company enters into contract with airport operator to use space to sell goods for three-year period.
Contract states exact amount of space and that the space must be located at any one of several boarding areas within the airport.
Airport operator can change location at any time; minimal costs to airport operator associated with doing so.
Does the contract contain a lease?
Identified asset?
Substantially all of the economic benefits?
Right to direct the use?
Substantive substitution right! no
n/a
n/a
The contract does not contain a lease.

21.   Solar farm (1/2) See next slide
Contract to purchase all electricity produced by new solar farm for 20 years; solar farm is explicitly mentioned in the contract; no substitution rights
Customer designed solar farm before it was constructed
Supplier is responsible for building solar farm to Customer’s specifications, and then operating it
Supplier will receive tax credits relating to construction/ownership of the solar farm, while Customer receives renewable energy credits
Relate to ownership
Relate to use
Does the contract contain a lease?
Identified asset?
Substantially all of the economic benefits?
Right to direct the use?  
See next slide

22.  Solar farm (2/2) predetermined n/a The contract contains a lease.
Contract to purchase all electricity produced by new solar farm for 20 years; solar farm is explicitly mentioned in the contract; no substitution rights
Customer designed solar farm before it was constructed
Supplier is responsible for building solar farm to Customer’s specifications, and then operating it
Supplier will receive tax credits relating to its construction /ownership of the solar farm, while Customer receives renewable energy credits
Right to direct the use?
How and for what purpose?
Customer operates the asset?
Customer has designed the asset?
predetermined
n/a 
The contract contains a lease.

23.    Retail unit The contract contains a lease.
Contract conveys exclusive use of explicitly specified retail unit
Supplier can require Customer to move to another unit; several similar units are available
Supplier benefits from relocating only if there is a new tenant that pays a certain rate; it is possible that these circumstances arise but not likely
Customer makes all decisions about use of retail unit throughout period of use
Payments: fixed component plus percentage of sales
Does the contract contain a lease?
Identified asset?
Substantially all of the economic benefits?
Right to direct the use?
Substitution right is not substantive!   
The contract contains a lease.

24. Network services n/a n/a no The contract does not contain a lease.
Customer enters into contract with Supplier for network services for 2 years; supplier supplies network services that meet a specified quality level.
Supplier installs and configures servers at Customer’s premises to supply services. Supplier determines speed/quality of data transportation and can reconfigure/replace servers when needed to continuously provide the network services.
Customer does not operate servers or make any significant decisions about their use.
Does the contract contain a lease?
Identified asset?
Substantially all of the economic benefits?
Right to direct the use?
n/a
n/a no
The contract does not contain a lease.

25. Recognition and measurement exemptions
Short-term leases
Lease term of 12 months or less (may include periods covered by options)
Accounting policy choice (by class of underlying assets)
Reassessment in case of modification or change in lease term
Only applicable for lessee
Low value assets
Assets with a value, when new, of USD 5,000 or less
Accounting policy choice (lease-by-lease basis)
Only applicable for lessee

26. Portfolio approach Lease contracts with similar characteristics and
No material effect
Portfolio approach permitted for lessee and lessor

27. Overview – what it’s all about!
Agenda
Overview – what it’s all about!
Definition of a lease
Lessee accounting

28. Lease payments made before or at commencement date
Lessee accounting
Right-of-use asset
Lease liability
Lease liability
Lease payments
Discount rate
Lease payments made before or at commencement date
Provision
Restoration costs
Initial direct costs

29. Lease payments during the lease term
Fixed payments +
Variable lease payments
See next slide +
Residual value guarantees
Expected payments lessee has to make +
Exercise price of a purchase option
the lessee is reasonably certain to exercise the option if +
Penalties for terminating
the lessee is reasonably certain to exercise the termination option if

30. Lessee accounting In-substance fixed payments Variable lease payments
dependent on ….
rate/index
other variable
e.g. inflation/ interest rate or market rental rates
e.g. passengers on a plane
e.g. payments made only if asset is proven capable of operating
Part of lease liability
Not part of lease liability
Part of lease liability

31. Lessee accounting
Change in index/rate used to calculate variable lease payments
Entity enters into 10-year lease contract
Annual lease payments of $50,000; payable at the beginning of the year
Lease payments increase every two years to reflect change in Consumer Price Index (CPI); at the commencement date CPI is 125
Commencement date
Beginning of second year CPI = 130
Beginning of third year CPI = 135
New lease payment: $54,000 ($50,000 × 135 / 125)
Lease liability reflects nine payments of CU 50,000
Lease liability remeasured to reflect eight payments of $54,000
No reassessment as the change has not affected payments
Cash flows change = Reassessment!

32. How do options affect lease payments?
Termination penalties
Exercise price of a purchase option
Extension/termination/purchase options affect the lease term
Contractual terms
Leasehold improvements
Market rates
“reasonably certain to exercise”
Importance of underlying asset

33. Subsequent measurement
Lease liability
Right-of-use asset
Interest expense
Lease payment
Depreciation

34. Question
Fact Pattern
Air Jam leases a plane for a term of five years.
The payments are as follows:
Fixed annual payment of GBP 5,000,000 each year covering 1,800 hours of operation
For each additional hour of operation the lessee must pay GBP 2,000; the lessee expects to use the plane for 250 hours each month (3,000 hours for the year)
Lease payments adjusted for changes in UK CPI after three years. Index is expect to increase by 10% during that time (i.e. the CPI currently is 100, after three years it is expected to be 110)

35. Question
Guaranteed value of plane after 3 years GBP 35,000,000 while the expected value is GBP 30,000,000
Customer can extend the lease term for another five years after initial period
Lease payments during the extension will remain unchanged
Identifying a new plane that is suitable for the airlines operations will result in significant costs
If the lease term is extended the residual value guarantee will be dispensed
What is the lease payment the lessee has to incorporate when calculating the lease liability?

36. Lease payments (annually) Variable lease payments
Debriefing
Lease payments (annually)
Fixed payments
GBP 5,
Payments depending on the use of the underlying asset are not taken into account
Variable lease payments
Variable payments for hours of operation exceeding 1,800
Adjustment for inflation

37. Debriefing
Lease term includes the extension period (lessee reasonably certain to exercise option)
Total lease payments
Payments during the non-cancelable period 
GBP 25,000,000 
Payments during the extension period
GBP 25,000,000
Residual value guarantees
GBP 50,000,000
Residual value guarantee will be dispensed if the lease term is extended

38. Overview
Lessor accounting stays substantially the same as under current guidance
Lessee recognises right-of-use asset and lease liability for almost all lease contracts
Exemptions for short-term leases and leases of low- value assets
Enhanced disclosure requirements
Effective date 1 January 2019
Comprehensive guidance on the defintion of a lease
Huge impact on KPI (debt/equity ratio; EBIT/EBITDA/ operating cash flow)
Earlier application permitted (together with IFRS 15)

39. Have a good flight!