1. IFRS 16 - Leases
Rosenswig McRae Thorpe LLP
Rosenswig McRae Thorpe LLP

2. Rosenswig McRae Thorpe LLP
IFRS 16 brings almost all leases, including leasing of real estate, onto the balance sheet.
Key performance metrics will be affected as assets and liabilities are increased and expenses become front-loaded.
Leasing clients will need to consider the financial statement impact of leases that are significantly different from today.
Rosenswig McRae Thorpe LLP

3. Rosenswig McRae Thorpe LLP
Agenda
IFRS 16
Overview
Accounting details
Transition
Example
Impact of changes
Takeaways for Company’s business
Rosenswig McRae Thorpe LLP

4. Rosenswig McRae Thorpe LLP
IFRS 16 - Overview
Elimination of operating lease classification for lessees
Effective for periods beginning on or after January 1, 2019
Replaces current lease standards (mainly IAS 17)
Increased transparency and comparability and removes the need for analysts to adjust for off-balance-sheet leases
Rosenswig McRae Thorpe LLP

5. Rosenswig McRae Thorpe LLP
IFRS 16 - Overview
Lessees have to recognize assets and liabilities for most leases; exceptions:
Lease term is 12 months or less
Underlying asset has a low value (<$5,000 for example)
Lessors can classify leases as operating or finance (fairly similar to current standards)
Rosenswig McRae Thorpe LLP

6. Accounting for Lessees
Initial Recognition
Record an asset (right-of-use asset)
= Lease Liability + Direct Costs + Any adjustments
Record a liability (lease obligation)
= Present value of lease payments over the lease term
Rosenswig McRae Thorpe LLP

7. Accounting for Lessees
Leases: a guide to IFRS 16. Deloitte. June 2016
Rosenswig McRae Thorpe LLP

8. Accounting for Lessees
Subsequent Measurement
Asset
Use the Cost Model – record it at cost less accumulated depreciation less accumulated impairment
Exception for Investment Properties that are recorded at fair value
Liability
Amortized using effective interest method
Rosenswig McRae Thorpe LLP

9. Accounting for Lessors
Fairly similar to IAS 17 as they continue to classify the lease as either an operating lease or a finance lease
Application of IFRS could result in different accounting treatment between lessor and lessee
Rosenswig McRae Thorpe LLP

10. Rosenswig McRae Thorpe LLP
Transition
TWO OPTIONS FOR THE LESSEE:
1) Apply IFRS 16 to all contracts that potentially contain leases
Higher cost and increased comparability OR
2) Apply IFRS 16 to only to contracts signed after adoption
Lower cost and reduced comparability
Rosenswig McRae Thorpe LLP

11. Rosenswig McRae Thorpe LLP
Transition
If applied to all contracts, there is a choice between:
1) Apply with and state full retrospective effect
Higher cost and increased comparability
2) Do not restate comparative information and recognise the cumulative effect as an adjustment to opening equity at the date of adoption
Lower cost and reduced comparability
Rosenswig McRae Thorpe LLP

12. Rosenswig McRae Thorpe LLP
EXAMPLE
The lessee enters into a 10 year lease for a floor of a building, with the option to extend for 5 more years.
Lease payments are $50,000 during the initial term of the lease and $55,000 during the optional period.
All payments are payable at the beginning of the period.
The lessee pays $5,000 to a real estate agent for commission for arranging the lease and $15,000 to a former tenant that was previously occupying the floor.
The lessor, as an incentive, agrees to reimburse the lessee for the $5,000 paid for commission and also pay for the lessee's leasehold improvements of $7,000
Rosenswig McRae Thorpe LLP

13. Rosenswig McRae Thorpe LLP
EXAMPLE
At the commencement date, the lessee concludes that it is not reasonably certain to exercise the option to extend the lease (making the lease term 10 years)
The interest rate implicit in the lease cannot be determined.
The company’s borrowing rate is 5%. This is the rate that the company could borrow funds to get an asset of the same nature for the same term.
Rosenswig McRae Thorpe LLP

14. Rosenswig McRae Thorpe LLP
EXAMPLE
Initial Recognition (IFRS 16)
Dr. Right-of-use asset $405,391*
Cr. Lease Liability $355,391
Cr. Cash (payment
for the 1st year) $50,000
To record the present value of the lease payments.
Dr. Right-of-use asset $20,000
Cr. Cash $20,000
To record direct costs
Dr. Cash $5, Cr. Right-of-use asset $5,000
To record lease incentive
Initial Recognition (IAS 17)
No asset recorded on the books
Dr. Expense $20,000
Cr. Cash $20,000
To record direct costs
Dr. Cash $5, Cr. Lease Incentive $5,000
To record lease incentive
*present value of 10 payments of $50,000 made at the beginning of the year, discounted at 5%
Rosenswig McRae Thorpe LLP

15. Rosenswig McRae Thorpe LLP
EXAMPLE
Subsequent Measurement: (IFRS 16)
Dr. Amortization $42,039* Cr. Accumulated Depreciation $42,039
To record depreciation
Dr. Lease Liability $50, Cr. Cash $50,000
To record payment of lease liability
Dr. Interest expense $17,770** Cr. Lease Liability $17,770
To record interest expense on lease liability
Subsequent Measurement: (IAS 17)
No depreciation recorded.
Dr. Lease Expense $49,500 Dr. Lease Incentive $ Cr. Cash $50,000
To record payment of lease liability
*Value of the asset is $420,391 initially – depreciated straight line over 10 years
**Value of the lease liability is $355,391 initially – recognize interest at 5% of remaining balance
Rosenswig McRae Thorpe LLP

16. Rosenswig McRae Thorpe LLP
IMPACT
Rosenswig McRae Thorpe LLP

17. Rosenswig McRae Thorpe LLP
IMPACT
Rosenswig McRae Thorpe LLP

18. Rosenswig McRae Thorpe LLP
IMPACT
Rosenswig McRae Thorpe LLP

19. Impact of Changes - Basics
Financial Statement
Impact
Balance Sheet
Higher Assets and higher liabilities
Income Statement
Front-loading of expenses
Cash Flow
Shift operating cash flows to financing cash flows (presentation only)
Note: the impact described above and in the following slides apply to lessees who accounted for a particular lease as an operating lease under the current standards
Rosenswig McRae Thorpe LLP

20. Impact of Changes – Balance Sheet
Higher assets (non-current)
Higher liabilities (split between current and non-current); lessees appear more leveraged as leases are brought onto the balance sheet
Ratios
Working capital ratios weakened by current portion of lease obligation
Capital turnover ratios are weakened by increased assets
Rosenswig McRae Thorpe LLP

21. Impact of Changes – Income Statement
IFRS 16
Current standards
Amortization expense on asset +
Interest expense on liability
Rent expense straight-lined over the lease term
In earlier years, the expense under IFRS 16 will exceed the expense that would have otherwise be recognized under current standards (front- loading expenses)
Transaction costs capitalized and amortized over the lease term rather than fully expensed in current period (reduces front-loading for year 1)
Rosenswig McRae Thorpe LLP

22. Impact of Changes – Income Statement
Lower net income in earlier years due to the frontloading effect
Higher EBITDA; lease expense is now classified as interest and amortization, which are below-the-line items for EBITDA
Generally a unfavourable impact on interest coverage ratios in earlier years
Rosenswig McRae Thorpe LLP

23. Impact of Changes – Lease vs. Buy
Much more consistent financial statement impact
Asset recognized in both scenarios, however:
Cost of asset could be very different if market price is not consistent with PV of lease payments
Liability recognized in both scenarios, however:
Lease obligation shows higher leverage than a mortgage on a purchased asset
Decision should now be focused on economic factors rather than FS presentation considerations
Rosenswig McRae Thorpe LLP

24. Impact of Changes – Sale and Leaseback
Sale and lease back arrangements no longer effective as an off- balance-sheet financing structure because leases are brought back onto the balance sheet
Could reduce the volume of sale and leaseback transactions
Rosenswig McRae Thorpe LLP

25. Take-aways for Company’s business
Larger, public companies will be forced to apply IFRS 16, but small businesses currently do not have to apply these standards and there are no equivalent standard in the pipeline for small businesses that apply Accounting Standard for Private Enterprises (ASPE) instead of IFRS
Expect a reduction in appetite for sale-and-leaseback transactions from clients who apply IFRS
Rosenswig McRae Thorpe LLP

26. Take-aways for Company’s business
For clients who apply IFRS 16, they will likely prefer to arrive at a lower lease liability to be recognized on their books in one of these two ways:
Reduce the accounting lease term by adding some uncertainty to the renewal options;
Shift some fixed payments to become variable payments; true variable payments are not included in the lease obligation
Rosenswig McRae Thorpe LLP

27. Rosenswig McRae Thorpe LLP
Questions?
Further questions can be sent to:
Jeff McRae:
Yale Ren:
Amrita Siva:
Rosenswig McRae Thorpe LLP
Chartered Professional Accountants
Associated Worldwide with CPA Associates International, Inc.
Michael Rosenswig
Jeff McRae
Lori Thorpe
Tony Rosso
Lorraine Varga
Rosenswig McRae Thorpe LLP