1. Accounting for Leases: CAM Focus
November 2017

2. Your presenter today
Lara Truman Executive Director Financial Accounting Advisory Services Ph:

3. Current status of the lease accounting in New Zealand
Webcast title
8/20/2019
Agenda
Current status of the lease accounting in New Zealand
Future developments / proposals for lease accounting
Practical considerations

4. Lease Accounting

5. For now, continue to use PBE IPSAS 13 but this will change!
Leases in the PBE Space
For-profit entities will be required to apply NZ IFRS 16 for periods beginning 1 January 2019
PBEs currently apply PBE IPSAS 13 Leases (based on NZ IAS 17)
Operating vs financing model for accounting for leases
Very different accounting outcomes based on bright-lines
In Nov 2016, NZASB decided not to adopt NZ IFRS 16 into PBE Standards
NZ IFRS 9 has been included in PBE standards to assist with the mixed group issue but NZ IFRS 16 wont be
NZASB will continue to monitor the situation at the IPSASB
For now, continue to use PBE IPSAS 13 but this will change!

6. Leases in the PBE Space
The IPSASB* has a project to draft a new standard on leases
Expected to issue an ED end of 2017, early 2018
Discussions to date indicate the standard will be similar to IFRS 16, adapted for the public sector
Lessee accounting is likely to be similar to NZ IFRS 16
However, lessor accounting is not expected to be aligned with NZ IFRS 16 – IPSASB preferred a symmetrical approach to lessee accounting
Control based model or residual asset approach?
NZASB** will need to consider this further when developing its version of the IPSASB standard
*IPSASB – International Public Sector Accounting Standards Board
**NZASB – New Zealand Accounting Standards Board

7. Leases in the PBE Space
IPSASB considerations to date of specific public sector issues relate to peppercorn rentals (concessionary rentals)
No guidance currently – PBE IPSAS 13 states lower of FV and present value of minimum lease payments
This is likely to lead to no recognition if lease payments are for example $1
Proposals - Measure concessionary lease at fair value and subsidised portion accounted for similar to concessionary loan
IPSAS 23 – non-exchange revenue – revenue or deferred revenue if conditions attached.
Todays discussion focusses on lessee accounting and the NZ IFRS 16 requirements as a starting point

8. Key changes primarily affecting lessees
Webcast title
8/20/2019
NZ IFRS 16 Leases
Key changes primarily affecting lessees
Recognise assets and liabilities for most leases
New presentation and disclosures
There is an identified asset
What is a Lease
The contract conveys the right to control the use of the identified asset for a period of time in exchange for consideration

9. IFRS 16 Leases Scope and definition of a lease
Webcast title
8/20/2019
IFRS 16 Leases Scope and definition of a lease
The new standard applies to leases of all assets except:
Leases to explore for or use non-regenerative resources
Leases of biological assets
Service concession arrangements
Licences of intellectual property granted by a lessor
Rights held by a lessee under certain licensing agreements (e.g., films)
Some exemptions apply regarding “low value” items and short-term leases
Overview of IFRS 16 Leases
January 2016

10. NZ IFRS 16 Leases Separating components of a lease
Lease and non-lease components are accounted for separately
Each lease component – apply IFRS 16
Each non-lease component – apply other standards
Practical expedient:
Lessees can make a policy election (by underlying asset class) to account for lease and non-lease components as lease components
Allocate consideration to lease and non-lease components:
Lessees – on a relative stand-alone price basis (unless the practical expedient is elected)
Overview of IFRS 16 Leases
January 2016

11. IFRS 16 Leases Lease term and lease payments
Webcast title
8/20/2019
IFRS 16 Leases Lease term and lease payments
Lease term includes any non-cancellable periods and ‘reasonably certain’ optional periods
Lease payments
Fixed payments
Purchase options*
(exercise price)
Residual value guarantees – amounts expected to be payable
(lessees only)
Termination option penalties**
Variable lease payments that depend on an index or rate
* Include only if reasonably certain of exercise.
** Include unless reasonably certain not to be exercised.

12. NZ IFRS 16 Leases Lessee accounting – recognition and measurement
Right-of-use (ROU) asset
Lease liability
Initial recognition
Measure at present value of lease payments using interest rate imputed in the lease or lessee’s incremental borrowing rate
Subsequent measurement
Cost less accumulated depreciation/amortisation; OR
Fair value of ROU (under NZ IAS 16 Property, Plant and Equipment, NZ IAS 38 Intangible Assets or NZ IAS 40 Investment Property)
Effective interest rate method:
Accrete interest expense using a discount rate determined at lease commencement
Reduce lease liability by payments made
Profit and loss
Depreciation expense (generally, straight-line over the shorter of useful life or lease term); OR
Change in fair value of investment property
Interest expense (annual charge is reducing over the lease term)
Initial measurement of the ROU asset would also include the lessee’s initial direct costs and prepayments made to the lessor less lease incentives received from the lessor, if any.
As long as a reassessment and a change in the discount rate have not occurred.

13. NZ IFRS 16 Leases Example Fact pattern 5 year lease of equipment
Lessee makes annual payments of $10,000
Discount rate 7.5% p.a.
PV of annual lease payments is $40,460
Depreciation recognised on a straight-line basis over the life of the lease
Overview of IFRS 16 Leases
January 2016

14. NZ IFRS 16 Leases An example
Year 1
Year 2
Year 3
Year 4
Year 5
Total
PBE IPSAS 13
Lease expense
10,000
50,000
Total assets -
Total liabilities
NZ IFRS 16
Interest expense
3,034
2,512
1,950
1,347
697
9,540
Depreciation
8,092
40,460
Total Expense
11,126
10,604
10,042
9,439
8,789
ROU asset
32,368
24,276
16,184
Lease liability
33,494
26,006
17,956
9,303
Impact
Profit before tax impact
(1,126)
(604)
(42)
561
1,211
EBITDA impact

15. NZ IFRS 16 Leases An example
Total expense
Annual payment allocation

16. IFRS 16 Leases Lessee accounting – Presentation
Balance sheet
Income statement
Statement of cash flows
ROU asset:
Separately from other assets (e.g., owned assets), or with corresponding underlying assets and disclose line items containing ROU assets
Depreciation expense (separate from interest expense)
Principal payments within financing activities
Lease liability:
Separately from other liabilities, or together with other liabilities and disclose line items containing lease liabilities
Interest expense (separate from depreciation expense)
Interest payments consistent with policy election in IAS 7 Statement of Cash Flows
Present or disclose:
Variable lease expense
Short-term lease expense
Low-value asset lease expense
Lease payments for low-value assets, short-term leases and variable lease payments (not included in the lease liability) within operating activities
Supplemental non-cash disclosure of new leases
Overview of IFRS 16 Leases
January 2016

17. Recognition and measurement Lessee accounting – exemptions
Small value items
Small value not defined (proxy: US$5,000)
No need to combine items (e.g. 100 laptops)
Short-term leases
Leases with initial lease term shorter than 12 months
Renewals not considered, unless reasonably certain

18. IFRS 16 Leases Disclosure
Webcast title
8/20/2019
IFRS 16 Leases Disclosure
New disclosures for lessees include:
Depreciation of ROU assets by class of underlying asset
Interest on lease liabilities
Expenses for short-term leases and leases of low-value assets
Sublease income
Total cash outflows
A single location; quantitative disclosures in tabular format
Overview of IFRS 16 Leases
January 2016

19. Practical Considerations

20. Lease accounting change journey IT environment challenges
Systems architecture
Data
Lease contracts may not be maintained in a central repository
Existing data structures may not have sufficient depth to support all critical data elements (e.g., discount rate, separation of lease and non-lease components and information required for disclosures) and may not allow documentation of management estimates and assumptions
Applications
Existing lease management systems may require review and modification because they lack computational ability to:
Calculate the balance sheet and income statement adjustments that vary based on whether the lease is classified as a finance lease or operating lease
Determine the impact of lease renewal, termination or purchase options, as well as reassessment requirements
Manage differences between US GAAP and IFRS requirements
General ledger and chart of accounts may require enhancement to accommodate new asset and liability classifications and reporting requirements
Reports
Parallel reporting may be necessary for comparative periods presented upon transition
Financial reports may need to be enhanced to reflect presentation and disclosure requirements
Management reports and key performance indicators may need to be modified to reflect new operating metrics

21. Impact on NZ IFRS 16 for Asset Managers
Do you have many operating leases now?
These will be recognised on balance sheet
Decisions in the future re lease v buy will change
Terms of the lease can impact recognition such as variable payments and the term of the lease
Key asset management metrics
Property Plant and Equipment per EFTS
Return on net assets ratio
Facilities burden ratio
Revenue to net assets

22. Impact of NZ IFRS 16 for Asset Managers
Profit-based KPIs and bonus arrangements
Debt ratios and covenants
Tax impact (for for-profit subs);
Impact on financial reporting obligations
Transitional provisions – choices to make
Modified less onerous but will not preserve trend data

23. Summary

24. Summary
PBEs are currently required to apply PBE IPSAS 13 for leases – operating vs finance distinction
For-profits will move to NZ IFRS 16 on 1 Jan 2019
IPSASB is completing a project to implement IFRS 16 into IPSAS
This will be included in PBE Standards in the future
General requirements is that all leases are on balance sheet
Impact of the expected changes will be significant on the balance sheet and profit or loss.
Important to understand the expected changes now as they will impact decisions being made today!

25. Questions?

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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.
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