1. The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation. International Financial Reporting Standards Leases May 2013

2. 2 Agenda Background Lessee accounting Lessor accounting Identifying a lease Other aspects

3. International Financial Reporting Standards The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation Background

4. 4 Why change accounting for leases? Lessee Most assets and liabilities are off- balance-sheet Insufficient information about operating leases Lessor Lack of transparency about residual values $1.25 trillion of off-balance sheet undiscounted operating lease commitments for US public companies * * Estimate according to the 2005 SEC report on off-balance sheet activities

5. How our proposals improve existing accounting 5 The proposals Existing accounting issues Most assets and liabilities are off balance sheet Insufficient information provided about operating leases Lack of transparency about residual values of equipment and vehicles Recognition of lease assets and liabilities for all leases of more than 12 months Enhanced disclosures Separately account for residual asset Enhanced disclosures about risk exposure to residual asset Greater transparency about lessee’s leverage and the assets used in its operations Greater transparency about residual values How the proposals improves the accounting Lessee Lessor

6. International Financial Reporting Standards The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation Lessee accounting model

7. Proposed right-of-use model 7 LessorLessee Right-of-use asset Lease payments

8. 8 Overview lessee accounting Balance sheet Recognition of assets and liabilities for leases over 12 months Income Statement Dual approach for recognition of lease expense Cash flow statement Dual model for recognition of cash payments

9. 9 Definition of an asset: A resource controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity. Definition of a liability: A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. Control over right-of-use asset Physical possession of (access to) leased asset Lessor cannot retrieve leased asset Unconditional obligation to pay Lessee cannot return leased asset (terminate lease) and avoid paying without breaching contract Recognition of assets and liabilities

10. Initial measurement 10 Right of use asset (at cost) Lease liability (present value of lease payments)

11. 11 Payments included in the lease liability Most excluded Fixed payments Residual value guarantees Discounted Optional payments Variable lease payments Short-term leases Fixed payments non-cancellable period Residual value guarantees expected amount Included

12. 12 Measurement simplifications Fixed payments Residual value guarantees Short-term leases Option to exclude leases of less than 12 months Variable lease payments Excluded if linked to sales or use Included only if payments linked to index or rate Options Excluded unless significant economic incentive to exercise option Optional payments Variable lease payments Short-term leases

13. 13 Overview lessee accounting Balance sheet Recognition of assets and liabilities for leases over 12 months Income Statement Dual approach for recognition of lease expense based on consumption of underlying asset Cash flow statement Dual model for recognition of cash payments

14. The consumption principle 14 Equipment Property (real estate) Start of leaseEnd of lease 5-year lease Asset consumption not more than insignificant part of asset consumed

15. Lease classification 15 Leases of equipment or vehicles are Type A leases unless: Lease term is insignificant relative to economic life of asset PV of lease payments is insignificant relative to FV of asset Leases of property (and and/or a building) are Type B leases unless: Lease term is major part of economic life of asset PV of lease payments is substantially all of FV of asset

16. Lessee accounting model 16 Most equipment/ vehicle leases ROU asset Lease liability Amortisation Interest Principal paid Interest paid Most property leases ROU asset Lease liability Single lease expense Cash paid Balance sheet Income statement Cash flow statement Type A Type B

17. Type AType B Balance sheet (year)0123123 ROU asset600400200-414215- Lease liability(600)(414)(215)-(414)(215)- Income statement (year)0123122 Operating expenses200 231 Finance expenses463217 Total lease expense246232216231 Lessee accounting–Example 17

18. Disclosures lessee Qualitative General description of leases Terms of: - variable lease payments -extension/termination options -residual value guarantees Restrictions and covenants Quantitative Reconciliation ROU asset by asset class* Reconciliation lease liability* Maturity analysis undiscounted cash flows for each of first 5 years plus total thereafter Judgements & Risks Nature and extent of risks arising from leases Significant assumptions and judgement* 18 * New disclosure compared to today for operating leases

19. International Financial Reporting Standards The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation Lessor accounting model

20. 20 Overview lessor accounting Balance sheet Dual approach for recognition of assets Income Statement Dual approach for recognition of lease income Cash flow statement Recognition of cash receipts within operating activities

21. Lessor accounting model 21 Most equipment/ vehicle leases Lease receivable Residual asset Interest income and any profit on the lease Cash received Most property leases Continue to report asset being leased Rental income Cash received Balance sheet Income statement Cash flow statement Type A Type B

22. Equipment Balance sheet (year)0123 Lease receivable600414215- Gross residual asset400431464500 Unearned profit(20) Net residual asset380411444480 Income statement (year)0123 Profit on lease30 Interest on receivable453216 Interest on residual asset313336 Total lease expense30766552 Example Type A lease 22

23. Disclosures lessor Qualitative General description of leases Terms of: -variable lease payments -extension/termination options -purchase options Quantitative Reconciliation: lease receivable and residual asset 1,2 Table of lease income 2 Maturity analysis undiscounted cash flows for each of first 5 years plus total thereafter Risk management for residual assets 1,2 Judgements & Risks Nature and extent of risks arising from leases Significant assumptions and judgement 2 23 1 For Type A leases only 2 New disclosure compared to today for operating leases

24. International Financial Reporting Standards The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation Identifying of a lease

25. Definition of a lease 25 Right to control the use of an identified asset No substantive right to substitute asset Decision-making authority over use of asset Receive benefits from use of asset Contract conveys the right to use an asset for a period of time in exchange for consideration

26. Multi-element contracts 26 * Lessor: allocate using revenue recognition guidance Allocation between lease and non-lease components based on stand-alone prices If stand-alone prices not available, lessee combines components and accounts for them as a single lease Allocation (lessee)* Contract contains a lease Each lease component is accounted for as a separate lease Separation

27. International Financial Reporting Standards The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation Other aspects

28. Sale and leaseback 28 Sale and leaseback? Use revenue recognition requirements to determine whether control of the asset has transferred to buyer no Accounted for as a financing arrangement seller continues to recognise the transferred asset and accounts for amounts received as financial liability buyer accounts for amounts paid as receivable Accounted for as sale and leaseback * seller accounts for sale and applies lessee accounting buyer accounts for purchase and applies lessor accounting Adjusted for current market rates yes Disclosures required: Terms and conditions of sale and leaseback any gains or losses arising from transaction

29. Transition 29 * Entity can choose to apply the new Leases standard retrospectively Use of hindsight No evaluation of initial direct costs for contracts before effective date Lessee: use ‘portfolio level’ discount rate calculated at effective date Reliefs available Modified approach based on information available at beginning of earliest comparative period Simplifications No requirement to make adjustments for leases currently classified as finance leases Carryover finance lease Modified retrospective approach *

30. Next steps 30 Revised ED- May 2013; Comment period ends- September 13, 2013 Outreach- May through September 2013 Redeliberations- beginning Q4 2013 Final standard and effective date- TBD

31. Thank you 31