IFRS update 2016
Transcript of IFRS update 2016
2
Agenda IFRS training
Introduction
IFRS 16 Leases
IFRS 15 Revenue from Contracts with Customers
Amendments in 2016
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IFRS 16 Leases
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The $3 trillion standard
4
“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
April 2008
“Listed companies are
estimated to have
US$3.3 trillion of lease
commitments, over 85%
of which do not appear
on their balance
sheets…”
Hans Hoogervorst
January 2016
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Most companies lease assets
Why is this important?
Under IFRS 16, lessees will bring leases on balance sheet.
New lease definition becomes the new on/off-balance sheet test.
Changes many financial ratios.
Your stakeholders/investors will want to understand the
impact on your business.
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1. Overview and impact
2. The critical definition
3. Lessee accounting
4. Lessor accounting
5. Other topics
5.1 Sale and Leaseback transactions
5.2 Subleases
5.3 Investment Property
5.4 Lease modifications
6. Disclosures
7. Effective date and transition
8. Your next steps
9. Tax and restructuring impacts
AgendaKPMG
Insights
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Overview and Impact
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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
JANUARY
2019
JULY 2006
Discussion Paper
Issued
Second Exposure
Draft IssuedProject added to Boards’
agendas
Final standard
issued
Q1 2016MARCH 2009 MAY 2013AUGUST 2010
First Exposure Draft
IssuedEffective
date
31 DECEMBER
2019
First annual financial
statements under
IFRS 16
…but
Why ?
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Lessees face major changes
Balance sheet
Asset
Liability
= ‘Right-of-use’ of underlying asset
= Obligation to make lease payments
Leases ‘On Balance Sheet’
P&L
Depreciation
+ Interest
= Front-loaded total lease expense
Lease expense
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Sir David Tweedie’s aircraft
10
Five year lease of an aircraft
CU1,000,000 per annum due at 31 Dec
No renewal no purchase option
Discount rate: 7%
Aircraft useful life: 20 years
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Journal entries
11
1 January 20X1 Debit (CU) Credit (CU)
ROU asset (present value of 5 x CU1,000,000 @ 7%) 4,100,000
Lease liability 4,100,000
31 December 20X1
Depreciation expense (CU4,100,000/5) 820,000
ROU asset 820,000
Interest expense (CU4,100,000 * 7%) 287,000
Lease liability 713,000
Cash 1,000,000
Total P&L expense 1,107,000
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70,236 70,236 70,236 70,236 70,236 70,236 70,236 70,236 70,236 70,236
49,165 45,607 41,799 37,725 33,366 28,701 23,710 18,370 12,656 6,542
119,401 115,842
112,035 107,961
103,602 98,937 93,946
88,606 82,892
76,778
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
1 2 3 4 5 6 7 8 9 10
CO
MP
AN
Y’S
E
XP
EN
SE
IN
$
YEAR
LEASE ACCOUNTING P&L IMPACT
Depreciation expense under new standard
Interest expense under new standard
RENTAL
EXPENSE
UNDER
CURRENT
STANDARD
ASSUMPTIONS:
1. 10 YEAR LEASE
2. RENT OF $100,000 PER
ANNUM
3. DISCOUNT RATE OF 7%
Impact on P&L – IFRS 16 vs IAS 17
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Computation – LiabilityBalance at beginning
of the yearInterest
Payment
(deduction)
Balance at end of
the year
T0 $702,358 $0 $0 $702,358
T1 $702,358 $49,165 -$100,000 $651,523
T2 $651,523 $45,607 -$100,000 $597,130
T3 $597,130 $41,799 -$100,000 $538,929
T4 $538,929 $37,725 -$100,000 $476,654
T5 $476,654 $33,366 -$100,000 $410,020
T6 $410,020 $28,701 -$100,000 $338,721
T7 $338,721 $23,710 -$100,000 $262,432
T8 $262,432 $18,370 -$100,000 $180,802
T9 $180,802 $12,656 -$100,000 $93,458
T10 $93,458 $6,542 -$100,000 ($0)
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Balance sheet under current
IAS 17Inception Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Assets - - - - - - - - - -
Liabilities - - - - - - - - - -
Balance sheet under IFRS 16
Right of use asset $702,358 $632,122 $561,887 $491,651 $421,415 $351,179 $280,943 $210,707 $140,472 $70,236 $0
Lease liability ($702,358) ($651,523) ($597,130) ($538,929) ($476,654) ($410,020) ($338,721) ($262,432) ($180,802) ($93,458) $0
Net equity $0 ($19,401) ($35,243) ($47,278) ($55,239) ($58,841) ($57,778) ($51,724) ($40,330) ($23,222) $0
Presentation Balance Sheet
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Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Income statement under IAS 17
Operating lease expense 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000
Income statement under IFRS 16
Amortization expense $70,236 $70,236 $70,236 $70,236 $70,236 $70,236 $70,236 $70,236 $70,236 $70,236
Interest expense $49,165 $45,607 $41,799 $37,725 $33,366 $28,701 $23,710 $18,370 $12,656 $6,542
Total expense $119,401 $115,842 $112,035 $107,961 $103,602 $98,937 $93,946 $88,606 $82,892 $76,778
Presentation – Income statement
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Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Cash flows as per IAS 17
Operating cash flows(100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000)
Cash flows under IFRS 16
Cash flow from financing activities(50,835) (54,393) (58,201) (62,275) (66,634) (71,299) (76,290) (81,630) (87,344) (93,458)
Cash flow from financing/operating(49,165) (45,607) (41,799) (37,725) (33,366) (28,701) (23,710) (18,370) (12,656) (6,542)
Total cash outflow(100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000)
Presentation – Cash flow statement
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Balance sheet under current IAS 17 Inception Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Assets - - - - - - - - - -
Liabilities - - - - - - - - - -
Balance sheet under IFRS 16
Right of use asset $702,358 $632,122 $561,887 $491,651 $421,415 $351,179 $280,943 $210,707 $140,472 $70,236 $0
Lease liability ($702,358) ($651,523) ($597,130) ($538,929) ($476,654) ($410,020) ($338,721) ($262,432) ($180,802) ($93,458) $0
Net equity $0 ($19,401) ($35,243) ($47,278) ($55,239) ($58,841) ($57,778) ($51,724) ($40,330) ($23,222) $0
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Income statement under IAS 17
Operating lease expense 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000
Income statement under IFRS 16
Amortization expense $70,236 $70,236 $70,236 $70,236 $70,236 $70,236 $70,236 $70,236 $70,236 $70,236
Interest expense $49,165 $45,607 $41,799 $37,725 $33,366 $28,701 $23,710 $18,370 $12,656 $6,542
Total expense $119,401 $115,842 $112,035 $107,961 $103,602 $98,937 $93,946 $88,606 $82,892 $76,778
Difference (19,401) (15,842) (12,035) (7,961) (3,602) 1,063 6,054 11,394 17,108 23,222
Presentation Summary
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Impact on balance sheet
Companies with operating
leases will appear to be more
asset-rich, but also more
heavily indebted
Asset Liability
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Total lease expense will be
front-loaded even when cash
rentals are constant
Impact on profit/loss
Depreciation Interest
Cash rental payments
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Impact on financial ratios
GearingEBITDA
EPS
(in early years) Net assets
Interest cover
Asset turnover
Total assets
RatiosProfit/loss Balance sheet
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Key impacts
New estimates
and judgments
Balance sheet
volatility
Changes in contract
terms and business
practices
New systems and
processes
Some impacts cannot
yet be quantified
Transition
considerations
Communication with
stakeholders will require
careful consideration
Identifying all lease
agreements and
extracting lease data
Changes in financial
metrics
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Industry impacts in the UAE
Schools
BanksAirlines
Power and Utilities Shipping & logistics
Retail
All industries, but especially:
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The critical definition
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OFF
Lease definition [1/2]
Current standard
New standard
Operating
lease
Service
Finance
lease
Lease
The new on/off-balance sheet test for lessees – a key judgement area
ON
Lease
classification
test
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A contract is, or contains, a
lease if the contract conveys
the right to control the use of
an identified asset
Lease definition [2/2]
Identified assets?
Lessee obtains the economic
benefits?
Lessee directs the use?
Contract is or contains a lease
Contract does
not contain
a lease
Yes
Yes
Yes
No
No
No
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The new definition increases
focus on who controls the
asset and may change which
contracts are leases
Lease definition – Control
?Lease
Not a lease
Expect
changes in
definition
from current
practice
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Example: Supply contract
27
Manufacturer S5-year contract
Contract specifies using plant P to supply components. Plant P
S will operate the plant and charge a cost plus price to B.
There is no prohibition to sell to other customers and it is remote that other customers will take any of the production.
Company B
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Example: Supply contract solution
28
IFRIC 4 ContractSpecific
assetRight to
useLease+ + =
IFRS 16 ContractIdentified
asset
Substantially all of the economic benefits
Directing right to
useLease+ + + =
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Comparing IFRS 16 and IFRIC 4
29
IFRIC 4
IFRS 16
Contract Asset
Operating asset or controlling access & > insignificant amount of output
orsubstantially all of the output and specific pricing
Substantially all of the economic benefits &directing the right of use
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Capacity portions
30
Physically distinctNot physically distinct:
Substantially all of total capacity?
Can be identified asset No identified asset
Yes No
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Lease definition – Identified assets
Identified assets?
Explicitly specified
Implicitly specified
Lessor has practical
ability to substitute the
asset
Lessor benefits
economically from
substituting the asset
and
or
However…
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Example
Kiosk space in a Mall
Leasing of fiber optic cable
Reservation of bus seat
Key tenant
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Example - Substantive substitution rightsCompany L, a lessee enters into a five year contract with a freight carrier (Lessor M)
to transport a specified quantity of goods.
M uses rail cars of a particular specification, and has a large pool of similar rail cars that can be used to fulfil the
requirements of the contract.
The rail cars and engines are stored at M’s premises when they are not being used to transport goods. Costs
associated with substituting the rail cars are minimal for M.
In this case because the rail cars are stored at M’s premises, it has a large pool of similar rail cars and
substitution costs are minimal, the benefits to M of substituting the rail car would exceed the costs of
substituting the cars. Therefore, M’s substitution rights are substantive and the arrangement does not contain a
lease.
Is there a specific asset?
Are the substitution rights substantive?
How could this transaction be a lease?
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Lease definition – Economic benefits
A company assesses whether it has the rights to:
obtain substantially all of the
economic benefits from use of the
identified asset throughout the
period of use
direct the use of the
identified asset
and
‘economic benefits’ = Primary output, by products and other economic benefits that could be realized
commercially
Identified assets?
Lessee obtains the
economic benefits?
Lessee directs the use?
Contract is or contains a
lease
Economic benefits
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+
=
25-year contract for
customised solar
panel output.
Supplier receives
renewable energy
credits.
2-years jet charter.
Share access and
use with another
party.
Car hire contract.
Limited to 20,000
miles per year and
inside country X.
Retail store
contract.
Rental = fixed
amount + 20% of
revenue.
Office contract.
Tenant sublets
25% of space.
Primary output
Other benefits
Substantially all
economic benefits
n/a n/a n/a
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Lease definition – Right to direct the use
Who takes the ‘how and what purpose’ decisions?
Customer Predetermined Supplier
Further analysis is
required
Contract is or contains
a lease
Contract does not
contain a lease
customer has a right to
operate the asset –
without the lessor’s
intervention
customer designed the
asset in a way that
predetermines how and
for what purpose
or
Identified assets?
Lessee obtains the
economic benefits?
Lessee directs the use?
Contract is or contains a
lease
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Example - Right to direct the use• Customer (C) enters into a contract with a manufacturer (M) to purchase a particular type, quality and quantity of
shirts for a three-year period. The type, quality and quantity of shirts are specified in the contract.
• M has only one factory that can meet the needs of C. M is unable to supply the shirts from another factory or
source the shirts from a third party supplier. The capacity of the factory exceeds the output for which C has
contracted (ie C has not contracted for substantially all of the capacity of the factory).
• M makes all decisions about the operations of the factory, including the production level at which to run the
factory and which customer contracts to fulfil with the output of the factory that is not used to fulfil C’s contract.
Is there an identified asset?
Is there a right of control of the use of the factory?
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Example - Right to direct the use (cont’d) The contract does not contain a lease.
The factory is an identified asset. The factory is implicitly specified because M can fulfil the contract only
through the use of this asset.
C does not control the use of the factory because it does not have the right to obtain substantially all of the
economic benefits from use of the factory.
C also does not control the use of the factory because it does not have the right to direct the use of the factory.
C does not have the right to direct how and for what purpose the factory is used during the three-year period of
use. C’s rights are limited to specifying output from the factory in the contract with M. C has the same rights
regarding the use of the factory as other customers purchasing shirts from the factory. M has the right to direct
the use of the factory because M can decide how and for what purpose the factory is used (ie M has the right
to decide the production level at which to run the factory and which customer contracts to fulfil with the output
produced).
Either the fact that C does not have the right to obtain substantially all of the economic benefits from use of the
factory, or that C does not have the right to direct the use of the factory, would be sufficient in isolation to
conclude that C does not control the use of the factory.
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Example - Right to direct the use• R contracts with S, a ship owner, for the transport of cargo from Dubai to Jeddah on an identified ship.
• The contract details the cargo to be transported on the ship and the dates of pick-up and delivery.
• The cargo will occupy substantially all of the capacity of the ship.
• S operates and maintains the ship and is responsible for the safe passage of the cargo on board the ship.
• R is prohibited from hiring another operator for the ship during the term of the contract or operating the ship
itself.
R does not have the right to control the use of the ship because it does not have the right to direct its use.
How and for what purpose the ship is used – i.e. the journey from Dubai to Jeddah transporting specified cargo
– is predetermined in the contract.
R does not have the right to operate the ship and did not design the ship in a way that predetermined how and
for what purpose it would be used.
R has the same rights regarding the use of the ship as if it were only one of many customers.
Therefore, the contract does not contain a lease.
Does R direct the right to use the asset?
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• Customer T enters into a five-year contract with Company U, a ship owner, for the use of an identified ship.
• T decides whether and what cargo will be transported, and when and to which ports the ship will sail throughout
the period of use, subject to restrictions specified in the contract.
• These restrictions prevent T from sailing the ship into waters at a high risk of piracy or carrying explosive
materials as cargo.
• U operates and maintains the ship, and is responsible for safe passage.
T has the right to direct the use of the ship.
The contractual restrictions are protective rights that protect U’s investment in the ship and its personnel.
In the scope of its right of use, T determines how and for what purpose the ship is used throughout the five-
year period because it decides whether, where and when the ship sails, as well as the cargo that it will
transport.
T has the right to change these decisions throughout the period of use.
Therefore, the contract contains a lease.
Does T direct the right to use the asset?
Example - Right to direct the use
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Right of use – Some insights
Some IAS 17 leases will not qualify as leases under IFRS 16
Under IAS 17, an arrangement could be a lease when the customer obtains substantially all of the output or other utility
even if the customer does not control the asset.
Under IFRS 16, a lease can only exist if the customer has BOTH the right to control the use of the identified asset and
obtain substantially all of the economic benefits from use of the asset.
When the ‘how and what’ decisions are predetermined, the ability to control the minor day-to-day operations may result
in a lease.
Protective rights usually define the rights but do not in isolation prevent the lessee’s control.
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Example - Protective rights
• Lessee L enters into a two-year contract with Lessor M, an aircraft owner, for the use of an identified aircraft.
• The contract details the interior and exterior specifications for the aircraft. There are contractual and legal
restrictions in the contract on where the aircraft can fly.
• Subject to these restrictions, L determines where and when the aircraft will fly, and which passengers and
cargo will be transported on the aircraft. M is responsible for operating the aircraft, using its own crew.
The restrictions on where the aircraft can fly define the scope of L’s right to use the aircraft. In the scope of its
right of use, L determines how and for what purpose the aircraft is used throughout the two-year period of use
because it decides whether, where and when the aircraft travels, as well as the passengers and cargo that it
will transport.
L has the right to change these decisions throughout the period of use.
The contractual and legal restrictions on where the aircraft can fly are protective rights and do not prevent L
from having the right to direct the use of the asset.
Does L direct the right to use the asset?
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Lease definition – Exemptions
Two major optional exemptions make the standard easier to apply
Leases of low
value items
Short term
leases
≤ 12 months ≤ USD 5,000 (suggested)
Election by class
of assets
Election on lease by lease basis
When exemption is applied, recognize the expense on a straight line basis over the lease term.
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Example – Exemption• Lessee L enters into a 10-year lease of a machine to be used in manufacturing parts for a plane that it expects to
remain popular with consumers until it completes development and testing of an improved model.
• The cost to install the machine in L’s manufacturing facility is not significant. L and Lessor M each have the right
to terminate the lease without a penalty on each anniversary of the lease commencement date.
The lease term consists of a one-year non-cancellable period because both L and M have a substantive
termination right – both can terminate the lease without penalty – and the cost to install the machine in L’s
manufacturing facility is not significant.
As a result, the lease qualifies for the short-term lease exemption.
Short-term lease exemption applicable?
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Example – ExemptionLessee B is in the pharmaceutical manufacturing and distribution industry and has the following leases:
leases of real estate: both office building and warehouse;
leases of office furniture;
leases of company cars, both for sales personnel and for senior management and of varying quality,
specification and value;
leases of trucks and vans used for delivery; and
leases of IT equipment such as laptops.
B determines that the leases of office furniture and laptops qualify for the recognition exemption on the basis
that the underlying assets, when they are new, are individually of low value.
B elects to apply the exemption to these leases. As a result, it applies the recognition and measurement
requirements in IFRS 16 to its leases of real estate, company cars, trucks and vans.
Is low value lease exemption applicable?
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Lease and non-lease components [1/3]
If a contract is, or contains, a lease, then the company accounts for each separate lease
component, separately from non-lease components.
Step1: Identify the
components
Step 2: Account for the
components
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Lease and non-lease components [2/3]
Separate components Combine components
Can the customer benefit from the
using the underlying asset either on
its own or together with other
resources that are readily available?
Is the asset neither highly dependent
on, nor highly inter-related with, the
other assets in the contract?+
Yes No
A company considers the right to use an underlying asset as a separate lease component if
it meets the following criteria:
Step1: Identify the
components
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Lease and non-lease components [3/3]
Step 2: Account for
the components
Lessee Lessor
Observable stand-alone
price for each component
Unless practical expedient
is elected, separate and
allocate based on the
relative stand-alone price
Always separate and
allocate following the IFRS
15 approach
No observable stand-alone
price for some or all
components
Maximize the use of
observable information
Taxes, insurance on the
property and admin costs
Activities that do not transfer a good or service to the
lessee are not components in a contract
Practical expedient Combine lease and any
associated non-lease
components and account
for them as lease
components
N/A
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Example - Lease and non lease components• Lessee L enters into a five-year contract with Lessor M to use an operating oil rig.
• The contract includes maintenance service provided by M and M obtains its own insurance for the oil rig.
• Annual payments are 2,000 (300 relate to maintenance services and 50 to insurance costs).
• L is able to determine that similar maintenance services and insurance costs are offered by third parties for 400
and 50 a year, respectively.
• L is unable to find an observable stand-alone rental amount for a similar oil rig because none is leased without
related maintenance services provided by the lessor.
In this case:
the observable stand-alone price for the maintenance services is 400;
there is no observable stand-alone price for the lease; and
the insurance cost does not transfer a good or service to the lessee and therefor is not a separate lease
component.
Therefore, L allocates 1,600 (2,000 – 400) to the lease component.
Can you identify lease and non lease components?
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Lessee accounting
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Lessee accounting
Balance sheet
Asset
Liability
= ‘Right-of-use’ of
underlying asset
= Obligation to make lease
payments
P&L
Depreciation
+ Interest
= Front-loaded total lease
expense
Lease expense
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Measuring the lease liability
Key inputs
52
Present value of
expected
payments at end
of lease
Present value of
lease rentals +=Lease liability
Lease term Lease payments Discount rate
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Initial measurement – Lease liability
Discount
rate
PV of lease payments over the lease term – includes:
Purchase options
Fixed payments
Term option penalties
Residual value
guarantees
Some variable lease
payments
Discount rate
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The lessee’s incremental
borrowing rate
The rate implicit in the
lease, if readily availableOR
Discount rate Lease liability
(5 year lease @
CU10,000 per annum)
3% CU46,000
5% CU43,000
7% CU41,000
10% CU38,000
“Why is the
discount rate
important?”
Discount rate – rate implicit in the lease
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Present value of lease
payments
Present value of
unguaranteed residual value
Fair value underlying asset
Initial direct costs
Lease term – example
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Five year
lease of a
machine
CU10,000
annually at 31
Dec (current
market rate)
Option to
terminate after
12 months for
significant
penalty
Lessee uses the
machine to
manufacture car
parts, which it must
supply for 10 years
Significant
installation
cost
Option to renew
for two further
periods of 5
years, each at
market rate
Lease term? Lease liability*
1 year CU9,000
5 years CU41,000
10 years CU70,000
15 years CU91,000
“Why is the
lease term
important?”
* Based on 7% discount rate
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Non-cancellable period
Optional renewal periods if lessee reasonably certain to exercise
Periods after optional termination date if lessee reasonably certain not to exercise
Lease term [1/2]
Lease
Term
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Level of rentals in any secondary period
compared to market rates
Contingent payments
Renewal and purchase options
Costs relating to the termination of the
lease and the signing of a new
replacement lease
Returning costs of the underlying asset
Nature of item (specialised)
Location
Availability of suitable alternatives
Existence of significant leasehold
improvements
Lease term [2/2]
Contractual / Market Asset
Consider economic factors in estimating lease term
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Lease term – example
59
Five year lease of a machine
CU10,000 annually at 31 Dec (current market rate)
Option to terminate after 12 months for significant penalty
Lessee uses the machine to manufacture car parts, which it must supply for 10 years
Significant installation cost
Option to renewfor two further periods of 5 years, each at market rate
Incentive to terminate / renew the lease?
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Lease payments – example
60
15 year lease of a wind farm
Usage payments for expected case of CU1,000,000 per annum
Maintenance costs of CU10,000 per annum
Restoration costs of CU100,000 at end of lease
Usage payments for extreme low case of CU700,000 per annum*
*based on 20 years of climate data: wind has never blown at less than 70% of the wind farm’s capacity.
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Lease payments – example
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61
15 year lease of a wind farm
Usage payments for expected case of CU1,000,000 per annum
Maintenance costs of CU10,000 per annum
Restoration costs of CU100,000 at end of lease
Usage payments for extreme low case of CU700,000 per annum*
(But still a liability under IAS 37!)
Include in lease liability?
*based on 20 years of climate data: wind has never blown at less than 70% of the wind farm’s capacity.
Lease payments – example
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15 year lease
of a wind
farm
Usage payments
for expected case
of CU1,000,000
per annum
Maintenance
costs of
CU10,000 per
annum
Restoration
costs of
CU100,000 at
end of lease
Usage payments
for extreme low
case of
CU700,000 per
annum*
*based on 20 years of climate data: wind has never blown at less than 70% of the wind farm’s capacity.
Lease payments – example
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15 year lease
of a wind
farm
Usage payments
for expected case
of CU1,000,000
per annum
Maintenance
costs of
CU10,000 per
annum
Restoration
costs of
CU100,000 at
end of lease
Usage payments
for extreme low
case of
CU700,000 per
annum*
(But still a liability
under IAS 37!)
Include in
lease
liability?
*based on 20 years of climate data: wind has never blown at less than 70% of the wind farm’s capacity.
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Variable lease payments
Payments based on an index
or rate
Payments based on turnover
or usage
Which variable lease payments are included in the lease liability?
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Example – Fixed payments• Company W leases a product line.
• The lease payments depend on the number of operating hours of the production line – i.e. W has to pay 1000
per hour of use.
• The annual minimum payment is 1,000,000. The expected usage per year is 1,500 hours.
Which payments are to be included in the lease liability?
This lease contains in-substance fixed payments of 1,000,000 per year, which are included in the initial
measurement of the lease liability.
The additional 500,000 that W expects to pay per year are variable payments that do not depend on an index or
rate and, therefore, are not included in the initial measurement of the lease liability but are expected as the ‘over-
use’ occurs.
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Example - Variable paymentsCompany X leases a store. The lease payments for the store amount to 1% of the store’s revenues. There is no
minimum rental payment.
Which payments are to be included in the lease liability?
Lease contains only variable lease payments that do not depend on an index or rate
Therefore, X measures the lease liability at the commencement of the lease as zero.
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Example - Variable payments• Company Y rents an office building.
• The initial annual rental payment is 2,500,000 and the rent will be reviewed every year and increased by the
change in the consumer price index (CPI).
Which payments are to be included in the lease liability?
This is an example of a variable lease payment that depends on an index.
The initial measurement of the lease liability is based on the value of CPI on lease commencement - i.e. Y
assumes an annual rental of 2,500,000.
If during the first year of the lease CPI increases by 5%, then at the end of the first year the lease liability is
recalculated assuming future annual rentals of 2,625,000 (i.e. 2,500,000 * 1.05).
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Example - Residual value guarantees• Lessee Z has entered into a lease contract with Lessor L to lease a car. The lease term is five years.
• In addition, Z and L agree on a residual value guarantee – if the fair value of the car at the end of the lease term
is below 400, then Z will pay to L an amount equal to the difference between 400 and the fair value of the car.
Which payments are to be included in the lease liability?
At the inception of the lease, Z expects that the fair value of the car at the end of the lease term will be 400.
Z therefore includes an amount of zero in the lease payments when calculating its lease liability.
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Example - Incentive• Lessee X enters into a non-cancellable lease contract with Lessor L to lease a building. The lease is for four years
initially, and X has the option to extend the lease by another four years at the same rental.
• To determine the lease term, X considers the following factors:
• Market rentals for a comparable building in the same area are expected to increase by 10% over the eight-year
period covered by the lease.
• At the inception of the lease, lease rentals are in accordance with current market rents.
• X intends to stay in business in the same area for at least 10 years.
• The location of the building is ideal for relationships with suppliers and customers.
X concludes that is has a significant economic incentive to extend the lease.
Therefore, for the purpose of accounting for the lease, X uses a lease term of eight years.
Is there a significant economic incentive to renew?
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Example - Incentive• Lessee Y enters into a lease of a three-year-old machine and the non-cancellable lease term is 10 years and has
the option to extend the lease after the initial 10-year period for optional periods of 12 months each at market
rent. To determine the lease term, Y considers the following factors:
• The machine is to be used in manufacturing parts for a type of plane that Y expects will remain popular with
customers until development and testing of an improved model are completed in approximately 10 years.
• The cost to install the machine in Y’s manufacturing facility is not significant.
• The non-cancellable term of Y’s manufacturing facility lease ends in 14 years and Y has an option to renew that
lease for another eight years.
• Y does not expect to be able to use the machine in its manufacturing process for the other types of planes
without significant modifications and the total remaining life of the machine is 25 years.
Y notes that the terms for the optional renewal provide no economic incentive and the cost to install is
insignificant. Y has no incentive to make significant modifications to the machine after the initial 10-year period.
Therefore, Y does not expect to have a business purpose for using the machine after the non-cancellable lease
term.
Y therefore concludes that the lease term consists of the 10-year non-cancellable period only.
Is there a significant economic incentive to renew?
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Subsequent measurement
Lease liability Right of use asset
Amortised cost using
effective interest
method
Remeasure to reflect
changes in lease
payments
Generally, cost less
accumulated
depreciation and
impairment losses
Adjusted for the
remeasurement of
lease liability
Alternative measurement
basis for right of use asset:
Fair value in accordance
with IAS 40
Revaluation model under
IAS 16
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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
IFRS 16 does
not specify
whether the
ROU asset is
tangible or
intangible
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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)
ROU asset is subject to impairment testing under IAS 36 impairment
IAS 40 applied if the leased property is investment property
IAS 16 depreciation
requirements apply
including
componentisation
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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:
The impairment
test replaces
the need to test
for an onerous
contract
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Example - Impairment• Lessee Y leases a machine for its manufacturing process over a non-cancellable 10-year period.
• The initial carrying amount of the right-of-use asset is 1,000, which is subsequently measured at cost and
depreciated on a straight-line basis over a period of 10 years.
• At the end of year 5, the cash-generating unit that includes the right-of use asset is impaired.
• An impairment charge of 200 is allocated to the right-of-use asset.
Is there a significant economic incentive to renew?
What will be the carrying amount of the right of use assets ?
Immediately before the impairment, the carrying amount of the right-of-use asset is 500.
Following the impairment, the carrying amount is reduced to 300 and the future depreciation charges are
reduced to 60 (300/5) per year.
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Subsequent measurement
Changes in carrying amount of lease liability due to:
Reassessment of lease
term, purchase option
and residual value
guarantee
Variable lease payments
not depending on an
index or rate
Reassessment of variable lease payments
depending on an index or rate
Relates to future
periods
Relates to current
periods
Adjust right-of-use asset* Recognize in profit or loss
*If the carrying amount of the right-of-use asset is reduced to nil, then any further reductions are recognized in profit or loss
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Presentation
Statement of financial position Statement of profit or loss and other
comprehensive income
Statement of cash flows
Right-of-use asset
Separate presentation in the
statement of financial position or
disclosure in the notes to the
financial statements
Lease liability
Separate presentation in the
statement of financial position or
disclosure in the notes
Lease expenses
Separate presentation of interest expense
on the lease liability from depreciation of
the right-of-use asset
Presentation of interest expenses as a
component of finance costs
Operating activities
Variable lease payments not included in the
lease liability
Payments for short-term and low-value leases
(subject to use of recognition exemption)
Financing activities
Cash payments for principal portion of lease
liability
Depending on 'general' allocation
Cash payments for the interest portion are
classified in accordance with other interest paid
Lessees present leases in their financial statements as follows:
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Companies with operating
leases will appear to be more
asset-rich, but also more
heavily indebted
Impact on balance sheet
Asset Liability
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Total lease expense will be
front-loaded even when cash
rentals are constant
Impact on profit/loss
Depreciation Interest
Cash rental payments
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Lessor accounting
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Lessor accounting
81
Same as IAS 17 Different to IAS 17
Lease classification test.
Finance lease model.
Operating lease model.
Definition of a lease.
Sale-and-leaseback guidance.
Sub-lease guidance.
Accounting for lease modifications.
Disclosure requirements.
No symmetry between lessee and lessor accounting!
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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
Lessor accounting [2/2]
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Lessor lease classification test
Ownership transfers at end of lease?
Bargain purchase option?
Operating
lease
Transfer substantially all risk and rewards of
ownership?
No
No
No
Yes
Yes
Yes
Assessment criteria similar to
current IAS 17 classification test
Lease classification test is not
applicable for lessees
Finance
Lease
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Example - Lease Classification• Lessor L enters into a non-cancellable lease contract with Company X under which X leases non-specialized
equipment for five years.
• The economic life of the equipment is estimated to be 15 years and legal title will remain with L.
• The lease contract contains no purchase, renewal or early termination options.
• The fair value of the equipment is 100,000 and the present value of the lease payments amounts to 50,000.
In assessing the classification of the lease, L notes that:
the lease does not transfer ownership of the equipment to X;
X has no option to purchase the equipment and the lease term is for one-third of the economic life of the
equipment, which is less than the major part of the economic life;
the present value of the lease payments amounts to 50% of the fair value of the equipment, which is less than
substantially all of the fair value; and the equipment is not specialized.
L notes that there are no indicators that the lease is a finance lease that, based on an overall evaluation of the
arrangement, the lease does not transfer substantially all of the risks and rewards incidental to the ownership of
the equipment to X.
Therefore, L classifies the lease as an operating lease.
How will be the lease classified?
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Balance sheet
Derecognize the underlying asset
Recognize a finance lease receivable
Finance lease
P&L
Recognize finance income
In addition, manufacturer or dealer lessors
recognize for finance leases:
revenue based on the lower of the fair
value of the underlying asset and the
present value of the lease payments
cost of sales based on cost or carrying
amount of the underlying asset, less
the present value of any unguaranteed
residual value
costs incurred in connection with
obtaining the lease as an expense
Lessor accounting [1/2]
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Balance sheet
Continue to present the underlying
asset
Add any initial direct costs incurred in
connection with obtaining the lease to
the carrying amount of the underlying
asset
Operating lease
P&L
Recognize lease income over the lease
term, typically on a straight-line basis
Expense costs related to the underlying
asset - e.g. depreciation
Lessor accounting [2/2]
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Other topics
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IFRS 16
essentially gets
rid of sale-and-
leaseback as an
off-balance sheet
financing
structure
Sale and leaseback [1/3]
Is there a sale?
On-balance sheet lease at
cost
On-balance sheet
financing, potentially at
fair value
Yes No
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Lessee (seller) Lessor (buyer)
Derecognize the underlying asset
and apply the lessee accounting
model to the leaseback*
Measure the ROU asset at the
retained portion of the previous
carrying amount (i.e. at cost)*
Recognize a gain or loss related
to the rights transferred to the
lessor*
Recognize the underlying asset
and apply the lessor accounting
model to the leaseback*
* Adjustments are required if the sale is not at fair value or lease payments are off-market.
Transfer to buyer-lessor is a sale
Sale and leaseback [2/3]
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Lessee (seller) Lessor (buyer)
Continue to recognize the
underlying asset
Recognize a financial liability under
IFRS 9 for any amount received
from the buyer-lessor
Do not recognize the underlying
asset
Recognize a financial asset under
IFRS 9 for any amount paid to the
seller-lessee
* Adjustments are required if the sale is not at fair value or lease payments are off-market.
Transfer to buyer-lessor is not a sale
Sale and leaseback [3/3]
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Example - Sale and lease back [1/2]Sale-and-leaseback transaction when transfer is a sale: Lessee perspective
Company C sells an office building to Company D for cash of 2,000,000.
Immediately before the transaction, the building is carried at a cost of 1,000,000.
At the same time, C enter into a contract with D for the right to use the building for 18 years with the annual
payment of 120,000 payable at the end of each year.
The transfer of the office building qualifies as a sale under IFRS 15.
The fair value of the office building on the date of the sale is 1,800,000.
Because the consideration for the sale of the office building is not at fair value, C and D make adjustments to
recognize the transaction at fair value.
The amount of the excess sale price of 200,000 (2,000,000 – 1,800,000) is recognized as additional financing
provided to D to C.
The incremental borrowing rate of the lessee is 4.5% per annum.
The present values of annual payments is 1,459,200 of which 200,000 relates to the additional financing and
1,259,200 relates to lease.
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Example - Sale and lease back [2/2]C recognizes the transaction as follows.
- C measures the right-of-use asset retained through the leaseback of the office building as a proportion of its
previous carrying amount, which is 699,556 (1,259,200/1,800,000 x 1,000,000).
- C recognizes only the portion of the gain on sale that relates to the rights transferred to D, which is 240,356. The
total gain on sale of the building amounts to 800,000 (1,800,000 – 1,000,000) of which:
- 559,644 (1,256,200/1,800,000 * 800,000) relates to the right to use the office building retained by C; and
- 240,356 ((1,800,000 – 1,259,200)/ 1,800,000 * 800,000) relates to the rights transferred to D.
- At the commencement date, C makes the following entries.
Debit Credit
CashROU assetBuildingFinance liabilityGain on sale-and leaseback
To derecognize the building and recognize ROU asset and finance liability
2,000,000699,556
1,000,0001,459,200
240,356
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Sub-leases
The intermediate lessor accounts for the head lease and the sub-lease as two different contracts
Head Lessor
Original lessee / Intermediate lessor
Sub-lessee
The intermediate lessor treats
the right-of-use asset as the
underlying asset in the sub-
lease, not the item of property,
plant or equipment that it
leases from the head lessor
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Sub-lease
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.
94
Head lessor
Original lessee / intermediate lessor
Sub-lessee
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Sub-lease – example
Head lease:
50-year lease of investment property, commenced 1 January 1996.
As at 1 January 2016:
Fair value of ROU asset CU30 million.
Lease liability of CU15 million.
95
Government (head lessor)
Prop Co (intermediate lessor)
Fast Retail Co (sub-lessee)
Sub lease:
30-year sub-lease, commenced 1 January 2016.
Initial direct costs of CU1 million.
Present value of fixed lease payments CU20 million.
Present value of expected turnover rents CU10 million.
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Example – Sub-lease• Head lease: Intermediate lessor L enters into a 5-year lease for office space with Company M
• Sub lease: At the beginning of year 3, L sub-leases the office space for the remaining term to sub-lessee N
• L classifies the sub-lease with reference to the ROU asset arising from head lease
Because the sub-lease is for the whole of the remaining term of head lease – i.e. sub-lease is for the major part
of the useful life of ROU asset – L classifies it as a finance lease
At the commencement date of the sub-lease, L:
• derecognizes the ROU asset that it transfers to N and recognizes the net investment in the sub-lease
• recognizes any difference between the carrying amounts of the ROU asset and the net investment in the
sub-lease in profit or loss; and
• continues to recognize the lease liability relating to the head lease, which represents the lease payments
owed to the head lessor
How will the lease be classified?
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A company applies IAS 40
Investment property to
account for a right-of-use
asset if the underlying asset
would otherwise meet the
definition of investment
property
Investment property
Two key differences in treatment of
investment property between IFRS
16 and IAS 17
The election
becomes a
requirement
There is a choice of
valuation basis
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Disclosures
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Disclosures for lessees [1/2]
Quantitative information
Relating to the statement of financial position
Additions to right-of-use assets
Year-end carrying amount of right-of-use assets by class of underlying asset and (if they are not presented separately) the corresponding line items in
the statement of financial position
Lease liabilities and the corresponding line items in the statement of financial position if lease liabilities are not presented separately
Maturity analysis for lease liabilities
Relating to the statement of profit or loss and other comprehensive income (including amounts capitalized as part of the cost of another
asset)
Depreciation charge for right-of-use assets by class of underlying asset
Interest expense on lease liabilities
Expense relating to short-term leases for which the recognition exemption is applied (leases with a lease term of up to one month can be excluded)
Expense relating to leases of low-value items for which the recognition exemption is applied
Expense relating to variable lease payments not included in lease liabilities
Income from sub-leasing right-of-use assets
Gains or losses arising from sale-and-leaseback transactions
Normally, a lessee discloses at least the following information.
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Disclosures for lessees [2/2]
Qualitative information
Description of how liquidity risk related to lease liabilities is managed
Use of exemption for short-term and/or low-value item leases
Additional Disclosure
Disclosures required by IAS 40 for right-of-use assets qualifying as investment property
If the revaluation model of IAS 16 is applied for right-of-use assets, then:
- Effective date of revaluation
- Whether an independent valuer was involved
- Carrying amount that would have been recognized under the cost model
- Revaluation surplus, change for the period and any distribution restrictions
Quantitative information (cont’d)
Relating to the statement of cash flows
Total cash outflow for leases
Other
- Amount of short-term lease commitments if current short-term lease expense is not representative for the following year
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Disclosures for lessors
Finance lease Operating lease
Quantitative information
Selling profit or loss
Finance income on the net investment in the lease
Lease income relating to variable lease payments not included in the net
investment in the lease
Significant changes in the carrying amount of the net investment in the
lease
Detailed maturity analysis of the lease payments receivable
Lease income relating to variable lease payments that do not depend
on an index or rate
Other lease income
Detailed maturity analysis of the lease payments receivable
If applicable, disclosures in accordance with IAS 16 (separately from
other assets), IAS 36, IAS 38, IAS 40 and IAS 41 Agriculture
Qualitative information
Significant changes in the carrying amount of the net investment in the
lease
N/A
Normally, a lessor discloses at least the following information.
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Multiple transition options
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Applying the new lease definition
Companies can choose whether to:
Apply the new definition to all contracts
Apply a practical expedient to ‘grandfather’
or
ComparabilityCost ComparabilityCost
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A lessee is permitted to:
- adopt the standard
retrospectively; or
- follow a modified
retrospective approach
Applying the new standard [1/2]
Modified retrospective approach
Operating lease
ROU asset As if IFRS 16 had always
been appliedOR
Lease liability
Finance lease
Lease liability
Present value of remaining
lease payments
ROU asset Previous carrying
amount of finance lease
asset
ROU asset Previous carrying
amount of finance lease
liability
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Applying the new standard [2/2]
A lessee can choose to apply the standard…
Retrospectively to all
accounting periods
ComparabilityCost
As a ‘big bang’ at the date
of initial application
OR
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Sub-leases on transition
Intermediate lessor to reassess ongoing sub-leases
Whether sub-lease
classified as
operating lease
under IAS 17 is
finance lease as per
IFRS 16?
Account as a
new finance
lease
Continue to
show as
operating
lease
Yes No
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Effective date
Early adoption permitted
if IFRS 15 is adopted
2016 2017 2018 2019 Mar Sep Dec
Effective date
1 January 2019
June
Interim reports
Annual report
31 December 2019
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IFRS ≠ US GAAP
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IFRS vs US GAAP
A joint project but not a joint standard
Lease
definition
Lessee
accounting
model
Leases on balance sheet
for lessees
Lessor
accounting
Detailed measurement
and transition
requirements
Exemption
for low value
items
IFRS and US GAAP standards converged?
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Next steps
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Are you ready for the new standard?
What do you need to do to get ready for 2019? Here are the key questions to help you prepare
for implementation:
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?
Lease data
Do you have a database of all of your assets?
Do you have the systems and processes necessary to calculate lease assets and liabilities?
Are your current disclosures of operating lease commitments complete and accurate?
Debt covenants Will application of the new standard impact your debt and other covenants?
Sale-and-leaseback
transactions
Do you understand the impact of the new standard on your sale-and-leaseback transactions?
Financial ratios
Do you understand the impact of the new standard on your financial ratios, KPIs, etc?
Will optional exemptions, such as those for short-term leases and leases of low-value items, have a
material impact on your financial statements?
Transition options Have you thought about how to transition to the new standard?
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Communications with audit committees
Initial discussion points
Discuss initial thoughts on the expected impact of IFRS 16.
Highlight non-accounting areas potentially affected.
Planned communications with external stakeholders.
Next steps
Start impact
assessment
Early
adoption?
Transition
approach?
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Disclosure prior to effective date
IAS 8.30 disclosure ― known/reasonably estimable possible impact of IFRSs issued but not yet
effective.
Considerations
Pre-adoption disclosures progressing in level of detail as your application date approaches?
Pre-adoption disclosures meeting external stakeholder expectations?
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Next steps – ResourcesReading
First Impressions
Transition options
Sector-specific publications
Go to:
http://www.kpmg.com/ifrs
http://www.kpmg.com/ae/en/kba/pages/default.aspx
http://www.kpmg.com/ae/en/pages/default.aspx
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Key points to remember
118© 2016 KPMG, KPMG LLP and KPMG Lower Gulf Limited, registered in the UAE and member firms of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All
rights reserved. Printed in the United Arab Emirates. The KPMG name, logo and are registered trademarks or trademarks of KPMG International.
118© 2016 KPMG, KPMG LLP and KPMG Lower Gulf Limited, registered in the UAE and member firms of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All
rights reserved. Printed in the United Arab Emirates. The KPMG name, logo and are registered trademarks or trademarks of KPMG International.
New leases
standard will
impact most
companies.
Key points to remember
Process of
assessing
impact should
start now.
119© 2016 KPMG, KPMG LLP and KPMG Lower Gulf Limited, registered in the UAE and member firms of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All
rights reserved. Printed in the United Arab Emirates. The KPMG name, logo and are registered trademarks or trademarks of KPMG International.
Other impacts
Restructuring
Resetting or recalculation of financial covenants in order to not be exposed to an event of default under a loan agreement
Important to clearly define Accounting Standards in loan agreements (for instance “frozen IFRS”)
Financing arrangements to achieve off-balance treatment needs to be revisited form a cost/benefit perspective
Tax
In most cases, operating leases may be tax deductible
Deferred tax impact may arise similar to any other finance leases
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© 2016 KPMG, KPMG LLP and KPMG Lower Gulf Limited, registered in the UAE and member firms of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the United Arab Emirates.
The KPMG name and logo are registered trademarks or trademarks of KPMG International.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate
and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on
such information without appropriate professional advice after a thorough examination of the particular situation.
Agenda1. Overview and scope
2. The five step model
3. Cost guidance
4. Other application guidance
5. Transition
6. Presentation and disclosure
7. Key points to remember!
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Overview
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Early adoption permitted Interim report
2014 2016 2017 2018 Mar Jun Sep Dec
Effective date
1 January 2018
Annual report
31 December 2018IFRS 15
issued
Clarifications to
IFRS 15
Amendments to IFRS 15 and Topic 606FASB
ASU
2015-14• One year deferral of the effective date
ASU
2016-08• Principal vs agent
ASU
2016-10
• Licences
• Sales- and Usage based royalties
• Performance obligations
• Shipping and handling services
ASU
2016-12
• Sales tax presentation
• Measurement of non-cash consideration
• Collectibility
• Transition practical expedients
• Definition of completed contract
ED #5• Disclosure relief
• Technical corrections and improvements
IASB
Amendment #1
(Sept 2015)• One year deferral of the effective date
Amendment #2
(April 2016)
• Licences
• Sales- and Usage based royalties
• Performance obligations
• Transition practical expedients
• Principal vs agent
125
The five step model overview
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STEP
1Identify the contract with a customer
STEP
2Identify the performance obligation
STEP
3Determine the transaction price
STEP
4Allocate the transaction price
STEP
5Recognise revenue
What’s changed
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IFRIC 15 type requirements removed and replaced by new over time criteria.
More guidance on separating goods and services bundled in a contract.
More guidance on measuring transaction price.
No IAS 11 equivalent to guide accounting when revenue is recognised over time.
Pre IFRS 15 IFRS 15
IAS 18, IFRIC 13, 15
IAS 11
Consolidation
guidance
Sale of goods or services
IAS 16 IAS 40Consolidation
guidance
Gains and losses Sales to non-customers
Sales to customers
IFRS 15Consolidation
guidance
IAS 16 IAS 40Consolidation
guidance
Some key sectors impacted
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SoftwareReal estate and
construction
Licensors – pharma,
film and entertainment
franchisors
Telecommunication
and cable
Aerospace and
defenceAsset managers Contract
manufacturers
Scope
129
Other
IFRSIFRS 15
Part of a contract Portfolio of contracts
Contract 1Contract 2Contract 3Contract 4
De-recognition of
non-financial assets
Lease contract
Insurance contractContractual rights
and obligations in the
scope of another
IFRSs
Certain types of non-
monetary exchanges
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Applying IFRS 15 to part of a contract
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Contract for a loan and safety deposit box
IFRS 9 IFRS 15
Apply IFRS 15 to residual after transaction price has been allocated to loan in
accordance with IFRS 9.
The five step model overview
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STEP
1Identify the contract with a customer
STEP
2Identify the performance obligation
STEP
3Determine the transaction price
STEP
4Allocate the transaction price
STEP
5Recognise revenue
Identify the contract
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STEP
1
... collection of consideration is
considered probable.
... rights to goods or services
and payment terms can be
identified.
... it has commercial substance.
... it is approved and the parties
are committed to their
obligations.
A contract
exists if...
Enforceable rights and obligations
Form of the contract
Combining contracts
134
Contracts may be combined and accounted for as a single contract.
Contracts are combined if entered into at or near the same time with the
same customer and one or more of the following criteria are met.
Contract 1 Contract 2
IFRS 15
Negotiated as
package with a single
commercial objective.
Consideration in one
contract depends on
the other contract.
Goods and services
are a single
performance
obligation.
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STEP
1
Example: Contract term
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Contract terms Contract term
• 3 year contract that can be terminated by either party at
one months notice.
• There is no penalty on termination.
• 3 year contract that can be terminated in the period up to
the end of year 1 by either party at no cost.
• After the end of year one a substantive termination
payment is payable to terminate the contract.
• 3 year contract that can be terminated by the customer
only at the end of each year for no cost.
STEP
1
1 month contract
1 year contract or 3 year contract.
3 year contract or 1 year contract plus
material right for additional periods.
Example: Assess collectibility at portfolio level Manufacturer X’s business involves sales of high volume homogeneous products Y and Z.
For product Y, based on historical data, X collects 60 percent of amounts billed to customers.
For Product Z, based on historical data, X collects 90 percent of amounts billed to customers.
X does not have a practice of offering formal price concessions to customers.
Question: Manufacturer X makes a sale of product X and Y to a customer, is the collectibility
threshold met?
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Product Y Product Z
• 60 percent collectability rate
strong indicator that
collectability is not probable
• 90 percent collectability rate
indicates collectability is
probable
• Consider if 10 percent
reduction is an implicit price
concession.
STEP
1
The five step model overview
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STEP
1Identify the contract with a customer
STEP
2Identify the performance obligation
STEP
3Determine the transaction price
STEP
4Allocate the transaction price
STEP
5Recognise revenue
Identify performance obligations
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Distinct performance obligationNot distinct – combined with other
goods and services
Yes No
+
Performance obligation (PO) = promise to deliver good or service that is
Criterion 1:
Capable of being distinct
Can the customer benefit from the good
or service either on its own or together
with readily available resources?
Criterion 2:
Distinct within context of the contract
Promise to transfer the good or service is
separately identifiable from other
promises in the contract?
STEP
2
Identify performance obligations - series exception
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STEP
2
Distinct goods or
services are
substantially the same
Same pattern of
transfer
Single performance
obligation
+ =+Each distinct good or
service is satisfied
over time
A series of distinct goods or services is treated as a single performance obligation if the
criteria below are met.
Single performance obligation?
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Do the goods and
services individually
meet the criteria?
Criterion 1 – Benefit on its
own or with other resources
Each material could be used with
another readily available item.
Criterion 2 – Good or service
is separately identifiable
Entity is providing a significant
integration service.
Contract to
build a house
Bricks Windows Fittings Construction
service
= + + +
STEP
2
Multiple performance obligations?
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Installation services are also
offered by third party providers.
Standard installationMachine
+
Contract
Does the machine
meet the performance
obligation criteria?
Criterion 1 – Benefit on its
own or with other resources
Machine can be used with other
available inputs (such as third
party installation).
Criterion 2 – Good or service
separately identifiable
No significant integration service;
installation is a standard service.
STEP
2
Potential separate performance obligation
Analysis required Unlikely to beLikely to be
Carpark Common areas
Land entitlement
Property management
services
Golf club membership Contractor activities
and materials
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STEP
2
The five step model overview
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STEP
1Identify the contract with a customer
STEP
2Identify the performance obligation
STEP
3Determine the transaction price
STEP
4Allocate the transaction price
STEP
5Recognise revenue
Determine the transaction price
144
Non-cash consideration
Consideration payable to a
customerVariable consideration and the
constraint
Significant financing
component
Transaction
Price
Exception: Variable consideration is not estimated for sales- or usage-based royalties
on licences of intellectual property.
…measured at fair value unless it
cannot be reliably measured.
…reduction to the transaction price
unless it’s a payment for a distinct
good or service.
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STEP
3
Variable consideration
145
Credits IncentivesDiscountsPerformance
bonuses
Many
more...
Variable consideration can be
Variable consideration is estimated using most appropriate method of either:
Expected value Most likely amount
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STEP
3
Estimating variable consideration
146
How would the
entity estimate
variable
consideration?
Rental Guarantee
Expected
value
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Land with approval
to develop a retail
centre
Transaction price
Fixed amount:
CU100Completion bonus:
CU100
Rental guarantee (not
in the scope of IAS
39/IFRS 9)
Completion
bonus
Most likely
amount
Fixed
amount
Not variable
STEP
3
Constraint on variable consideration
147
The risk of a reversal arising from an uncertain future event.
The magnitude of the reversal if the uncertain event occurs.
Qualitative
Assessment
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STEP
3
CU100
Estimate of variable
consideration
CU75
Amount that is ‘highly probable will
not result in significant reversal’…
…included in
transaction price
Applying the constraint indicators
148
At contract inception, how much variable consideration is included in the transaction price?
Likely nil because…
Use of jet is
outside entity’s
control.
No experience with
similar contracts.
Significant period
before uncertainty
will be resolved.
Large range of
possible amounts.
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STEP
3
Contract to
build a jet
Estimate variable consideration
Completion bonus
CU100
Performance bonus
CU80
First model of this jet type
constructed and put into
service.
Expected delivery of first jet:
five years from inception.
Example: expected value is not a possible outcome
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X enters into contracts with similar terms with several customers. The terms of the contract include a
performance bonus related to the timing of completing the contract.
Based on historical experience the bonus amounts and the probabilities of achieving the bonus are:
Can the estimated transaction price under the expected value method be an amount that is not a
possible outcome of an individual contract?
Bonus Amount Probability of occurrence Accumulated probability
$0 15% 15%
$50,000 40% 55%
$100,000 45% 100%
Estimated outcome Expected value = $65,000 Highly probable amount =$50,000
Yes, an amount not possible for an individual contract can be used as the estimate.
Same concept can be applied when estimating sales returns.
STEP
3
Significant financing component
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Discount
rate
STEP
3
Interest incomeInterest expensePractical expedient available
– no adjustment required
t0
Performance
t -12
monthst +12
months
Payment in arrearsPayment in advance
To make the assessment all relevant factors are considered – in particular the:
Difference between the transaction price and the cash selling price of the goods or services;
Combined effect of the length of time between payment and performance and the prevailing interest rates;
Other reasons for the payment terms.
Rate that would be used in a separate financing transaction between the entity
and customer.
Yes because…
Significant financing component
151
Does the
transaction
price include a
significant
financing
component?
Significant period
between delivery
and payment.
Cash price is
different from
transaction price.
No indicators
advance is for
another reason.
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STEP
3
Contract to
construct
equipment
Contract price:
CU80 paid on
contract inception
Expected delivery date:
2 years from contract
inception
Cash price: CU100 if
payment on delivery.
Significant financing component
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How should entities determine if the practical expedient can be applied in scenarios in which
there is a single payment stream for multiple performance obligations?
Monthly installments of $100 for 24 months
Device
($500)
Received from customers
Goods and services
(allocated transaction price) Services for 24 months ($79 per month)
View A: FIFO approach. Allocate all payments initially to the device. Therefore, practical
expedient applies to the device.
View B: Proportionally allocate the consideration between the device and the services.
Therefore, the practical expedient does not apply to the device.
STEP
3
The five step model overview
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STEP
1Identify the contract with a customer
STEP
2Identify the performance obligation
STEP
3Determine the transaction price
STEP
4Allocate the transaction price
STEP
5Recognise revenue
Allocate transaction price to performance obligations
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STEP
4
Fair value measurement
Allocate based on relative
stand-alone selling prices
Performance obligation 1
Performance obligation 2
Performance obligation 3
Determine stand-alone selling prices
Best evidence
Observable price Estimate price
If not available
Expected cost plus
a margin approach
Residual approach only if
selling price is highly variable or
uncertain
Adjusted market
assessment
approach
Example: Estimating the selling price
155
Methods for
estimating
stand alone
selling price
Cost plus Observable
priceResidual
Transaction price allocated to phone = CU650 x (CU350/CU710) = CU320
Transaction price allocated to plan = CU650 x (CU360/CU710) = CU330
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STEP
4
Two year contract – CU650
Phone Data, calls and
texts plan
Entity sells phone and plan separately
CU350 12 month plan for CU15 per
month – CU360 (24XCU15)
Adjusted
market
Example: Allocating discount
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Entity X regularly sells Products A, B and C individually by the following stand-alone selling
price: Product A = $ 40, Product B = $ 55 and Product C = $ 45
X enters into a contract with a customer to sell Products A, B and C for $ 100, which includes
a discount of $ 40 on the overall transaction
X regularly sells Products B and C together for $ 60 and A for $ 40
How is the discount allocated?
Product Allocated transaction price $
A 40 (there is evidence related to only B and C)
B 33 (55 / 100 stand-alone selling price x 60)
C 27 (45 / 100 stand-alone selling price x 60)
STEP
4
Example: Using stated contract prices
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Medical Company X sells a medical imaging device bundled together with one year of post
customer support and 10 days of training to a customer for a fee of 560,000.
Can Medical Company X use the stated contract prices as each items allocation of the
transaction price?
Performance obligation Contract prices Range of prices X sells each
good or service for
Medical imaging device 505,000 500,000 to 525,000
Post customer support 45,750 45,000 to 47,500
Training 9,250 900 to 950 per day
Yes, because each items stated price is within the narrow range set for its stand alone
selling price.
If any item was outside the range then an allocation calculation is required.
STEP
4
The five step model overview
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STEP
1Identify the contract with a customer
STEP
2Identify the performance obligation
STEP
3Determine the transaction price
STEP
4Allocate the transaction price
STEP
5Recognise revenue
Performance obligations satisfied over time
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Customer simultaneously receives and
consumes the benefits as the entity
performs.
The customers controls the asset as the
entity creates or enhances it.
The entity’s performance does not create an
asset with an alternate use and there is a
right to payment for performance to date.
An performance obligation is satisfied over time if either:
2
3
Routine or recurring
services.
Asset built on
customer’s site.
Asset built to order.
1
STEP
5
Example: Partial construction at the entity’s siteEntity X agrees to build a specialised asset for Customer C. The contract includes a timeline
that indicates 35% of the work is undertaken at X’s premises and that work is 70% of the total
expected contract duration. The asset will then be transferred to the C’s site.
1 January – X begins to build asset at its premises
1 February – The partially built asset no longer has an alternative use
1 March – The partially built asset is delivered to C’s site
30 June – Construction is completed
Question: When should X start recognising revenue?
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STEP
1
1 Jan 1 Feb 1 March 30 June
? ?
• Recognise revenue over
time
• Cumulative catch-up
adjustment
Criteria 3 requirements
No alternative
use
Right to compensation
for performance to date
Substantive contractual
restriction
Limited practically from
redirecting the asset
OR
Reasonable profit margin
Right is enforceable if
contract is terminated for
reasons other than a
failure to perform
AND
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STEP
5
STEP
5
Example 1 – Over Time Criterion 3
Right to paymentNo alternate use
Assess if rights are enforceable by considering:
Laws and legal precedent.
Any customary business practices that may have voided the entity’s rights.
Question: Do the terms meet the no alternate use and right to payment criteria?
Contract only
terminates if terms
are breached
Courts have upheld
developer’s right to full
payment on default
LAW
Customer default;
developer right to full
payment
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STEP
5
STEP
5
Example 2 – Over Time Criterion 3
Right to paymentNo alternate use
Assess if rights are enforceable by considering:
Laws and legal precedent.
Any customary business practices that may have voided the entity’s rights.
Question : Do the terms meet the no alternate use and right to payment criteria?
Contract only
terminates if terms
are breached
LAW
Customer default;
developer right to full
payment
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Entity has a practice of
taking properties back at
no penalty
Past
practice
?
STEP
5
STEP
5
Measuring performance over time
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For each performance obligation an entity chooses a method that depicts its performance.
Units delivered and similar methods not appropriate if work in progress is material.
Adjustments required for wastage and uninstalled materials when cost method used.
STEP
5
Output method
Surveys
Milestones reached
Units delivered
Input method
Costs incurred
Labour hours
Machine hours
Performance obligations satisfied at a point in time
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Exception: Separate requirements for distinct licences of intellectual property.
Recognise revenue when customer obtains control of the promised asset.
Indicators that control has transferred include the customer has…
Accepted the
asset
A present
obligation to
pay
Legal titlePhysical
possession
Risks and
rewards of
ownership
STEP
5
Contract costs
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Costs to obtain a contract
Capitalise incremental costs if:
Incurred only as result
of obtaining the contract
(e.g. sales commission)
Recovery is expected
Costs to fulfil a contract
Capitalise as fulfilment costs if:
Directly related
Generate or enhance
resources
Recovery is expected
Amortisation period < 1 year?
Expense costs as incurredPractical
expedient
Not in the scope of
another standard
Costs to fulfil a contract
Direct labour (e.g. employee wages)
Cost that are explicitly chargeable to the
customer under the contract
Direct materials (e.g. supplies)
General and administrative costs –
unless explicitly chargeable under
the contract
Allocation of costs that relate directly to
the contract (e.g. depreciation and
amortisation)
Other costs that were incurred only
because the entity entered into the
contract (e.g., subcontractor costs)
Costs that relate to satisfied performance
obligations
Costs of wasted materials, labour, or
other contract costs
Direct costs that are eligible for
capitalisation if other criteria are metCosts to be expensed when incurred
Costs that do not clearly relate to
unsatisfied performance obligations
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Example: Capitalising costsA cable services company enters into a two year service contract with a customer. The
company incurs the following costs:
On average, CU300 in advertising for each new customer.
Sales commission costs of CU200 paid upon contract signing.
Costs of CU100 for installation at the customer’s site. Installation is not a separate
performance obligation.
What costs does the entity capitalise?
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Sales commission InstallationAdvertising
Cost to obtain Cost to fulfil
Amortisation and impairment
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Amortisation period
Systematic basis consistent with the pattern of transfer.
Considers anticipated contracts (e.g. renewal options).
Impairment
Carrying
amount
Remaining
consideration
amount expected to
be received
−Costs directly
related to providing
goods or services
If conditions improve, impairment can be reversed
Can IAS 11 accounting continue?IAS 11
Acceptable to measure revenues and
costs applying POC with balance
sheet ‘true up’.
IFRS 15
No automatic link between revenue
and cost.
Costs incurred that relate to satisfied
or partially satisfied performance
obligation are expensed as incurred.
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Contract costs recognitionRevenue recognition Cost recognition
Point in time Costs capitalised when they represent:
− Costs to fulfil a contract;
− Costs to obtain a contract; or
− Capitalised in accordance with another standard e.g. IAS 2.
Costs expensed when control of the goods or services are transferred to the customer.
Over Time Costs capitalised prior to the existence of the contract are expensed to the
extent they relate to past performance.
Costs incurred after commencement of performance are generally expensed as incurred.
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Contract modificationsIs the contract modification
approved?
Do not account for contract
modification until approved
Does it add distinct goods or
services that are priced
commensurate with their stand-
alone selling prices?
Account for as
termination of existing
contract and creation
of new contract
Yes
Yes
Yes
No
No Are the remaining goods or
services distinct from those already
transferred?
Account for as part of
the original contract
No
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Account for as
separate contract
Licences of intellectual propertyIs the licence distinct from other goods or services in the contract?
Revenue recognition depends on items in the
bundle
Provides right to access
Assess nature of licenceApply revenue
recognition criteria to the combined bundle
Provides right to use
YesNo
Over time Point in time
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STEP
2
STEP
5
Right to access to intellectual property (IP)A customer has a right to access to IP (i.e. over time) if all of the following criteria are met:
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1. Entity expects to undertake activities that significantly affect the IP.
2. Customer is directly exposed to positive or negative effects of the entity’s activities that affect the IP.
3. The activities do not transfer a good or a service to the customer.
If all the criteria are not met, the licence provides a right to use the entity’s IP that is
satisfied at a point in time.
Assessing the nature of a software licence Company X licenses software on a non-exclusive basis to Customer Y for 3 years for a fixed fee of
CU50,000.
Post-contract support (PCS) service X will provide is identified as a separate performance obligation.
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What is the nature of the software licence and when should X recognise revenue?
Provides a right to use the IP, recognise revenue at the point in time the software is provided to Y
because…
X will not undertake any further actions that significantly affect Y’s ability to use
the licence.
Licences with sales- or usage-based royalties
P recognises revenue as movie tickets are sold by C.
Consideration for sales- or usage-based royalties on licences of intellectual property
is recognised at the later of:
Subsequent sale or usage; and
Satisfaction (or partial satisfaction) of the performance obligation to which the
royalties relate.Exception
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P (movie distributor) licenses the right to show Movie XYZ in cinemas for 6 weeks to C (movie theatre).
In exchange for the licence, P is entitled to 20% of the ticket sales by C. Under the contract, P is
responsible for advertising and promotion of Movie XYZ.
The exception also applies when a licence of intellectual property is the predominant
item to which the royalty relates.
Sales with a right of returnRevenue entity
expects to be
entitled to
A refund liabilityAn asset – right to
returned products
Recognise
initially:
Revenue is reassessed
Refund liability is remeasured
Asset is remeasured
With the
following
subsequent
effects:
An entity applies the variable consideration guidance when determining the amount it expects to
be entitled to.
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Sales with a right of return
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Company B sells 50 tablet devices @ CU200 each to a customer, total CU10,000.
Customer can return undamaged devices within 30 days for a full cash refund.
Cost of each device is CU150.
Based on its past experience, B estimates that 3 tablets will be returned (most likely approach).
Debit Credit
Cash (or receivable)
Refund liability (CU200 x 3 tablets to be returned)
Revenue
10,000
600
9,400
Asset (CU150 x 3 tablets to be returned)
Cost of sales
Inventory
450
7,050
7,500
Warranties
Factors to consider when making the assessment:
Is it required by law? Length of the warranty? What tasks are performed?
Does the customer have the option to purchase the warranty separately?
Performance obligation
(i.e. service warranty)Are services in addition to assurance that the product complies with agreed specifications
provided as part of warranty?
Not a separate performance obligation
(i.e. assurance warranty)
No
No
Yes
Yes
Apply
IAS 37
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STEP
2
STEP
4
Warranties – example
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Car Standard warranty:
3 years or 36,000 miles Extended warranty:
extra 3 years or up to
70,000 miles for CU5,000
Car manufacturer N sells to Customer A
How many performance obligations are there in the contract?
Warranties – example solution
The customer has the option to
purchase the extended warranty
separately.
The extended warranty provides
additional services to the customer.
Car and standard warranty Extended warranty
Standard warranty is an
assurance type warranty
AND
Apply
IAS 37
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Performance obligations
Principal versus agent
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An entity is principal in a transaction if it controls the specified goods or services in advance of
transferring them to the customer.
Indicators that an entity is principal in the transaction include:
Discretion to
establish prices
for specified
goods or servicesCredit risk
Inventory risk
Primary
responsibility to
provide specified
goods or services
Transition approaches
Cumulative effect approach: entity also needs to disclose revenue amounts that would have been
presented under legacy GAAP.
Full retrospective – no
practical expedients
Full retrospective –
practical expedients
Cumulative effect
IAS 11/18
IAS 11/18
IAS 11/18
IFRS 15
Mixed
requirements
IFRS 15
IFRS 15
1 January 2017
1 January 2017
1 January 2018
Approach 2016 2017 2018Date of equity
Adjustment*
IFRS 15IAS 11/18
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* - assumes one year of comparative information.
PresentationContract asset or contract liability is recognised when the:
Entity performs by transferring goods or services; or
Customer performs by paying consideration to entity.
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(net) contract asset
if rights > obligations
(net) contract liability
if obligations > rightsRights and obligations
Receivable
Unconditional
right to
consideration
Distinguished
from contract
assets
Capitalised contract costs
Presented
according to
nature or function
Separate
presentation from
contract assets
DisclosureObjective: help users understand the nature, amount, timing and uncertainty of
revenue and cash flows arising from contracts with customers.
Disaggregation of revenue
Performance obligations
Determining the transaction price
Determining amounts allocated to
performance obligations
Changes in contract assets, liabilities
and costs
Determining the timing of satisfaction of
performance obligations
Contracts with customersSignificant judgements and changes
in judgements
Assets recognised from the costs to obtain or fulfil a contract
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Disclosure prior to effective date
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Pre-adoption disclosures (IAS 8.30) considerations:
Focus area for regulators.
More detailed as the entity’s application date approaches.
Meeting external stakeholder expectations.
Key points to remember! New revenue standard will impact all entities, in
different ways.
Additional guidance for:
– Separating goods and services in a contract
– Significant financing components.
Many new concepts. For example:
– Estimating variable consideration & application of the constraint
– Allocating the transaction price
– Recognising revenue over time
– Capitalising costs of obtaining a contract.
Extensive disclosure requirements.
Process of assessing impact and transition options should start now.
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Agenda
Agenda
1. Introduction2. Annual Improvements to IFRSs 2012-14 Cycle
3. Consolidation suite of standards
4. Disclosure Initiative
5. Other
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Introduction – why are we discussing this topic? Provide overview of amendments to IFRSs
that will become effective in 2016
Provide insight into the impact of how the
amendments will change the way the
affected standards are applied
Agenda
Agenda
1. Introduction
2. Annual Improvements to IFRSs 2012-14 Cycle3. Consolidation suite of standards
4. Disclosure Initiative
5. Other
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Amendments finalised in the AIP 2012-14 Cycle
Relevant IFRSs Issues
IFRS 5 Non-current Assets Held for Sale and
Discontinued OperationsChanges in method of disposal
IAS 19 Employee BenefitsDiscount rate in a regional market sharing the
same currency – e.g. the eurozone
IAS 34 Interim Financial ReportingDisclosure of information ‘elsewhere in the interim
financial report’
IFRS 7 Financial Instruments: Disclosures
‘Continuing involvement’ for servicing contracts
Offsetting disclosures in condensed interim
financial statements
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IFRS 5 – Changes in method of disposalScenario 1 – Change from one method of disposal to another
*Or disposal group
No time lagAsset* classified as
held for sale
Asset* classified as
held for distribution
No time lag Asset* classified as
held for sale
Asset* classified as
held for distribution
OR
Continue held-for-sale or
held-for-distribution accounting
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Scenario 2 – No longer available for immediate distribution or distribution is no longer
highly probable
Asset* classified as
held for distribution
Asset* reclassified
as held for use
Criteria no longer met
Cease held-for-distribution
accounting and follow guidance for
‘changes to a plan of sale’
*Or disposal group
Transition provisions
■ Effective for annual periods beginning on or after
1 January 2016
■ Prospective application to changes in method of
disposal that occur on or after 1 January 2016
■ Early adoption permitted
IFRS 5 – Changes in method of disposal
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‘Changes to a plan of sale’ – par 26-29
If IFRS 5 accounting is stopped:
• Non current assets are measured at lower of recoverable amount and carrying amount as if
the asset was not classified as held for sale (I.e. compute depreciation)
• Reversal may create rare instance where goodwill impairment is reversed.
• Adjustments affect P&L
However, if the disposal group was a subsidiary, joint operation, joint venture, associate then the
prior period financial statements are amended.
• IOV – the amendment is made in the year of reclassification as an adjustment to opening
retained earnings
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IFRS 7 – ‘Continuing involvement’ for servicing contracts
IFRS 7: Transfers of
financial assets –
disclosures
Amendments clarify
when servicing
contracts constitute
continuing
involvement
■ IFRS 7 par 42E requires disclosures on financial assets that have been
derecognised in their entirety but the entity has continuing involvement* in
them
■ Lack of clarity when servicing rights constitute continuing involvement – IAS
39 and IFRS 9 definitions were not consistent
■ Clarification provided
■ Examples given of servicing contracts that represent continuing
involvement:
– Servicing fee is dependent on the amount or timing of cash flows from
the transferred asset
– Servicing fee would not be paid in full if the asset defaults
Transition provisions
■ Effective for annual periods beginning on or after 1 January 2016
■ Retrospective application
– Need not be applied for any period presented that begins before the annual period in which the amendments are first applied
■ Early adoption permitted
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IFRS 7 – Offsetting disclosures in condensed interim financial statements
IFRS 7: Offsetting
disclosures
Amendments clarify
when offsetting
disclosures are
required in
condensed interim
financial statements
■ IFRS 7 requires disclosures on offsetting financial assets and liabilities
■ Lack of clarity whether these disclosures are always required in the
condensed interim financial statements under IAS 34
■ The wording was: “these amendments shall apply …for annual periods…
and interim periods within those annual periods.”
■ Offsetting disclosures only required if general principles of IAS 34 require
their inclusion
■ Consider if significant to understanding changes in financial position and
performance of the entity since the end of the last annual reporting period
Transition provisions
■ Effective for annual periods beginning on or after 1 January 2016
■ Retrospective application
■ Early adoption permitted
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IAS 19 – Discount rate in a regional market sharing the same currency – e.g. the Eurozone
YesNo
Discount rate is determined using
bonds denominated in the currency in
which the benefits will be paid
Is there a deep market for high-quality corporate bonds denominated in that
currency?
Use government
bonds
Use high-quality corporate
bonds
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IAS 19 – Discount rate in a regional market sharing the same currency –e.g. the Eurozone
Fact pattern
■ Entity B operates in country X, which is part of
the eurozone
■ Benefits are payable in euro
■ There is no deep market for high-quality
corporate bonds in country X
■ However, there is a deep market for high-
quality corporate bonds denominated in euro
in other eurozone countries
Outcome
■ The discount rate used by Entity B for its
defined benefit pension plan should be based
on high-quality corporate bonds issued in euro
in other eurozone countries
Example – Determining the discount rate in the eurozone
Transition provisions
■ Effective for annual periods beginning on or after 1
January 2016
■ Applied from beginning of the earliest comparative
period presented in the first financial statements in
which the amendment is applied
– Any initial adjustment is recognised in retrained
earnings at the beginning of that period
■ Early adoption permitted
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IAS 34 – Disclosure of information ‘elsewhere in the interim financial report’
Cross reference
Interim financial statements Other document forming part
of interim financial report
Interim Financial Report
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IAS 34 – Disclosure of information ‘elsewhere in the interim financial report’
Information in par 15 – 15C (significant events and transactions)
• Must be disclosed in the interim financial statements
Information in par 16 (Other disclosures)
• Can be cross referenced to other parts of the interim report, that is available to users on the
same terms and at the same time as the interim financial statements
Transition provisions
■ Effective for annual periods beginning on or after 1 January 2016
■ Retrospective application
■ Early adoption permitted
Agenda
Agenda
1. Introduction
2. Annual Improvements to IFRSs 2012-14 Cycle
3. Consolidation suite of standards4. Disclosure Initiative
5. Other
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Amendments finalised related to consolidation suite of standards
Relevant IFRSs Issues
IFRS 10 Consolidated Financial Statements
IFRS 12 Disclosure of Interests in Other Entities
IAS 28 Investments in Associates and Joint
Ventures
Investment entities: applying the consolidation
exception
IAS 27 Separate Financial Statements
IFRS 11 Joint ArrangementsAccounting for acquisitions of interests in a joint
operation that constitutes a business
Equity method in separate financial statements
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IFRS 10, 12, IAS 28 – Investment entities: applying the consolidation exception
Investors
Investment
portfolio
Fund F (IE)
Fund S
(IE)
Investment-
related services
100%
100%
Issue 1 – Accounting for a dual-purpose subsidiary
Question
How should Fund F (IE) account for Fund
S (IE) which also provides investment-
related services?
■ Consolidate; or
■ Fair value
Conclusion
Before amendment:
■ IFRS 10 unclear
■ Accounting policy choice
After amendment:
■ Fair value
IE – Investment entity
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Amendments:
■ Clarify that all IE’s subsidiaries that are IEs themselves should be measured at FV,
regardless of whether they provide investment-related services
■ Exception for consolidation only for those subsidiaries that act as extension of operations of
IE parent
Summary:
Subsidiary does not provide
investment-related service
Subsidiary provides investment-
related service
Non-IE subsidiary Fair value Consolidated
IE subsidiary Fair value Fair value
Issue 1 – Accounting for a dual-purpose subsidiary (cont.)
If an entity followed the consolidation approach for a dual-purpose subsidiary prior to
amendments, it retroactively adjusts its financial statements to reflect as fair value
through profit or loss
IFRS 10, 12, IAS 28 – Investment entities: applying the consolidation exception
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IFRS 10, 12, IAS 28 – Investment entities: applying the consolidation exception
Issue 2 – Equity accounting of an investment entity by a non-investment entity investor
Question
Should an investor (non-IE) retain or
unwind the fair value accounting applied
by Fund A (IE) in equity accounting?
Conclusion
Before amendment:
■ IAS 28 unclear
After amendment:
■ Accounting policy choice, regardless
of whether A is associate or joint
venture Investment
portfolio
Investor
(non-IE)
Fund A (IE)
Equity
accounting 30%
100%
IE – Investment entity
FVTPL
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IFRS 10, 12, IAS 28 – Investment entities: applying the consolidation exception
Issue 3 – Exception from preparing consolidated financial statements
Question
Can an intermediate parent (holding, non-
IE) in an IE group be exempt from
preparing consolidated financial
statements?
Conclusion
Before amendment:
■ IFRS 10 unclear
After amendment:
■ Exemption in IFRS 10.4 also available
for IE’s non-IE subsidiary, which is a
parent itself, if IE parent’s financial
statements are available for public use
and other criteria are met
IE – Investment entity
Investment
portfolio
Intermediate
parent (non-IE)
Ultimate parent
(IE)
FVTPL 100%
100%FVTPL
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IFRS 10, 12, IAS 28 – Investment entities: applying the consolidation exception
Transition provisions
■ Effective for annual periods beginning on or after 1 January 2016
■ Retrospective application
– An entity need only present quantitative information for the following, as required by IAS 8,
for the annual period immediately preceding the date of initial application:
■ each financial statement line item affected; and
■ EPS (basic and diluted)
■ Early adoption permitted
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IFRS 11 – Accounting for acquisitions of interests in a joint operation that constitutes a business
Apply new requirements in IFRS 11*
Formation of a joint operation when an existing business is
contributed
Acquisition of an additional interest in a
joint operation by a joint controller
Acquisition of an interest in a joint
operation by an entity that does not
participate in joint control
*New requirements clarify that IFRS 3 (acquisition accounting) should be applied when accounting for an acquired interest in a
joint operation in which the activity of the joint operation constitutes a business.
Acquisition of an initial interest in a
joint operation by a joint controller
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IFRS 11 – Accounting for acquisitions of interests in a joint operation that constitutes a business
Example 1 – Initial acquisition
Fact pattern
■ Entity P acquires a 50% interest in an
existing joint operation (JO) for cash of
1,100, and incurs transaction costs of
20
■ JO operates a producing oil field and
is considered by P to be a business
■ The fair value of JO’s identifiable net
assets is 2,000, which includes a fair
value uplift of 500 on the assets. The
tax base of the net assets in JO’s
financial statements is equal to their
carrying amount at the acquisition
date – i.e. 1,500. The tax rate is 20%
Outcome
■ P records the entries shown
DEBIT CREDIT
Identifiable assets acquired(2,000 x 50%)
1,000
Goodwill(1,100 - (1,000 - 50))
150
Deferred tax ((500 x 20%) x 50%)
50
Cash 1,100
To record acquisition
Profit or loss 20
Cash 20
To record acquisition costs
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IFRS 11 – Accounting for acquisitions of interests in a joint operation that constitutes a business
DEBIT CREDIT
Identifiable assets acquired(2,500 x 10%)
250
Goodwill(300 - (250 - 20))
70
Deferred tax ((1,000 x 20%) x 10%)
20
Cash 300
To record acquisition
Profit or loss 10
Cash 10
To record acquisition costs
Example 2 – Acquisition of additional interest
Fact pattern
■ Five years later, P acquires an
additional interest of 10% in a JO
while still retaining joint control for
cash of 300, and incurs transaction
costs of 10
■ The fair value of JO’s identifiable net
assets is 2,500, which includes a fair
value uplift of 1,000 on the assets.
The tax base of the net assets in JO’s
financial statements is equal to their
carrying amount at the acquisition
date – i.e. 1,500. The tax rate is 20%
Outcome
■ P records the entries shown
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IFRS 11 – Accounting for acquisitions of interests in a joint operation that constitutes a business
Transition provisions
■ Effective for annual periods beginning on or after 1 January 2016
■ Prospective application
– An entity’s financial statements are not restated for transactions that occur before the start
of its annual reporting period on or after 1 January 2016
■ Early adoption permitted
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IAS 27 – Equity method in separate financial statements
IFRS 9/
IAS 39
Cost
Equity
method
Investments
in
subsidiaries,
associates,
JVs
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IAS 27 – Equity method in separate financial statementsTransition provisions
■ Effective for annual periods beginning on or after 1 January 2016
■ Retrospective application
■ Early adoption permitted
Agenda
Agenda
1. Introduction
2. Annual Improvements to IFRSs 2012-14 Cycle
3. Consolidation suite of standards
4. Disclosure Initiative5. Other
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IAS 1 – Disclosure Initiative
Clarifications
to IAS 1
Specific criteria
for presenting
subtotals in SFP
and SPLOCI
Not to
obscure material
information with
immaterial
information
Specific
requirements
for Items of OCI
of associates/
JVs
Not required
to present specific
disclosures, if
not material
May aggregate
line items on
SFP if IAS 1
line items are
immaterial
Disaggregate
lines on SFP
and SPLOCI if
helpful to
users
Notes may be
combined, and
order not
prescribed
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IAS 1 – Disclosure InitiativeNotes may be combined and order is not prescribed: Practical example – Unilever Plc
Source: 2014 annual report
Accounting policy
Note 12 Inventories
Disclosure to support item presented in
primary financial statements
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IAS 1 – Disclosure Initiative
Subtotals in the statement of financial position and statement of profit or loss and OCI should be:
—comprised of line items made up of amounts recognised and measured in accordance with IFRS
—presented and labelled in a manner that makes the line items that constitute the subtotal clear and understandable
—consistent from period to period, and
—displayed with no more prominence than the subtotals and totals presented in these statements
In addition, subtotals in the statement of profit or loss and OCI should be reconciled in the statement of profit or loss
and OCI with the subtotals and totals required in IFRS
Specific criteria for presenting subtotals
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IAS 1 – Disclosure InitiativeSpecific criteria for presenting subtotals: Practical example – ITV Plc
Excerpt from Consolidated Income Statement
Reconciliation in the notes of
‘EBITA before exceptional
items’ to ‘Profit before tax’
Source: 2014 annual report
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IAS 1 – Disclosure Initiative
Excerpt from note 2.1 Profit before tax
Additional reconciliation requirements: Practical example – ITV Plc
Source: 2014 annual report
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IAS 1 – Disclosure Initiative
Transition provisions
—Effective for annual periods beginning on or after 1 January 2016
—Prospective application
If the order of notes or information presented/disclosed is altered compared to the previous year,
comparative information is adjusted to align to current year presentation/disclosure
—Early adoption permitted
Agenda
Agenda
1. Introduction
2. Annual Improvements to IFRSs 2012-14 Cycle
3. Consolidation suite of standards
4. Disclosure Initiative
5. Other
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Amendments related to other standards
Relevant IFRSs Issues
IAS 16 Property, Plant and Equipment
IAS 38 Intangible AssetsAcceptable methods of depreciation/amortisation
IAS 16 Property, Plant and Equipment
IAS 41 AgricultureBearer Plants
230© 2016 KPMG Lower Gulf Limited and KPMG LLP, operating in the UAE, member firms of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
IAS 16, 38 – Acceptable methods of depreciation/amortisation
Revenue-based
depreciation/
amortisation
Permitted (for
intangible assets
only) if…
Expressed as
measure of revenue
Revenue and
consumption of
economic benefits
‘highly correlated’
Asset is property,
plant and equipment
Intangible asset not
meeting one of
above criteria
Not permitted if…
231© 2016 KPMG Lower Gulf Limited and KPMG LLP, operating in the UAE, member firms of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Results
IAS 16, 38 – Acceptable methods of depreciation/amortisationExample – revenue not highly correlated to consumption of economic benefits
Fact pattern
■ An entity obtains a programme right to run
the programme six times in four years
■ Based on historical trends, the entity
forecasts that total revenue of 800 will be
received within four years
■ The programme will be shown twice in the
first two years, and then once a year over its
remaining useful life
■ The generation of revenue from each run is
not highly correlated to the consumption of
the economic benefits
■ Actual revenue and runs are shown in the
table below
Outcome
■ Units-of-production amortisation method
Ye
ar
Reve
nu
e
Ru
ns
Amortisation method
Revenue-based
Units-of-production
Straight-line
1 500 2 250 133 100
2 200 2 100 133 100
3 75 1 38 67 100
4 25 1 12 67 100
800 6 400 400 400
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IAS 16, 38 – Acceptable methods of depreciation/amortisation
—Effective for annual periods beginning on or after 1 January 2016
—Prospective application
—Early adoption permitted
Transition provisions
Essentially sets a high hurdle to have depreciation based on revenue:
• The revenue and consumption of benefits must be ‘highly correlated’; or
• The intangible asset is expressed as a measure of revenue (for example, right to operate
a toll until revenue reached $10m)
Amendment may be relevant to media sector and service concession operators
233© 2016 KPMG Lower Gulf Limited and KPMG LLP, operating in the UAE, member firms of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
IAS 16, 41 – Bearer Plants
Current accounting for
Bearer Plants
Fair value model
IAS 41
Amended accounting for
Bearer Plants
Revaluation model
IAS 16
Cost model
IAS 16
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IAS 16, 41 – Bearer Plants
Includes those plants:
—used in the production or supply of agricultural
produce;
—expected to bear produce for more than one period;
and
— that have a remote likelihood of being sold as
agricultural produce, except for scrap sales
Excludes:
—plants cultivated to be harvested as agricultural
produce – e.g. trees grown for use as lumber;
—plants cultivated to produce agricultural produce when
there is more than a remote likelihood that the entity
will also harvest and sell the plant as agricultural
produce, other than as incidental scrap sales – e.g.
trees cultivated both for their fruit and their lumber
—annual crops – e.g. maize and wheat; and
—produce growing on a bearer plant – e.g. grapes
growing on a vine
How the amendments apply
Biological
assets
Consumable
biological assets
Bearer
biological assets
OthersPlants
IAS 41
continues to
apply
IAS 16 applies,
except for
produce
growing thereon
Produce
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IAS 16, 41 – Bearer PlantsExample – applying the cost model to bearer plants
Fact pattern
■ Entity P owns vineyards
■ The vine plants and grapes on the vines together
have a fair value of 2,000
■ The historical cost of the vine plants, net of
depreciation, is 700
■ The fair value of the grapes on the vine plants is 100
Outcome
Existing requirements
■ P measures the vine plants and the grapes growing
on them at their combined fair value of 2,000
After amendments
■ P accounts for the vine plants and the grapes
growing on them separately. In this example, P elects
to measure the vine plants at their cost of 700, and
the grapes are measured at their fair value of 100
236© 2016 KPMG Lower Gulf Limited and KPMG LLP, operating in the UAE, member firms of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
IAS 16, 41 – Bearer Plants
Transition provisions
—Effective for annual periods beginning on or after 1 January 2016
—Election in method of adoption:
- Apply amendments retrospectively in accordance with IAS 8; or
- Use a bearer plant’s fair value at the beginning of the earliest period presented as its deemed
cost at that date
—Entities are exempt from quantifying the effects of the change in accounting policy for the current
period
—Early adoption permitted
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Questions?
Thank youYusuf [email protected]