Having the right to control the use of an identified asset means having the right to direct, and obtain all of the economic benefits from, the use of that asset. Sign in with LinkedIn to save articles to your bookmarks. Applying the new definition involves three key evaluations, all of which must be met in order to conclude that a contract is or contains a lease. An earlier G4+1 Study had recommended capitalising property rights inherent in all leases. The customer makes all relevant decisions concerning the use of the individual fibres by connecting them to its own electronic equipment (ie, the customer ‘lights’ the fibres) and deciding what data, and how much data, each strand will carry. The supplier has a large supply of similar cars and engines that are available to fulfil the obligations of the arrangement. So how can the TMT industry ride out the turbulence and thrive? The Group is now required to recognise a lease liability at … This means the entity will need to keep a record of the amounts spent on all short-term leases. As a practical expedient, a lessee may elect, by class of underlying asset, not to separate non-lease components from lease components and instead account for all components as a lease. The supplier cannot substitute the fibres for reasons other than repair, maintenance or malfunction. 3 An entity shall apply this Standard to all leases, including leases of right -of use assets in a sublease, except for: (a) leases to explore for or use minerals, oil, natural gas and similar non- regenerative resources; (b) leases of biological assets within the scope of IAS 41 Agriculture held by a lessee; [IFRS 16:46A, 46B], A lessee accounts for modifications required by the IBOR reform (modifications required as a direct consequence of the IBOR reform and made on an economically equivalent basis) by updating the effective interest rate. Scope 7 2.1. a lease under IFRS 16 and that the useful life of the extraction equipment is five years. An identified asset is an asset that is either: Even if an asset is explicitly specified, a customer does not have the right to use an identified asset if the supplier has a substantive substitution right throughout the period of use. In determining the lease term and assessing the length of the non-cancellable period of a lease, paragraph B34 of IFRS 16 requires an entity to determine the period for which the contract is enforceable. This supplement focuses on the disclosure requirements in IFRS 16 . The second evaluation involves determining whether a customer has the right to obtain substantially all of the economic benefits from use of the identified asset throughout the period of use. Variable lease payments based on the customer’s use of the asset (eg variable payments based on sales) do not prevent a customer from obtaining substantially all of the economic benefits from the use of the asset. Example 2: First adoption of IFRS 16 with an existing operating lease. We hope you find the information in this article helpful in giving you some detail into aspects of IFRS 16. So what’s the solution? IFRS 16 represents the first major overhaul of lease accounting in over 30 years. The new Standard will affect most companies that report under IFRS and are involved in leasing, and will have a substantial impact on the financial statements of lessees of property and high value equipment. These words serve as exceptions. [IFRS 16:C1], As a practical expedient, an entity is not required to reassess whether a contract is, or contains, a lease at the date of initial application. During the preparatory works, ABC discovered that the operating lease contract related to a machine might require some adjustments. A lessee that that applies the exemption accounts for COVID-19-related rent concessions as if they were not lease modifications. Here are the The non-cancellable period for which a lessee has the right to use an underlying asset, plus: a) periods covered by an extension option if exercise of that option by the lessee is reasonably certain; and, b) periods covered by a termination option if the lessee is reasonably certain not to exercise that option. the supplier having the practical ability to substitute each car and engine throughout the period of use. • The right-of-use asset is componentized under the same method as owned assets accounted for under IAS 16 – Property, Plant and Equipment. [IFRS 16:100a)], If the fair value of the sale consideration does not equal the asset’s fair value, or if the lease payments are not market rates, the sales proceeds are adjusted to fair value, either by accounting for prepayments or additional financing. Although the customer passes on some of the benefits to the supplier through variable payments, the customer is still the party that receives the economic benefits arising from use of the asset (in this case, the cash flows arising from the sales). The Staff gave the Board an update of the activities that they have undertaken to assist stakeholders with implementing IFRS 16 'Leases'. Otherwise a lease is classified as an operating lease. IFRS 16 . A contract can be (or contain) a lease only if the underlying asset is ‘identified’. Under IFRS 16, all leases, excluding those that meet the practical expedient for low-value and short-term leases, if elected, are treated as finance leases. for short-term leases in IFRS 16 is made by class of underlying asset. Our advice is to build a wider ‘digital risk’ function which integrates data privacy and cyber security. The objective is to ensure that lessees and lessors provide relevant information in a manner that faithfully represents those transactions. [IFRS 16:24], After lease commencement, a lessee shall measure the right-of-use asset using a cost model, unless: [IFRS 16:29, 34, 35], i) the right-of-use asset is an investment property and the lessee fair values its investment property under IAS 40; or. For full functionality of this site it is necessary to enable JavaScript. It has substantially all of the economic benefits from use of the rail cars and engines. Leases, which are due to become effective for annual periods beginning on or after 1 January 2019. IFRS 16 specifies how an IFRS reporter will recognise, measure, present and disclose leases. [IFRS 16:71c)], A lessor recognises operating lease payments as income on a straight-line basis or, if more representative of the pattern in which benefit from use of the underlying asset is diminished, another systematic basis. In practice, the main impact will be on contracts that are not in the legal form of a lease but involve the use of a specific asset and therefore might contain a lease – such as outsourcing, contract manufacturing, transportation and power supply agreements. NZ IFRS 16 is a nuanced accounting standard, with various practical complexities to navigate through. [IFRS 16:1], IFRS 16 Leases applies to all leases, including subleases, except for: [IFRS 16:3], A lessee can elect to apply IFRS 16 to leases of intangible assets, other than those items listed above. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and replaces the previous Standards IAS 17 Leases and related IFRIC and SIC Interpretations. This site uses cookies to provide you with a more responsive and personalised service. The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. [IFRS 16:36(c)], A lessee may elect not to assess whether a COVID-19-related rent concession is a lease modification. Determining the lease term 21 4.1. They are the ‘big-ticket’ leases that almost every business has, from retailers to . "Grant Thornton” refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. The supplier chooses which rail cars and engines are used for each delivery and therefore directs them. 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