The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation.

International Financial Reporting Standards

Leases

May 2013

2Agenda

• Background• Lessee accounting • Lessor accounting• Identifying a lease• Other aspects

International Financial Reporting Standards

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation

Background

4Why change accounting for leases?

Lessee• Most assets and liabilities are off-

balance-sheet• Insufficient information about

operating leases

Lessor• Lack of transparency about

residual values

$1.25 trillion of off-balance sheet undiscounted operating lease commitments for US public companies*

* Estimate according to the 2005 SEC report on off-balance sheet activities

How our proposals improve existing accounting 5

The proposalsExisting

accounting issues

Most assets and liabilities are off balance sheet

Insufficient information provided about operating leases

Lack of transparency about residual values of equipment and vehicles

Recognition of lease assets and liabilities for all leases of more than 12 months

Enhanced disclosures

Separately account for residual asset Enhanced disclosures about risk exposure to residual asset

Greater transparency about lessee’s

leverage and the assets used in its

operations

Greater transparency about residual values

How the proposals improves the accounting

Lessee

Lessee

Lessor

International Financial Reporting Standards

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation

Lessee accounting model

7Proposed right-of-use model

Lessor LesseeRight-of-use asset

Lease payments

8Overview lessee accounting

Balance sheet

Recognition of assets and liabilities for leases over 12 months

9

Definition of an asset:A resource controlled by an entity as a result of past events and from which

future economic benefits are expected to flow to the entity.

Definition of a liability:A present obligation of the entity arising from past events, the settlement of which

is expected to result in an outflow from the entity of resources embodying economic

benefits.

Control over right-of-use asset

• Physical possession of (access to) leased asset

• Lessor cannot retrieve leased asset

Unconditional obligation to pay

• Lessee cannot return leased asset (terminate lease) and avoid paying without breaching contract

Recognition of assets and liabilities

Initial measurement 10

Right of use asset

(at cost)

Lease liability (present value of lease payments)

11Payments included in the lease liability

Most excluded

Fixed payments

Residual value guarantees

Dis

coun

ted

Optional payments

Variable lease payments

Short-term leases

Fixed payments• non-cancellable period

Residual value guarantees • expected amount

Included

12Measurement simplifications

Fixed payments

Residual value guarantees

Short-term leases• Option to exclude leases of less than 12

months

Variable lease payments • Excluded if linked to sales or use• Included only if payments linked to

index or rate

Options• Excluded unless significant economic

incentive to exercise option

Optional payments

Variable lease payments

Short-term leases

13Overview lessee accounting

Balance sheet

Recognition of assets and liabilities for leases over 12 months

14The consumption principle

Equipment

Property (real estate)

Start of lease End of lease5-year lease

Asset consumption not more than insignificant

part of asset consumed

15Lease classification

Leases of equipment or vehicles are Type A leases unless:

• Lease term is insignificant relative to economic life of asset

• PV of lease payments is insignificant relative to FV of asset

Leases of property (and and/or a building) are Type B leases unless:

• Lease term is major part of economic life of asset

• PV of lease payments is substantially all of FV of asset

Lessee accounting model 16

Most equipment/ vehicle leases

ROU assetLease liability

AmortisationInterest

Principal paid

Interest paid

Most property leases

ROU assetLease

liability

Single lease expense Cash paid

Balance sheet

Income statement

Cash flow statement

Type

A

Type

B

Type A Type B

Balance sheet (year) 0 1 2 3 1 2 3

ROU asset 600 400 200 - 414 215 -

Lease liability (600) (414) (215) - (414) (215) -

Income statement (year) 0 1 2 3 1 2 2

Operating expenses 200 200 200 231 231 231

Finance expenses 46 32 17

Total lease expense 246 232 216 231 231 231

Lessee accounting–Example 17

18Disclosures lessee

Qualitative

General description of leases

Terms of:- variable lease payments

-extension/termination options-residual value guarantees

Restrictions and covenants

Quantitative

Reconciliation ROU asset by asset class*

Reconciliation lease liability*

Maturity analysis undiscounted cash flows for each of first 5 years

plus total thereafter

Judgements & Risks

Nature and extent of risks arising from leases

Significant assumptions and judgement*

* New disclosure compared to today for operating leases

International Financial Reporting Standards

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation

Lessor accounting model

20Overview lessor accounting

Balance sheet

Dual approach for recognition of assets

Lessor accounting model 21

Most equipment/ vehicle leases

Lease receivable

Residual asset

Interest income and

any profit on the lease

Cash received

Most property leases

Continue to report asset being leased

Rental income

Cash received

Balance sheet

Income statement

Cash flow statement

Type

A

Type

B

Equipment

Balance sheet (year) 0 1 2 3

Lease receivable 600 414 215 -

Gross residual asset 400 431 464 500

Unearned profit (20) (20) (20) (20)

Net residual asset 380 411 444 480

Income statement (year) 0 1 2 3

Profit on lease 30

Interest on receivable 45 32 16

Interest on residual asset 31 33 36

Total lease expense 30 76 65 52

Example Type A lease 22

23Disclosures lessor

Qualitative

General description of leases

Terms of: -variable lease

payments-extension/termination

options-purchase options

Quantitative

Reconciliation: lease receivable and residual

asset1,2

Table of lease income2

Maturity analysis undiscounted cash flows for each of first 5 years plus total thereafter

Risk management for residual assets1,2

Judgements & Risks

Nature and extent of risks arising from leases

Significant assumptions and judgement2

1 For Type A leases only2 New disclosure compared to today for operating leases

International Financial Reporting Standards

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation

Identifying of a lease

25Definition of a lease

Right to control the use of an identified asset

No substantive right to substitute asset

Decision-making authority over use of asset

Receive benefits from use of asset

Contract conveys the right to use an asset for a period of time in exchange for consideration

26Multi-element contracts

* Lessor: allocate using revenue recognition guidance

• Allocation between lease and non-lease components based on stand-alone prices

• If stand-alone prices not available, lessee combines components and accounts for them as a single lease

Allocation (lessee)*

Contract contains a lease

• Each lease component is accounted for as a separate lease

Separation

International Financial Reporting Standards

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation

Other aspects

28Sale and leaseback

Sale and leaseback?Use revenue recognition requirements to

determine whether control of the asset has transferred to buyer

no

Accounted for as a financing arrangement • seller continues to recognise the

transferred asset and accounts for amounts received as financial liability

• buyer accounts for amounts paid as receivable

Accounted for as sale and leaseback*

• seller accounts for sale and applies lessee accounting

• buyer accounts for purchase and applies lessor accounting

• Adjusted for current market rates

yes

Disclosures required:• Terms and conditions of sale and leaseback• any gains or losses arising from transaction

29Transition

* Entity can choose to apply the new Leases standard retrospectively

• Use of hindsight• No evaluation of initial

direct costs for contracts before effective date

• Lessee: use ‘portfolio level’ discount rate calculated at effective date

Reliefs available

Modified approach based on information available at beginning of earliest comparative period

Simplifications

No requirement to make adjustments for leases currently classified as finance leases

Carryover finance lease

Modified retrospective approach*

30Next steps

Revised ED-May 2013;

Comment period ends- September 13, 2013

Outreach-May through September

2013

Redeliberations-beginning Q4 2013

Final standard and effective date-

TBD

Thank you 31