navigating the new world of ifrs 16 leases€¦ · lease accounting – future • ifrs 16 issued...
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IFRS 16 – Leases Agenda
This presentation and its contents are intended for informational purpose only.
Introduction and Background
Presentation and discussion on accounting under IFRS 16
• Lessee accounting
• Lessor accounting
Practical challenges and implications on leasing strategy
Wrap up / questions
This presentation and its contents are intended for informational purposes only.
Navigating the new world of IFRS 16 Leases 2
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BackgroundSetting the stage
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The accounting frameworksSetting the stage
What are the GAAPs?
International Financial Reporting Standards“IFRS”
Accounting Standards for Private Enterprises“ASPE”
U.S. GAAP
Who does it apply to?
• Canadian public companies• International
public companies• Canadian private companies
who have chosen to use IFRS
• Canadian private companies• Certain subsidiaries of
U.S. parents
• U.S. parent (both public and private)
• Certain Canadian public companies who have chosen U.S. GAAP
Lease accounting –Current
• IAS 17 • CPA Handbook, CICA 3065 • FAS 13 (ASU 840)
• Distinction between finance and operating leases• For lessees, operating leases are off balance sheet and finance leases are on balance sheet• For lessors, assets relating to operating and finance leases are recognized on balance sheet
(although characterization differs)
Lease accounting –Future
• IFRS 16 issued January 2016 • No current changes proposed
• ASU 842 issued February 2016
Implementation date
• Annual periods on or after January 1, 2019
• Annual periods beginningJanuary 1, 2019, for public business entities,January 1, 2020, for all other entities
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The Canadian marketWho is impacted?
1,167,978
-
-
1,899
-356
SMALL TO MEDIUM SIZE ENTITIES (SME) PUBLIC COMPANIES
PUBLIC VS. PRIVATESMEs Public companies adopting IFRS Public companies adopting U.S. GAAP
A subset of these entities may use IFRS and US GAAP but most will likely use ASPE
5
The above chart is based on the data from Statistics Canada, Business Register, December 2015 and SEDAR. The chart is for illustration purposes. Actual numbers of businesses may vary based on market data sources used.
This is the subset impacted by IFRS 16
This is the subset impacted by ASC
842
Navigating the new world of IFRS 16 Leases
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Why change lease accounting?The drivers of change…
• Current lease accounting model requires lessees to classify leases as operating versus finance lease
• Operating leases do not result in the recognition of a leased asset or lease liability – Perceived as not being transparent and creating “off balance sheet” financing
• Analysts and other financial statement users “adjust” the financials to better understand entity’s leverage
• Better comparison between companies that lease vs. buy assets
• Economically similar transactions were being accountedfor differently
Excerpt from the IASB’s IFRS 16 Effects Analysis
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IFRS 16 - LeasesThe accounting
7Navigating the new world of IFRS 16 Leases
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The HighlightsIASB issues IFRS 16
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Project concluded –long time in works
Joint project with US – converged in some respects but
not all
Most leases on balance sheet for
lessees
Lessor accounting largely unchanged
Data and systems may be impacted
2019 timeline but clock ticking now
Navigating the new world of IFRS 16 Leases
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TimelinesTransition
Entities can elect to apply either
I. Full retrospective approach (as if always applied) or
II. A ‘modified’ retrospective approach with no restatement of comparatives (adjust opening retained earnings)
1 Jan 20191 Jan 2018
December year-ends:Retrospective application with restatement
December year-ends:Effective date
Comparative period
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Lessee accounting
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Lessee accountingIn a nutshell – “before” and “after”
Old standard New standard
Balance Sheet FY 20xx $
Lease assets xxx
Lease liabilities xxx
Income statement FY 2015 $
Low-value/short-term leases xxx
EBITDA xxx
Depreciation and amortisation xxx
Finance cost xxx
Profit before tax xxx
Balance Sheet FY 20xx $
Income statement FY 2015 $
Lease payments xxx
EBITDA xxx
Profit before tax xxx
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In a nutshellLessee accounting
EBITDA
Profit profile (lower in earlier years of lease)
Assets and liabilities
Impact on gearing
Operating cash inflows
Financing cash outflows
Balance sheet Income statement Cash flow statement
• Recognise lease assets and liabilities on balance sheet.
• Initially measured at the present value of unavoidable lease payments.
• Consider impact on KPIs, lending covenants, earn-outs, bonus programs, etc.
• Repayment of principal: finance activities
• Repayment of interest: finance or operating activities (depends on accounting policy for interest).
• Some variable payments, payments from short-term leases and from assets of low value: operating activities
• No change to total cash flows as no change to the economics. Pattern of recognition has changed.
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Initial measurement Lessee accounting
At commencement date: recognise right-of-use asset and lease liability
Lease liability Right-of-use asset
Present value of lease payments Cost
Rate implicit in the lease or Incremental borrowing rate
The capitalized asset and liability would likely still be lower than purchased asset and debt as it is only the economically unavoidable payments under the lease contract that come on balance sheet.
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Initial measurement Lessee accounting
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Payments made less incentives receivable after commencement date
Commencement date
Payments made less incentives received beforecommencement date
Measurement of lease liability
Cost of right-of-use asset
Discounted at:Rate implicit in the lease or Incremental borrowing rate
Navigating the new world of IFRS 16 Leases
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Lease paymentsLessee accounting
Fixed payments
less incentives
Exercise price of purchase
option (reasonably
certain)
Variable payments
(e.g., CPI/rate)
NPV =
Lease liability Right-of-use asset
Payments less incentives
before commence-ment date
Initial direct costs
Lease liability
Estimated cost for
dismantling restoring
asset
Expected residual value
guarantee Penalty for terminating
(if reasonably certain)
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Lease term – Extension and termination options Lessee accounting
Option to extend
Option to terminate
Non-cancellable period
Reassess significant event or change in circumstances that lessee controls and affects whether exercise ‘reasonably certain’. Revise: change in non-cancellable period.
‘Reasonably certain’
Consider all facts and circumstances that create an economic incentive, including expected changes:
• Contractual terms for optional periods
• Significant leasehold improvements
• Costs of termination and return
• Importance to operations (specialized, location, alternatives)
• Conditionality associated with option
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Right-of-use asset
Subsequent measurementLessee accounting
Lease liability
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Time
Expe
nse
prof
ile
Constant periodic rate of interest (P&L- finance cost)
Increase the lease liability to reflect the interest
Decrease the lease liability to reflect payments made
Time
Expe
nse
prof
ile
(P&L - depreciation)
Apply depreciation requirements in IAS 16
Depreciate over the useful life (taking extension options into consideration)
Impairment under IAS 36
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Recognition exemptionsLessee accounting
Accounting policy choice:
Apply IFRS 16 or straight-line the expense
(if applying the exemption: Apply IAS 37 to assess onerous contracts)
Short-term leases (12 months or less)
Has a lease term at commencement of 12 months or less
Not highly dependent on, or highly interrelated with, other assets
Low-value leases
A lease that contains a purchase option is not a short-term lease
Assessment on an absolute basis (new asset value of < $5K)
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Election by class of underlying asset Election on a lease-by-lease basis
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Combining or separating contracts Lease contracts
*Both lessees and lessors are required to separate lease components from non-lease components
Account for as a single contract Account for each component separately
Account for separately from non-lease components of a
contractor
Elect not to separate (by class) – Lessees
Non-lease
Combine two or more contracts Identify separate lease components*
Identify separate non-lease components (e.g., service)*
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The practical expedient is
only available to lessees, not lessors
Separating the non-lease components reduces the amounts recognized for the lease asset and liability
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Portfolio application Lease contracts
Lease
Lease Lease
Lease
Lease
Lease
Lease
Lease
Practical expedient for leases with similar characteristics
20Navigating the new world of IFRS 16 Leases
• Should not be expected to result in materially different accounting
• Likely to apply to leases for items such as vehicles where they are all part of a master agreement
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A comparison of IFRS 16 model with the FASB model (ASC 842)Lessee accounting
IFRS 16 U.S. GAAP (FASB model)
All leases Former on-B/S leases
Former off-B/S leases
Balance sheet
Recognition
All leases on balance sheet
Exemption for short-term leases
Exemption for leases of low-value assets --- ---
Measurement
Lease liabilities on a discounted basis
Initial lease asset = lease liability
Depreciation of lease assets Typically straight-line
Typically straight-line
Typically increasing
PresentationLease liabilities IAS 1 Separate
presentation (from former off b/s lease)
Separate presentation (from
former off b/s lease)Lease assets PPE or own line
Income statement
Operating costs Depreciation Depreciation Single expense
Finance costs Interest Interest ---
Cash flow statement
Operating activities Interest Interest Interest and principal
Finance activities Principal Principal
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Lessor accounting
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A snapshotLessor accounting
Classification • Classify a lease as either an operating or finance lease
Finance Leases • Recognize at the commencement date and present as a receivable at an amount equal to the net investment in the lease
• Net investment measured as the sum of both:
− The lease receivable measured at the present value of the lease payments, and
− The residual asset, measured at the present value of any residual value accruing to the lessor
• Subsequently, recognize finance income over the lease term, based on a pattern reflecting a constant periodic rate of return on the lessor’s net investment in the lease
Operating Leases • Recognize lease payments as income on either a straight-line basis or another systematic basis
Presentation and disclosure • Additional disclosures about a lessor’s leasing activities see next slide
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DisclosuresLessor accounting
Finance leases
• Selling profit or loss
• Finance income on the net investment in the lease
• Income relating to variable lease payments not included in the measurement of the net investment in the lease
• Qualitative and quantitative explanation of the significant changes in the carrying amount of the net investment in finance leases
• A maturity analysis of the lease payments receivable
Operating leases
• Lease income
• Income relating to variable lease payments that do not depend on an index or a rate
• Apply IAS 16 disclosure requirements for items of PPE
• Apply disclosure requirements in IAS 36, IAS 38, IAS 40 and IAS 41 for assets subject to operating leases if applicable
• A maturity analysis of lease payments
Other
• The nature of the lessor's leasing activities
• How the lessor manages the risk associated with any rights it retains in underlying assets
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Leasing strategyPractical challenges and implications
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Who is expected to be impacted?Leasing strategy
The above chart is based on the data from the IASB’s Effect Analysis
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Africa/ Middle East
Latin America
Asia/Pacific
Europe
North America
Total
Off-balance sheet leasesby region
in U.S.$ trillions (discounted)
≈ 14,000 companies
Excerpt from the IASB’s IFRS 16 Effects Analysis
Impact by industry
Airlines (23%) Retailers (21%)Travel & leisure (21%) Transport (12%)Telecommunicationns (6%) Energy (6%)Media (6%) Distributors (4%)Information technology (3%) Healthcare (3%)Other
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How will these changes impact leasing?Leasing strategy
• Own vs lease strategy
− The cash flows and economics remain the same
− Impact to key metrics, covenants, cost of borrowing, etc will require consideration
− Credit ratings would not be expected to be impacted as analysts were already adjusting for operating leases
• Changes to lease structure and terms
− Lease terms will this mean shorter leases?
− Lease payments could we see more variable payment terms?
− May see unbundling of lease vs. service components to avoid allocation requirements
− Lessees may pay more attention to implicit interest rate vs borrowing rate (now that on balance sheet)
• Fewer overall structuring opportunities
Uncertainty on what this will mean to leasing strategies too early to tell but here are some considerations
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What does this mean for lessors? Leasing strategy
• Knowing your client matters
− Which ones are impacted i.e.. IFRS and US GAAP reporters with large operating lease portfolios
− Clients likely to require support (understanding impact, data, informational needs)
• The business benefits of leasing will remain, for example:
− Convenience
− Service
− Flexible terms matching payments to cash flow requirements
− Low cost financing
− Residual risk transfer avoid owning obsolete equipment
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