AASB 16 Leases · 2020. 9. 4. · Lessee accounting Two lease recognition exemptions. Short term...
Transcript of AASB 16 Leases · 2020. 9. 4. · Lessee accounting Two lease recognition exemptions. Short term...
AASB 16 Leases –More practical implementation considerations
—5 June 2019
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Your facilitators are…
Michael Voogt
Julie Locke Daina Klunder
Patricia Stebbens
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AASB 16 Leases
Transition projects Lessors and lessees Flow on impacts
Agenda• Lease term – how far can it extend?• Embedded leases – identification/ completeness• Variable lease payments based on index or rate• Other considerations• Tools to assist• Wrap up
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Lease term
How far can it extend?
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Lease term – reminder
Lease term
Non-cancellable period
Optional renewal periods if lessee reasonably certain to exercise
Periods after optional termination date if lessee reasonably certain not to exercise
The period for which the contract is enforceable.
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Lease term – a reminder
Lease term
Non-cancellable period
The period for which the contract is enforceable.
A lease is no longer enforceable when the lessee and the lessor each has the right to terminate the lease
without permission from the other party with no more than an insignificant penalty.
AASB 16:B34
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Lease term – beyond the legal contract?What mechanism is considered part of the contract when determining lease term?
Contractual terms only. Contained within legislation to which
contract refers.
Contained within legislation which applies to the contract but the
contract does not refer to it.
Consistently upheld by the courts but not included in legislation or the written
agreement.
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Lease term – Example
Tenant leases a property from Landlord.• Written contract is for a term of 5 years.• No extension options in the contract.• Within first few months, Tenant will install significant leasehold improvements
(useful life 8 years).
Y0 Y2 Y6Y4 Y8 Y10
Commencement of lease
End of written contract
Y1 Y3 Y5 Y7 Y9
Useful life of leasehold improvements
What is the period during which the contract is enforceable?
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Lease term – Example
Tenant leases a property from Landlord.• Written contract is for a term of 5 years.• No extension options in the contract.• Within first few months, Tenant will install significant leasehold improvements
(useful life 8 years).
Y0 Y2 Y6Y4 Y8 Y10
Commencement of lease
End of written contract
Y1 Y3 Y5 Y7 Y9
Useful life of leasehold improvements
What is the period during which the contract is enforceable?
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Lease term – Example
Tenant leases a property from Landlord.• Written contract is for a term of 5 years.• No extension options in the contract.• Within first few months, Tenant will install significant leasehold improvements
(useful life 8 years).• At the end of year 5 – month-to-month.
Y0 Y2 Y6Y4 Y8 Y10
Commencement of lease
End of written contract
Y1 Y3 Y5 Y7 Y9
Useful life of leasehold improvements
Tacit agreement: month-to-month
What is the period during which the contract is enforceable?
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Lease term – Global reference and development
Broad definition of penalty Should a broader economic assessment be considered in determination of lease
term?
IASB webcast ESMA letter to IFRIC
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Lease term – what we are seeing in practice
Key customer contract impact to the lessee’s operations
Hold-over period during negotiation
Extension option assessmentsEnforceable contract assessment
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Embedded leases
Identification – Completeness
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Lease definition – reminder
Yes
No
Yes
No
Contract does not contain
a lease
Yes
NoIdentified asset?
Lessee obtains substantially all of the economic benefits?
Lessee directs the use?
Contract is or contains a lease
Rig
ht to
con
trol
the
use
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Lessee accountingTwo lease recognition exemptions
Short term leases
≤ 12 months and no purchase option
Accounting policy choice – class
by class
Exemptions not available for lessors
Leases of low value items – when new
≤ USD 5,000for example and not subject to sublease
Asset by asset
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Paper cup supply contract – backgroundSupplier manufactures paper cups for CustomerKey features of the supply contract: Supplier has one manufacturing line to produce cups
for Customer The manufacturing line is highly specialised and
located at Supplier Customer uses weekly purchase orders and these
effectively determine whether, when and how much output is produced
Key operating decisions are standardised and any changes in operating procedures are subject to approval by Customer
The supply contract is for a 5 year term Customer pays both a fixed amount of $500,000 and
a variable amount based on actual quantity of cups delivered in excess of 5 million units
How does Supplier account for the supply contact?
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Paper cup supply contract – thought process
Lease definition and exemptions ?
Identified asset?
Substantially all economic benefits?
Direction of use?
Short term lease?
Low value item?
Variable payment subject to usage? ?
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Lessor profit/loss impactOperating lease
Profit/loss extract
$’000
Revenue from contracts with customers 560,000Manufacturing line rental income 425,000…..
Depreciation 330,000
…..
EBITDA 450,000
Net profit 10,000
Finance lease
Profit/loss extract
$’000
Revenue from contracts with customers 560,000Finance lease interest income 25,000…..
Depreciation -
…..
EBITDA 50,000
Net profit 9,000
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Paper cup supply contract – variationsPotential variations in form of supply contract: Supplier has multiple production lines to fulfil orders for
multiple customers The manufacturing line is not highly specialised
OR
Customer provides a half-yearly non-binding production forecast
Paper cups can be easily stored – i.e. Supplier can decide when the output is produced
Impact on Supplier’s accounting?
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Road tunnel – background
Subcontracts to bore tunnel
Contracts for a 15km underground four lane road
Tunnel Operator (TO)
HeadContractor (HC)
SubContractor (SC)
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Road tunnel – backgroundHC enters into contract with SubContractor (SC) to bore the tunnelKey features of the boring contract: SC will order a specific specialised boring machine At end of tunnel construction SC will retrieve the boring
machine HC determines tunnel design and determines the overall
site plan which involves all aspects to deliver a completed road under the head contract
Key operating decisions are standardised and any changes in operating procedures are subject to approval by HC
Expected length of time is two years HC pays a fixed amount of $50 million
How does HC account for the contract with SC?
HeadContractor(HC)
SubContractor(SC)
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Road tunnel – thought process
Lease definition and exemptions ?
Identified asset?
Substantially all economic benefits?
Direction of use?
Short term lease?
Low value item?
Variable payment subject to usage?
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Road tunnel – head contract
Impact on HC’s accounting for its contract with TO?
HeadContractor(HC)
Tunnel Operator (TO)
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Road tunnel – head contract
Control of underlying assetvs
Control of a right to use the underlying asset
What revenue gets recognised when?
HeadContractor(HC)
SubContractor(SC)
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Where could we find embedded leases?
IT servicesDedicated
manufacturing capacity
‘As a service’ contracts
Sales contracts
Supply contracts
Advertising
Transportation
Construction
Related party transactions
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Variable lease payments based on index or rate
Change in practice
$10,000 x 5%
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Variable lease payments based on index or rate
Payments based on an index or rate - e.g. CPI or interest rate
Payments based on revenues or usage
Which variable lease payments are included in the lease liability?
Remeasure lease liability to reflect reassessment of any changes in an index or rate
(includes market rent review)
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Variable lease payments with multiple indices – Example
End of year 6
End of year 10
Market rent review
Commencementdate
CPI = 100
End of first year
CPI = 105
At the end of first year, should the lessee update the Y6-Y10 cash flows for change in CPI when remeasuring the lease liability?
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Variable lease payments with multiple indices – ExampleYear View 1
(all remaining payments increased by changes in CPI)
View 2(only future payments until the market
rent review increased by changes in CPI)
Year 2Year 3Year 4Year 5Year 6
10,50010,50010,50010,50010,500
10,50010,50010,50010,50010,500
Year 7Year 8Year 9Year 10
10,50010,50010,50010,500
10,00010,00010,00010,000
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Variable lease payments with multiple indices – ExampleYear View 1
(all remaining payments increased by changes in CPI)
View 2(only future payments until the market
rent review increased by changes in CPI)
Year 2Year 3Year 4Year 5Year 6
10,50010,50010,50010,50010,500
10,50010,50010,50010,50010,500
Year 7Year 8Year 9Year 10
10,50010,50010,50010,500
10,00010,00010,00010,000
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Other considerations
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Other considerations
Impairment considerations
Tax effect accounting
Lease incentives
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KPMG Tools How does it work?
Conforms to the new AASB 16 Leasesaccounting standard
Generates supporting lease level results which can be grouped for presentation and decision making purposes
Provides Balance Sheet, Profit and Loss, and Cash Flow projections
Supports large lease portfolios
What are the benefits?
Suitable for companies with lean operations
Easy to use automated
solution
Fast and cost effective
deployment
Versatile
Oversight
Efficiency
KPMG IFRS 16 Accounting Tool
(KIAT)
KPMG Lease Reporting Model
(LRM)
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IFRIC considerations
Customer’s Right to Access
Supplier’s Software
Hosted on the Cloud
Contracts that give rights to
space below the ground for a
period of time
Deferred tax related to
assets and liabilities
arising from a single
transaction
Liabilities in relation to a Joint
Operator’s interest in a Joint
Operation
Agenda decision:Change in accounting policy?Time to adopt?Disclosures required?
Wrap up
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Take-aways
1 Be aware of challenges and judgements involved in determining the lease term.
2 Importance of identifying all embedded leases for completeness of the population of lease contracts.
3 Consider impact of variable lease payments linked to index/ rate on the measurement of lease liability.
4 Broader financial reporting impacts.
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ResourcesAASB 16: Leases AASB 16 Check – Have you considered these questions?
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KPMG.com.au
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