aasb 16 leases...2018/10/23 · y% difference lease liability $300,000 12 years $1,100,000 $800,000...

AASB 16 Leases

Modifications and implementation

________23 October 2018

2© 2018 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

Your facilitators are

Patricia Stebbens Hayley Pang

Michael Voogt Daina Klunder


Setting the scene

More to consider…

Date of initial application is almost upon us… 1 January 2019.

On transition to the new standard and on an ongoing basis.

Overview (2016)

Transition options (2017)

Have you got its measure?

(2017)


Transition for lessees - modifications

Reconstruct modifications Reconstruct modifications Ignore prior modifications

Modified retrospective –

reconstruct ROUAFull retrospective

Modified retrospective – ROUA

= lease liability


Agenda

Accounting for lease modifications, both lessees and lessors

Disclosurerequirements, on transition and ongoing

Implementation insights

Modifications


Lease modification - definition

Change in the: scope of a lease, or consideration for a leasethat was not part of the original terms and conditions.


Lease modification examples

Negotiate to reduce floor space from 4 floors to 3 floors.

Receive a rent rebate for 2 years due to downturn in economy.

Negotiate to increase lease term.

Negotiate to increase the number of vehicles rented.


Lessee: modifications overview

Increase in scope

Decrease in scope

Quantity of assets

Lease term

Change in consideration


Reduce rent due to downturn in economy.

Add to lease an extra floor of office space.

Reduce the lease term for office space.

Lease an additional 2 trucks as part of a

master leasing arrangement that does not

take a minimum quantity of trucks to be

leased.

Understanding modifications

Decrease in scope

Account for as a new lease

Increase in scope – increase in quantity of assets

Neither increase nor decrease in scope –change in consideration


Examples

Increase in scope: Lease term

Increase in scope: Additional vessel

Decrease in scope: Reduction in floor space


Example: Increase in scope – lease term

Y0 Y6 Y22Y14 Y26 Y30

Scenario 20 year lease of an industrial area commences,

no extension options Lease payments are $150,000 p.a. Incremental borrowing rate is X%

Y10 Y18 Y28Y2 Y24Y4 Y8 Y12 Y16 Y20

End of Year 18 – an extension is agreed for an additional 10 years

No change in annual lease payments

Incremental borrowing rate is Y%


Example: Increase in scope – lease term

At end of Year 18 Revised term Y% Difference

Lease liability $300,000 12 years $1,100,000 $800,000

ROUA $200,000

Accounting for the modification:

Remeasure lease liability: $1,100,000Adjust ROU asset: $1,000,000

Y0 Y6 Y22Y14 Y26 Y30Y10 Y18 Y28Y2 Y24Y4 Y8 Y12 Y16 Y20

Effective date of modification

End of Year 18 – an extension is agreed for an additional 10 years

No change in annual lease payments


Scenario 20 year lease of an industrial area commences,

no extension options Lease payments are $150,000 p.a. Incremental borrowing rate is X%


Scenario 10 year lease of a vessel (vessel 1) Lease payments are $1,000,000 p.a. Incremental borrowing rate is X%

Example: Increase in scope – quantity of assets

Y0 Y2 Y10Y6 Y8Y4

End of Year 4 – lessee signs an amendment to lease an additional vessel (vessel 2) for an $1,000,000 p.a. for 6 years

Market rent for vessel 2 is $1,200,000



Increase in lease payment is not commensurate with standalone price



Y0 Y2 Y10Y6 Y8Y4

End of Year 4 – lessee signs an amendment to lease an additional vessel (vessel 2) for an $1,000,000 p.a. for 6 years




Remeasurement: Remeasure lease liability (present value $2m for remaining 6 years at revised discount rate)

Increase in lease payment is not commensurate with standalone price




Y0 Y2 Y10Y6 Y8Y4

End of Year 4 – lessee signs an amendment to lease an additional vessel (vessel 2) for $1,200,000 p.a. for 6 years



Increase in lease payment is commensurate with standalone price




Separate lease: Recognise new lease liability (present value $1.2m for 6 years at revised discount rate)Vessel 1: No change

Y0 Y2 Y10Y6 Y8Y4

End of Year 4 – lessee signs an amendment to lease an additional vessel (vessel 2) for $1,200,000 p.a. for 6 years



Increase in lease payment is commensurate with standalone price



Additional considerations – discount rates

• Estimate – requires judgement

• Process in place?

• May require use of specialists


Example: Increase in scope – forward starting

Y0 Y2 Y6 Y8Y4Y1 Y3 Y5 Y7


End of Y2 – lease amended to include the rental of the underground car park from Y5 for $30,000 p.a.

Relative stand alone prices are $375,000 for building rental and $75,000 for the car park


Car park available for use

Scenario 8 year lease of a building Lease payments are

$400,000 p.a. Incremental borrowing rate is

X%



Y0 Y2 Y6 Y8Y4Y1 Y3 Y5 Y7


End of Y2 – lease amended to include the rental of the underground car park from Y5 for $30,000 p.a.

Relative stand alone prices are $375,000 for building rental and $75,000 for the car park


Car park available for use

Scenario 8 year lease of a building Lease payments are

$400,000 p.a. Incremental borrowing rate is

X%

Poll question:

When is the car park component recognised?

a) At the effective date of the modification, the end of year 2

b) At the effective date of the modification, the start of year 5

c) When the car park is made available for use, the start of year 5


Example: Increase in scope – forward startingAllocation of consideration:

Observable stand-alone price: building A $375,000Observable stand-alone price: car park B $75,000Total C = A+B $450,000Building component as % of total observable prices D = A/C 83%Car park component as % of total observable prices E = B/C 17%Allocation of consideration to building lease D x $430,000 $357,000Allocation of consideration to car park lease E x $430,000 $73,000



Y0 Y2 Y6 Y8Y4Y1 Y3 Y5 Y7

Recognise car park lease:Remeasure building lease:

Lease liability:$1,700,000 - $200,000 = $1,500,000ROU asset:$1,600,000 - $200,000 = $1,400,000

Lease liability: $300,000ROU asset: $300,000


Example: Decrease in scope

Y0 Y6Y4 Y8 Y10Y2

Scenario 10 year lease for right to use 10,000m2

warehouse space Lease payments are $100,000 p.a. Incremental borrowing rate is X%

Contract modified to lease 7,500m2 for last 4 years

Lease payments are $85,000 p.a. Incremental borrowing rate is Y%

10,000m2 7,500m2

Lease payments $85,000Lease payments $100,000



Y0 Y6Y4 Y8 Y10Y2



10,000m2 7,500m2


Step 1: Remeasure lease liability and ROUA. Recognise gain or loss: P&L impactStep 2: Remeasure lease liability and ROUA for revised lease payments




Step 1


Y0 Y6Y4 Y8 Y10Y2

At end of Year 675% (25% partial

termination)ROUA $280,000 $210,000

Difference$70,000 (Cr)

Lease liability $340,000 $255,000 $85,000 (Dr)

$15,000 (CR – P&L)



10,000m2 7,500m2







Y0 Y6Y4 Y8 Y10Y2



10,000m2 7,500m2



At end of Year 6Revised lease

paymentsROUA $210,000 $230,000

Difference$20,000 (Dr)

Step 2

Lease liability $255,000 $275,000 $20,000 (Cr)




Lessee: modification accounting complexitiesMultiple elements

Y0 Y3Y2 Y4 Y5Y1

5 year lease term

1 year lease term

3 year lease term

Modification

Car 1

Car 1

Car 2

Y6


Lessee: modification accounting complexitiesMultiple elements

Y0 Y3Y2 Y4 Y5Y1

5 year lease term

1 year lease term

3 year lease term

Modification

Car 1

Car 1

Car 2

Y6

Poll question:Is there a gain or loss to be recognised?

a) Yes, there is a decrease in lease term for car 1

b) No, there is an overall increase in lease term


Lessor: modifications to an operating lease

Account for as a new lease – taking into account prepaid/accrued lease payments.

Classify new lease as operating or finance, depending on terms.

Amortise prepaid/accrued lease

payments over new lease term


Lessor: modifications to a finance leaseIncrease in scope is at the standalone price, account for a separate lease


Lessor: modifications to a finance lease

Operating lease

Terminate original lease, create a new lease

Carrying amount of underlying asset = net investment of original lease immediately before modification effective date

Finance lease

Apply AASB 9: Consider is the modification to the lease receivable substantial? Apply modification of financial asset accounting

If not a separate lease – reassess lease classification

OR

Increase in scope is at the standalone price, account for a separate lease

Implementation insights


Lease term assessment - penalties

Lessee and the lessor each have the right to terminate

the lease without permission from the other party with no more than an

insignificant penalty

Lease is no longer

enforceable


Example: Lease term assessment - penalties

5 year lease of a warehouse Lessee uses the warehouse as a furniture showroom Fit-out costs are incurred Lessee and lessor each have the right to terminate the lease after 6 months

‘Penalty’ should be applied broadly, and includes economic disincentives to exercise a termination option


Example: Lease term assessment - penalties

5 year lease of a warehouse Lessee uses the warehouse as a furniture showroom Fit-out costs are incurred Lessee and lessor each have the right to terminate the lease after 6 months

‘Penalty’ should be applied broadly, and includes economic disincentives to exercise a termination option

Poll question:Can the short-term lease exemption be applied?

a) Yes

b) No

c) Further information is required


Economic disincentives that may create a ‘penalty’:

Economic value of leasehold improvements

Cost to dismantle leasehold improvements

Cost to restore the warehouse to its original condition

Potential impact of early termination on customer relationships

Lease term assessment - penalties


Transition disclosures

Retrospective approach Early adoption

Practical expedients for lease definition

Modified retrospective approach Early adoption

Practical expedient for lease definition

Practical expedients relating to operating leases

Weighted-average incremental borrowing rate

Differences between operating lease commitments and lease liabilities

1 2


Go forward disclosuresMandatory quantitative information – specific disclosures

Additional entity-specific information

Extension and termination options

Residual value guarantees

Variable lease payments

Sale & leaseback transactions

Maturity analysis of lease commitments

Lease expense for low value leases

Lease expense for short term leases

Lease costs and sub-lease income

Reconciliation of ROU assets by major class of underlying assets

Total cash outflows for leases

1

2


Overview of Key Operating Decisions

Impact on debt covenants

Procurement and approval process

New leasing systems to capture data and perform calculations for statutory reporting purposes

Go forward processes and controls

Changes to KPIs

Budgeting and forecasting process


Key points to remember

1The lease liability and ROUA are required to be remeasured when there is a lease modification. There may be a gain or loss if there is a decrease in scope.

2 For a multiple element modification, each element is separately addressed.

3 Disclosures are required for leases not on balance sheet.

4 There could be significant impacts on the business on transition to AASB 16.


KPMG Resources

IFRS 16 Leases standard – core concepts Leases – Transition to AASB 16 AASB 16 Leases – Do you have its

measure?

Thank you

kpmg.com.au

© 2018 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

Liability limited by a scheme approved under Professional Standards Legislation.

The information contained in this document is of a general nature and is not intended to address the objectives, financial situation or needs of any particular individual or entity. It is provided for information purposes only and does not constitute, nor should it be regarded in any manner whatsoever, as advice and is not intended to influence a person in making a decision, including, if applicable, in relation to any financial product or an interest in a financial product. Although we endeavour 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.

To the extent permissible by law, KPMG and its associated entities shall not be liable for any errors, omissions, defects or misrepresentations in the information or for any loss or damage suffered by persons who use or rely on such information (including for reasons of negligence, negligent misstatement or otherwise).

http://kpmg.com.au

https://www.youtube.com/user/kpmgaustralia

https://www.youtube.com/user/kpmgaustralia

https://www.facebook.com/KPMGinAustraliaGraduatesandStudents?fref=ts

http://www.facebook.com/kpmgaustralia

https://instagram.com/kpmgaustralia/

https://instagram.com/kpmgaustralia/

https://www.linkedin.com/company/kpmg-australia?trk=hb_tab_compy_id_2639873

http://www.linkedin.com/company/kpmg-australia

https://twitter.com/kpmgaustralia

https://twitter.com/kpmgaustralia

aasb 16 leases...2018/10/23 · y% difference lease liability $300,000 12 years $1,100,000 $800,000...

Documents