Summary of new Lease standard to be implemented from January 1st 2019. Removes differentiation between operating and finance leases.

1. Leases – IFRS 16
SUMMARY OVERVIEW

2. Overview
• IFRS 16 – effective periods commencing January 1st 2019
• It can be applied before that date for entities that also apply IFRS 15
• IFRS 16 eliminates the classification of leases as either operating leases or finance leases, and
introduces a single lessee accounting model.
• The new standard requires the lessee to recognise lease assets and any related financial
obligation to make future lease payments.
• This applies to all leases with a term of more than 12 months, unless the value is low.
• In a simple lease, the lessee obtains the right to use the leased asset for a period of
time.This meets the IFRS definition of an asset, and the obligation to pay rent meets
the definition of a liability.
• IFRS16 therefore requires that a lessee will recognise within the accounts:
• An asset representing its right to use the asset for the period of the lease term (“the right of
use”), and;
• A liability representing its obligation to pay a rental cost for the period of the lease.
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3. Identifying leases
• Lease definition:A contract that conveys the right to use an asset (the underlying
asset”) for a period of time in exchange for consideration.
• At inception of contract assess whether the contract is, or contains, a lease.
• This will be if the contract conveys the right to control the use of an identified asset for a
period of time in exchange for consideration.
• Control is considered to exist:
• If the customer has:
• The right to obtain substantially all of the economic benefit from the use of an identified asset;
and, the right to direct the use of that asset.
• If the supplier has substantive rights to substitute the asset throughout the period of
use there will not be an identified asset.
• “Substantive rights”: the supplier has the practical ability to substitute and would
benefit economically from doing so.
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4. Identifying leases
• Separating lease components:
• Account for each lease component in a contract as a lease separately from non-lease
components – e.g. split service elements from the identifiable asset.
• Lessees must allocate consideration in the contract to each component
• On the basis of their relative stand-alone price
• The price that a lessor, or a similar supplier, would charge an entity for that component
(or similar) on its own, or a reasonable estimate of this.
• Exemptions to IFRS16:
• Short term leases – election is made by class of underlying asset to which the short term
right of use relates (expected term cannot exceed 12 months)
• Low value leases – election is made on a lease by lease basis (guidelines indicate value
of new asset less than USD $5000)
• Instead, account for these as currently required by IAS17 as operating leases.
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5. Liability measurement
• Lease payments to be included
• Fixed Payments – less any lease incentives receivable
• Variable lease payments – that depend on an index or a rate, initially measured using
the index or rate at the start date
• ResidualValue guarantees – to be paid by the lessor
• The exercise price of a purchase option – if a lessee is reasonably certain to exercise the
option, and;
• Lease termination penalties – given that the lease term reflects the lessee exercising an
option to terminate the lease.
• LeaseTerm
• The non-cancellable period of a lease plus periods covered by options to:
• Extend the lease – if the lessee is reasonably certain to exercise that option; and,
• Terminate the lease – if the lessee is reasonably certain not to exercise the option
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6. Identifying leases
• Within IFRS16 there are illustrative examples to go through a variety of
circumstances and across a range of business operations and sectors:
• Rail cars
• Concession space
• Fibre-optic cable
• Retail unit
• Truck Rental
• Ship
• Aircraft
• Contract for shirts
• Contract for energy / power
• Contract for network services
• Leases of low value assets
• Portfolio applications
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7. Impact of new standard
• Consider the impact upon the financial statements of an entity by the new policy
changes – if they have substantial operating leases that have been kept “off-
balance sheet”
• Under current rules the cost of these operating leases will be reported as an operating
expense with no substantive impact on the balance sheet.
• With the definition under IFRS16
• Value of assets and liabilities will be recorded on the balance sheet
• Long term value of the asset will be depreciated over lease term
• Interest charges will be calculated and apportioned on the value of the lease payments
• Therefore if a company is measured on its EBITDA results – it has transferred a
substantial cost “below the line” into depreciation and interest with the
application of the new lease standard.
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8. Impact of new standard
• When considering the impact upon the reporting of the results, businesses
should consider the impact across a range of potential areas:
• Key Performance Indicators
• EBITDA
• Return on Assets
• Bonus targets and executive remuneration schemes
• Contingent consideration in business combinations
• Tax
• Debt covenants (if not based on “frozen” GAAP)
• Ability to pay dividends
• Regulatory capital requirements
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9. Impact of new standard on results by sector
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Source: Global PWC survey – www.pwc.com

10. Example – impact of new standard on retail
• Consider a retail company:
• 400 branches / retail units
• Multiple time lines on operating leases
across property portfolio
• Policy - 10 yr lease with 5 yr break clause
• Full repairing lease upon exit
• Inflation adjusted rental periods/prices
• Rent free periods upon signing contract
and re-negotiated at break clause.
• Currently reported in P&L as
operating lease cost in the year of
expenditure
• Balance sheet reflecting liabilities for
onerous lease costs and dilapidation
provisions.
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Scoping
Data extraction
Set up contract
management
Link to ERP & Ledger
Lease Reporting
Process stages to review lease impact:

11. Further guidance and information
• Resources:
• https://www.pwc.com/gx/en/services/audit-assurance/ifrs-16-the-new-leasing-standard.html
• PWCwebcast: https://www.youtube.com/watch?v=_91_jGaETCI&feature=youtu.be
• https://www2.deloitte.com/uk/en/pages/audit/articles/ifrs-16-leases.html#
• Contact
• E-mail: arm-fdsolutions@outlook.com
• LinkedIn: https://www.linkedin.com/in/tonymason-arm-interim-fd-cfo
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