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The views expressed in this presentation are those of the presenter,
not necessarily those of the IASB or IFRS Foundation....
International Financial Reporting Standards
The views expressed in this presentation are those of the presenter,
not neces...
• IFRS 16 Leases published in January
2016
• replaces IAS 17 and related
interpretations
• changes lessee accounting
subst...
International Financial Reporting Standards
The views expressed in this presentation are those of the presenter,
not neces...
Leases are an important and flexible source of financing—
listed companies using IFRS Standards or US GAAP
estimated to ha...
• Leases create assets and liabilities
• Most leases are not reported on the balance sheet
• Long-term liabilities of heav...
• 6 retail chains that ultimately went into liquidation
7
The need for change
Currently a lack of information
© IFRS Found...
• Many do not adjust reported numbers
• More sophisticated investors adjust using estimation
techniques (eg multiples of r...
10
The need for change
Lack of comparability – unlevel playing field
© IFRS Foundation | 30 Cannon Street | London EC4M 6X...
International Financial Reporting Standards
The views expressed in this presentation are those of the presenter,
not neces...
• Substantially carry forward IAS 17 accounting requirements;
some additional disclosure requirements
• Former operating l...
• Similar to previous definition, changed guidance on control
• Control = directing the use and obtaining the benefits fro...
• A lease conveys the right to use an asset for a period of time
in exchange for cash payments
• Lessee reports lease asse...
• Increase in lease assets and financial liabilities—all leases
reported on balance sheet (other than short-term leases an...
• Short-term leases
• Leases with lease term <12 months
• Low-value asset leases
• Leased assets in order of magnitude of ...
17
Lessee Accounting
Balance sheet: what’s excluded?
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs...
18
Lessee Accounting
Initial measurement
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Right o...
• Right of Use (ROU) Asset
• Balance sheet presentation separately as an asset
• Depreciated over the life of the lease
• ...
Balance sheet
• ROU assets together with PPE or as own line item
• Lease liabilities in accordance with IAS 1
Income state...
22
Lessee Accounting
Disclosure
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
• Breakdown of l...
• New requirements will affect key ratios that are used to
analyse a company’s financial leverage and performance:
23
Less...
• Subleases—Intermediate lessor
• Account for head lease and sublease as two separate
contracts
• Classify a sublease with...
• In essence, no change to lessor accounting in IAS 17
• Feedback on 2013 ED
• Lessor accounting in IAS 17 is not broken
•...
• IFRS 16 effective for annual periods beginning on or after 1
January 2019
• Early application permitted if IFRS 15 Reven...
• In practice, little difference in profit or loss reported for many
companies
27Convergence with the FASB
© IFRS Foundati...
International Financial Reporting Standards
The views expressed in this presentation are those of the presenter,
not neces...
33Effects of lessee accounting changes
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
1 2014 an...
• Greater transparency about financial leverage and capital
employed
• More level playing field for all market participant...
• Leases website
http://www.ifrs.org/Current-Projects/IASB-Projects/Leases
• Effects analysis
http://go.ifrs.org/Leases/ef...
36Thank You
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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IFRS 16 Leases Presentation

Assurance and advisory firm Nkonki will be hosting a roundtable session exclusively for CFOs with Darrel Scott, Board Member of the IFRS Foundation. Scott, who is in Johannesburg for the occasion, will provide global and industry insights on the newly-released IFRS 16, issued on 13 January 2016, to CFOs from many of South Africa’s leading companies.

“The session is designed to share insights and deliberate on how this new accounting standard will impact processes and financial reporting, and how industries across the globe will deal with this change,” says Sindi Zilwa, CEO of Nkonki. It will also provide an update on accounting developments in the medium term.

The International Accounting Standards Board (IASB) issued IFRS 16 Leases in January 2016. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, namely, the customer (‘lessee’) and the supplier (‘lessor’). IFRS 16 is effective from 1 January 2019. IFRS 16 completes the IASB’s project to improve the financial reporting of leases. IFRS 16 replaces the previous leases Standard, IAS 17 Leases, and related Interpretations.

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IFRS 16 Leases Presentation

  1. 1. The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation. International Financial Reporting Standards IFRS 16 Leases © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org CFO Roundtable 5 April 2016 Darrel Scott IASB member
  2. 2. International Financial Reporting Standards The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation When? © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
  3. 3. • IFRS 16 Leases published in January 2016 • replaces IAS 17 and related interpretations • changes lessee accounting substantially • little change for lessors • Effective date 1 January 2019 • early application permitted (only with application of IFRS 15 Revenue from Contracts with Customers) 3New Leases Standard © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
  4. 4. International Financial Reporting Standards The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation Why? The need for change © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
  5. 5. Leases are an important and flexible source of financing— listed companies using IFRS Standards or US GAAP estimated to have US$3.3trillion lease commitments Therefore, it is difficult for investors and others to: • Get accurate picture of entity’s lease assets and liabilities • Compare companies that lease assets with those that buy • Estimate the amount of off balance sheet obligations: often overestimated 5The need for change © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Over 85% of lease commitments do not appear on balance sheet today
  6. 6. • Leases create assets and liabilities • Most leases are not reported on the balance sheet • Long-term liabilities of heaviest users of off balance sheet leases1 understated by: • 26% Europe • 22% North America • 32% Asia Pacific • Huge variation across and within industries 6The need for change © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 1 1,022 IFRS/US GAAP listed entities (excluding banks and insurance companies) each with estimated operating lease liabilities of >$300M (discounted basis). Data obtained from financial data aggregators that may contain errors; this information should, therefore, be used with a degree of caution.
  7. 7. • 6 retail chains that ultimately went into liquidation 7 The need for change Currently a lack of information © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 1 Based on averaged published financial statement data available for 5 years before company entered Chapter 11 (US), liquidation (UK) or bankruptcy (DEU). 2 Estimated using (i) a discount rate of 5% and (ii) estimated average lease terms based on the information disclosed in the financial statements. 3 Off balance sheet leases (discounted) as a multiple of on balance sheet debt Retailer Off balance sheet leases On balance sheet debt1 Discounted leases as multiple of debt3 (undiscounted)1 (discounted)2 Borders (US) $2,796M $2,152M $379M 5.68 Circuit City (US) $4,537M $3,293M $50M 65.86 Clinton Cards (UK) £652M £525M £58M 9.05 HMV (UK) £1,016M £809M £115M 7.03 Praktiker (DEU) €2,268M €1,776M €481M 3.69 Woolworths (UK) £2,432M £1,602M £147M 10.90
  8. 8. • Many do not adjust reported numbers • More sophisticated investors adjust using estimation techniques (eg multiples of rent expense) • Uses incomplete information so difficult and inaccurate 8 The need for change Why investors need better information? © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 1 1,022 IFRS/US GAAP listed entities (excluding banks and insurance companies) each with estimated operating lease liabilities of >$300M (discounted basis). Data obtained from financial data aggregators that may contain errors; this information should, therefore, be used with a degree of caution. Expert investors attempt to estimate; others do not Asymmetry and inaccuracy of information in the market 1,022 entities(1) On balance sheet If all leases on balance sheet Common practice (rent x8) Long-term debt (US$m) 6,440,942 8,102,729 9,063,971 LT debt to equity 59% 74% 82%
  9. 9. 10 The need for change Lack of comparability – unlevel playing field © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Airline 1 (leases <10% of aircraft) Airline 2 (leases ≈70% of aircraft) On balance sheet If all leases on B/S1 On balance sheet If all leases on B/S1 PPE 16,908 19,926 15,748 24,020 Non-current liabilities 13,232 16,567 9,615 18,320 Equity 6,719 6,402 5,604 5,171 Ratio non-current liabilities to equity 2.0:1 2.6:1 1.7:1 3.5:1 1 The figures included in the “if all leases on balance sheet” columns are estimates using various assumptions about the discount rate and average lease term of leases held by each company.
  10. 10. International Financial Reporting Standards The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation What? The changes © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
  11. 11. • Substantially carry forward IAS 17 accounting requirements; some additional disclosure requirements • Former operating leases capitalised. All1 leases accounted for similarly to today’s finance leases 12What’s changed for lessors & lessees? © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 1 Exemptions for short-term leases and leases of low-value assets Changes to lessor accounting Changes to Lessee accounting Leased assets Financial Liabilities Equity Operating expense Finance cost Operating flows Financing flows Balance Sheet Cash flow statementIncome statement
  12. 12. • Similar to previous definition, changed guidance on control • Control = directing the use and obtaining the benefits from use • Based on control of the use of an identified asset • Separate services provided with leases • Separate using available information (including estimates) • Option to not separate components 13Definition of a lease © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Who controls the use of the asset? Customer or Supplier Lease Service
  13. 13. • A lease conveys the right to use an asset for a period of time in exchange for cash payments • Lessee reports lease assets and liabilities on balance sheet, except for short-term and for low-value asset leases, at present value of future lease payments • Discount rate: the rate implicit in the lease, or, if rate implicit not available, lessee’s incremental borrowing rate • Exclude variable payments and most optional payments • Portfolio application, simplified reassessment 14 Lessee Accounting Right-of-use model © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
  14. 14. • Increase in lease assets and financial liabilities—all leases reported on balance sheet (other than short-term leases and leases of low-value assets) 15 Lessee Accounting Balance sheet: what’s included? © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Included in lease liabilities: • Fixed payments (including inflation- linked payments) • Optional payments if lessee is reasonably certain to extend beyond non-cancellable period • Expected amount of residual value guarantees Discounted Fixed payments (including inflation-linked payments) Residual value guarantee Optional payments (reasonably certain)
  15. 15. • Short-term leases • Leases with lease term <12 months • Low-value asset leases • Leased assets in order of magnitude of <$5,000 • Examples: laptops, office furniture, mobile phones 16 Lessee Accounting Optional recognition exemptions © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
  16. 16. 17 Lessee Accounting Balance sheet: what’s excluded? © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Short-term leases Leases of low- value assets Variable lease payments linked to sales or use Optional payments (not reasonably certain) Not required to be included in lease liabilities Excluded from lease liabilities
  17. 17. 18 Lessee Accounting Initial measurement © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Right of use asset (at cost) Lease liability (present value of lease payments)
  18. 18. • Right of Use (ROU) Asset • Balance sheet presentation separately as an asset • Depreciated over the life of the lease • Depreciation carried in profit and loss • Reassessed for impairment • Liability • Balance sheet presentation separately as a liability • Interest expense (discount unwind) through profit and loss as interest • Simplified reassessment 20 Lessee Accounting Subsequent measurement © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
  19. 19. Balance sheet • ROU assets together with PPE or as own line item • Lease liabilities in accordance with IAS 1 Income statement • Depreciation of all leased assets • Interest expense for all lease liabilities Cash flow statement • Principal within financing activities • Interest within either operating or financing activities (IAS 7 option) 21 Lessee Accounting Presentation © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
  20. 20. 22 Lessee Accounting Disclosure © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org • Breakdown of lease costs • Total lease cash flows • Maturity analysis of undiscounted commitments • Information about ROU assets by major class of leased asset Quantitative disclosures • Additional information, if relevant • Extension and termination options • Variable lease payments • Residual value guarantees • Sale and leaseback Entity-specific information
  21. 21. • New requirements will affect key ratios that are used to analyse a company’s financial leverage and performance: 23 Lessee Accounting Performance metrics © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Metric Measure Calculation Effect Leverage Solvency Liabilities / Equity Increase Asset turnover Profitability Sales / Total assets Decrease EBIT/Operating profit Profitability Various methods Increase EBITDA1 Profitability Refer name Increase EBITDAR2 Profitability Refer name No change 1 Earnings before interest, tax, depreciation and amortisation 2 Earnings before interest, tax, depreciation, amortisation and rent
  22. 22. • Subleases—Intermediate lessor • Account for head lease and sublease as two separate contracts • Classify a sublease with reference to the ROU asset arising from the head lease • Should not offset lease assets and liabilities, or income and expenses, unless meets existing IFRS guidance for offsetting • Sale and leaseback transactions • Sale must meet the requirements in IFRS 15 • Seller/lessee recognises only gain related to rights transferred • Adjustment made for off market terms 24Subleases, Sale and leaseback © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
  23. 23. • In essence, no change to lessor accounting in IAS 17 • Feedback on 2013 ED • Lessor accounting in IAS 17 is not broken • Concerns about cost and complexity • IFRS 16: enhanced disclosures • Information about the residual value risk • Operating leases: separate disclosures for leased assets and assets used by a lessor for other than leasing 25Lessor Accounting © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
  24. 24. • IFRS 16 effective for annual periods beginning on or after 1 January 2019 • Early application permitted if IFRS 15 Revenue from Contracts with Customers applied • If cumulative catch-up transition method elected: • No restatement of comparatives • No need to apply IFRS 16 to leases ending within 12 months • Simplified measurement option on transition 26Effective date and transition © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
  25. 25. • In practice, little difference in profit or loss reported for many companies 27Convergence with the FASB © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Measure- ment of liability Leases on balance sheet Definition of a lease Converged decisions Lease in income statement Different
  26. 26. International Financial Reporting Standards The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation Benefits? © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
  27. 27. 33Effects of lessee accounting changes © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 1 2014 annual reports for the vast majority of companies. 2 Estimate using the average cost of debt for these companies, that was 5%. IAS 17 issues Benefits of IFRS 16 • A lack of information • Investors attempt to estimate • Companies provide lease- adjusted information • Improved quality of financial reporting • A lack of comparability • No level playing field • Improved comparability
  28. 28. • Greater transparency about financial leverage and capital employed • More level playing field for all market participants • Reduce the need to make adjustments and to provide ‘non- GAAP’ information • Improve comparability between those who lease and those who borrow to buy 34Key benefits of IFRS 16 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Facilitate better capital allocation by enabling better credit and investment decision-making by both investors and companies
  29. 29. • Leases website http://www.ifrs.org/Current-Projects/IASB-Projects/Leases • Effects analysis http://go.ifrs.org/Leases/effects-analysis • Project summary and feedback statement http://go.ifrs.org/Leases/project-summary • Register for email alerts http://eifrs.ifrs.org/eifrs/Register 35Further information © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
  30. 30. 36Thank You © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

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