IFRS 16 Lease Accounting Workshop - EIB

IFRS 16
Lease accounting workshop
23 October 2018
1 Overview 7 Special aspects
2 Identifying a lease 8 Effective date and transition
3 Key concepts 9 Effect on KPIs
4 Lease classification (lessors only) 10 Your questions
5 Lessee accounting
6 Lessor accounting
Agenda
Ground Rules
All I want is a positive participation

► Respect time:
► start on time
► 15-minute break for every three hours of training
► Distraction-free zone
► turn off all cell phones, PDAs and computers, since these can be distracting to
others.
► Safety - criticism-free environment.
► Be patient and encourage other participation to discussion process
► Mistakes are acceptable in discussions : making mistakes is fine. That is how we
learn!
► Open discussions
► Enjoy the learning experience!
3
Page 3 IFRS 16 - Lease accounting workshop
IFRS 16
01 Overview
What is changing?
What changes can we expect? Overview

• The lessee will be required to • IFRS 16 Leases was issued on 13 January 2016.
recognize the majority of leases in • It replaces all previous IFRS provisions on lease accounting (IAS 17,
its balance sheet. SIC 15, SIC 27 and IFRIC 4).
• Apart from some exemptions, the • The standard is the result of a joint project with the FASB, which for its
lessor
will use a single on-balance sheet
part issued new guidance on lease accounting on 25 February 2016.
accounting model for all leases. However, as the IASB and the FASB reached different decisions in
• Lessor accounting will remain some areas as the project progressed, differences still exist.
essentially unchanged. • The new standard will be effective for annual periods beginning on or
• Disclosure requirements will after
increase significantly. 1 January 2019. Early application is permitted if IFRS 15 is also
applied.
Timeline
Prior periods
Effective
presented
2016 2017 2018 2019
Final revenue Full retrospective Modified

standard application date retrospective
application date
Timeline assumes that one comparative period is required. In some regulatory environments or jurisdictions,
two comparative periods may be required.
5
What will change for your company?
Managing the expectations of stakeholders while simultaneously implementing

Interaction with other accounting various programs will be a challenge.
changes
• The lessee will be required to
recognize the majority of leases in
its balance sheet.
• Apart from some exemptions, the
lessor
will use a single on-balance sheet
accounting model for all leases.
• Lessor accounting will remain
essentially unchanged.
• Disclosure requirements will
increase significantly.
6
High-level impact analysis for Companies
cur-
IAS 17 IFRS 16 new
rent
High-level
Finance Operating All
impact analysis
leases leases leases for Companies
jjvv
Assets j G – + EUR Xm
GGG
Liabilities $$ – $$$$$$$ + EUR Xm
vv
Rights and off-balance Retained
– j G G –
sheet items earnings
$$$$$ — EUR X m
Revenue X X X X
Implications
Lease
Other expenses – – - EUR Xm
expenses
EBITDA + EUR Xm
Depreciation Depreciation – Depreciation - EUR Xm
EBIT + EUR Xm
Finance cost Interest – Interest - EUR Xm
EBT + EUR Xm

IFRS 16
02 Identifying a lease
Identifying a lease
Scope and scope exclusions
Scope: All leases
• … except
• Leases to explore for or use natural resources (e.g., oil)
• Leases of biological assets (IAS 41)
• Service concession arrangements (IFRIC 12)
• Licenses of intellectual property granted by a lessor within the scope of IFRS 15
• Licensing agreements within the scope of IAS 38 – Intangible assets
NOTE:
• Intangible assets: Lessees have the option to apply this standard
• Bearer plants are in the scope of IFRS 16
• Leased property that is subleased (investment property): Off-balance sheet recognition no longer
an option

Decision tree (IFRS 16.B31):
Is there an identified asset? No

(IFRS 16.B13-B20)
Yes
Does the customer have the right to obtain substantially all of
the economic benefits from use of the asset throughout the No
period of use?
(IFRS 16.B21-B23)
Yes
Does the customer, the supplier or neither party have the right
Customer to direct how and for what purpose the asset is used Supplier
throughout the period of use?
(IFRS 16.B25-B30)
Neither; how and for what purpose the

asset is used are predetermined
Does the customer have the right to operate the asset
Yes throughout the period of use, without the supplier having the
right to change those operating instructions?
(IFRS 16.B24(b)(i))
No
Did the customer design the asset in a way that predetermines
how and for what purpose the asset will be used throughout No
the period of use?
(IFRS 16.B24(b)(ii))
Yes
The contract contains a The contract does not

lease contain a lease

IFRS 16 — Definition of a lease
“A contract, or part of a contract, that Does the customer have the right to obtain
conveys the right to use an asset (the underlying substantially all of the economic benefits from use of
asset) for a period of time the asset throughout the period of use (IFRS 16.B21 -
No
in exchange for consideration.” B23) ?
Yes
Does the customer have the right to direct the use of
Does the fulfilment of the contract the asset throughout the period of use (IFRS 16.B24 -
depend on the use of an identified asset B30) ?
Right to control the use

(IFRS 16.B13 - B20) ?
Does the customer have the right to direct how and for Yes
Identified asset
what purpose the asset is used throughout the period

(IFRS 16.B25 - B30) ?
Supplier has the substantive right to substitute the
asset throughout the period of use
(IFRS 16.B14 - B19) ? No
No Are the relevant decisions about
how and for what purpose the asset
is used predetermined?
Supplier has the practical ability No
throughout the period of use ? Yes
Does the customer have the
Yes
Yes right to operate the asset
(IFRS 16.B24b(i)) ?
Supplier would benefit economically from No
Yes
the exercise of it’s right to substitute ? No Did the customer
design the asset
Yes (IFRS 16.B24b(ii)) ?
No lease (service) Lease

Example 1A: Lease of a hotel
Example Solution
• Agreement for the use of a specific hotel building with The contract contains a lease.
precisely defined interior and exterior appointments No
Identified asset
• Term of 20 years with a 10-year extension option (B13-B20)
Yes
• Customer has its own management and hotel staff
Customer has the right to obtain
• Customer decides on the use and occupancy of the substantially all the economic No
hotel benefits
(B21-B23)
• Customer is responsible – with the exception of the Yes
exterior walls and roof – for maintenance as set out in a
separate arrangement Customer Customer, supplier or neither has Supplier
right to direct the use (B24(a))
Neither
Yes Customer has the right to operate
the asset (B24(b)(i))
No
No
How and for what purpose asset is
used are predetermined (B24(b)(ii))
Yes
A lease No lease

Example 1B: Management contract
Example Solution
• Company XY concludes an agreement for the • Usually, not a lease but a service provided by company
management of a hotel with precisely defined interior XY (and therefore governed by IFRS 15)
and exterior appointments • Provision of branding and reservation platform are
• In this context, the supplier provides the hotel separate performance obligations under IFRS 15
(including furniture, fittings and staff)
• Company XY provides the management, allows the use
of branding and grants access to the reservation
platform Problem
• Consideration for the use of branding and access to the • The circumstances are often not this clear-cut
reservation platform is paid separately • Such a contract will often contain a lease component
• Management compensation is largely dependent on the
performance of the hotel
• Term of 5 years

Example 2A: Concession space
Example Solution
• Agreement for the use of a specific number of counters The contract does not contain a lease.
(floor space, furniture and fittings and price are Identified asset No
specified) in an airport terminal (B13-B20)
• Airport operator is entitled to change the location at Yes
any time in accordance with the contractual terms and Customer has the right to obtain
No
also has alternative spaces at its disposal substantially all the economic
benefits
• Alternatively, the branding can be readily changed in a (B21-B23)
simple same-day redesign Yes
• Costs of relocation are low Customer

Customer, supplier or neither Supplier
has right to direct the use
• Term of 3 years (B24(a))
• Alternative: Customer uses its own, mobile sales booth Neither
Yes Customer has the right to
operate the asset (B24(b)(i))
No
No
Yes
A lease No lease

Example 2B: Concession space
Example Solution
• Agreement for the use of a defined counter The contract contains a lease.
(floor space and price are specified) at a major (hub) Identified asset No
airport (B13-B20)
• Counter location and branding are fixed. Yes
The airport operator does not have the contractual Customer has the right to obtain
No
right to relocate the counter. substantially all the economic
benefits
• Term of 3 years (B21-B23)
Yes
Customer
(B24(a))
Neither
Yes Customer has the right to
operate the asset (B24(b)(i))
No
No
Yes
A lease No lease

Example 3: Aircraft
Example Solution
• Agreement for the use of a specific aircraft The contract contains a lease.
(interior and exterior appointments defined ó very Identified asset No
specific) (B13-B20)
• Term of 2 years Yes
• Contract contains legal provisions on flight destinations Customer has the right to obtain
No
substantially all the economic
• Customer decides on the flight destination and time as benefits
well as on passengers and cargo (with due regard to (B21-B23)
the above provisions) Yes

• Supplier is responsible for the operation of the aircraft Customer
and uses its own crew (B24(a))
• Customer may not hire another operator for the Neither
aircraft or operate the aircraft itself during the period Yes Customer has the right to
of use operate the asset (B24(b)(i))
• Supplier may replace the aircraft at any time over the
No
term of the contract and is obligated to provide a No
replacement (with all contractually defined interior and How and for what purpose asset is
exterior appointments) in the event of
repairs/maintenance Yes
A lease No lease
Page 16 16
IFRS 16 - Lease accounting workshop
Example 4: Problem area: Classifying a capacity agreement
Example Problem area

Before IFRS 16: With this type of contractual arrangement, it could
• Purchase of 1,000 hotel beds for the winter season generally be assumed that there is no longer an
“identified asset” as defined by the standard because the
• Operating leases under IAS 17 lessor has a substantive right to substitute the asset.
After IFRS 16: As a result, it is normally possible to structure leases as
• Hotel provides 1,000 category A beds for the winter “capacity agreements” for certain assets.
season (definition:
1 bed = 1 room for an overnight stay)
BUT:
• Fixed fee
All rooms of a certain category are rented or a specific
• No right to a specific room in the hotel, only to a hotel area is rented for a whole season or several
specific room category seasons.
E.g., part of a complex on Greek islands for the opening
periods from April to the end of October for three years
è Then it is a lease
Page 17 18
Example 5: Problem area: Network services
Example Analysis:
• Customer enters into a contract with a Customer does not control the use of the servers because
telecommunications company (Supplier) for network Customer’s only decision rights relate to the level of
services for two years network services (the output of the servers) before the
• The contract requires Supplier to supply network period of use, i.e. the level of network services cannot be
services that meet a specified quality level. In order to changed during the period of use without modifying the
provide the services, Supplier installs and configures contract
servers at Customer’s premises - Supplier determines Supplier is the only party that can make relevant
the speed and quality of data transportation in the decisions about the use of the servers during the period
network using the servers. Supplier can reconfigure or of use (e.g. how data is transported using the servers,
replace the servers when needed to continuously whether to reconfigure the servers and whether to use
provide the quality of network services defined in the the servers for another purpose), hence the Supplier
contract controls the use of the servers in providing network
• Customer does not operate the servers or make any services to Customer.
significant decisions about their use
Conclusion:
The contract does not contain a lease. Instead, the
contract is a service contract in which Supplier uses the
equipment to meet the level of network services
determined by Customer
Page 18 18
PM 1: Scope of IFRS 16
PM1 – Scope of IFRS 16
PM 1 HO 1
Objective:
Determine whether specific transactions in in the scope
of IFRS 16
Identify lease and non-lease components of a contract
• Time: 10 minutes (5+5)
Directions:
• Work individually
• Review the transactions and determine if those
transactions are in the scope of IFRS 16
29
Identifying a lease
Exemptions for low-value assets leases
Option to account for leases for which the underlying asset is of low value:
“Off-balance sheet” or “on-balance sheet”
• Definition according to IFRS 16.B5:
• The lessee can benefit from use of the underlying asset on its own
• The underlying asset is not highly dependent on other assets
• Rough threshold: USD 5,000 ó ~ EUR 5,000
• Off-balance sheet: No assets/no liabilities/straight-line expense
• Anti-abuse rule on the “breakdown” of leases
2
0
Identifying a lease
Short-term leases
Option to account for short-term leases:

“Off-balance sheet” or “on-balance sheet”
• Lease term of 12 months or less
• Only applies to lessees!
• Option must be exercised consistently for each class of underlying asset
Example: Lease with a term of nine months + four months option
A: Exercise of option is reasonably certain = not short-term lease
Nine months Four months
B: Exercise of option is not reasonably certain = short-term lease
Nine months Four months
Non-cancellable lease term Optional extension period

Identifying a lease
Portfolio approach for similar leases
Option to group individual leases in a portfolio

(IFRS 16.B1)
• Similar assets
• Similar terms
• As expected, accounting for a portfolio of leases is similar to that for individual leases
• Option to freely select portfolios
Problem:
• Treatment of early termination
• Future changes in the portfolio

Identifying a lease
Combining leases
NO
Were leases entered into at or near
the same time?
YES
NO
Do they have the same

counterparty?
YES NO
Were contracts negotiated as a Are there interdependencies in

package (with a single commercial relation to price or
objective)? performance?
YES
YES NO
Combine leases Account for leases separately

Identifying a lease
Separating lease from non-lease components
Inspection Paper, toner, inspection
• Lease and non-lease components must be separated

• Exemption for lessees: Option to combine both components and account for them as a single lease
component
• The option applies for each class of underlying asset
• Amounts payable by the lessor for administrative tasks are not separate components

Identifying a lease
Separating lease components
• Contracts may contains rights to use several assets (e.g., storage space and parking lot)
• Rights to use individual assets must be accounted for separately when:
• Benefits can be obtained separately from the use of the underlying asset
and
• The underlying asset is not dependent on the other underlying assets in the contract
• Otherwise it is accounted for as a lease component

Lease payments
PM 2: Identifying and separating lease and non-lease components of a contract
Part 1: Multiple underlying assets of a contract Part 2: Other activities and costs in a contract
Objective: Identify lease and non-lease components of a Objective: Determine whether an item is a separate
contract component of a contract
• Time: 4 minutes • Time: 4 minutes
Directions:
Directions: • Work in table teams
• Work in table teams • Review each fact pattern and determine whether the
• Review each fact pattern and determine whether the activities and costs are separate components of a
contracts contain lease and non-lease components (see contract (see extract from Appendix B to IFRS 16)
extract from Appendix B to IFRS 16)
PM 2 HO 2
29
Identifying a lease
Allocating contract consideration
Inspection Consideration Lease
20%
80%
• Lessees
• Allocate consideration on the basis of the relative stand-alone price
• If an observable stand-alone price is not readily available, the stand-alone price is estimated
• Maximize the use of observable information
• Apply estimation methods in a consistent manner
• Lessors allocate consideration in accordance with the provisions of IFRS 15
• Reallocation of consideration necessary in some cases

Lease payments
PM 3: Allocation of consideration in a contract by lessee
Objective:
Allocate consideration in a contract to lease and non-
lease components
• Time: 4 minutes
Directions:
• Work in table teams
• Review fact pattern and allocate consideration in the
contract to separate lease and non-lease components
PM 3 HO 3
29
IFRS 16
03 Key concepts
Key concepts
Lease term
• Non-cancellable periods are always part of the lease term

• Optional periods are only part of the term if it is “reasonably certain” that the option will be
exercised
• “Reasonably certain” has the same meaning as in IAS 17
• Assessment criteria, e.g.:
• Price of options
• Termination penalities
• Leasehold improvements
• Other leases
• Reassessment of lease term required?
• Lessees – upon the occurrence of significant events or significant changes in circumstances within
the lessee’s control
• Lessors – no requirement to reassess
30
Key concepts
PM4: Lease term
PM4 – Lease term
PM 4 HO 4 Objective:
Determine the lease term in given scenarios
• Time: 10 minutes (5+5)
Directions:
• Work individually
• Review the transactions and determine the lease term
for each contract
29
Key concepts
Lease payments
Lease payments
Residual value
guarantees – Variable lease
Purchase options* Termination option payments that
Fixed payments amounts expected to
(exercise price) be payable penalties* depend on an index
or rate
(lessees only)
* Include only if reasonably certain of exercise.
• Fixed payments also include variable payments if they are in-substance fixed, e.g.,
• Minimum payments or minimum purchase volumes
• Penalties for failure to meet to minimum purchase volumes, minimum amounts, etc.
• Lessors include lessee residual value guarantees only when they are in-substance fixed payments
44
Key concepts
Variable lease payments
Payments that depend on

Performance or usage-based payments
an index or rate
• Included in the initial measurement • Recognize expense as incurred (lessees) or income as

earned (lessors)
• Based on index or rate that exists at commencement
Lessee reassessment:
Lease liability is remeasured (for other reasons)
Payments change due to a change in the index or rate
4
5
Lease payments
Example 6: Treatment of other costs as a lease payment
Case A Solution:
• Company C leases an aircraft for a period of 10 years. The legal requirement to perform a D check after every
• The aircraft must undergo a Diagnosis check after 100,000 flight hours does not directly lead to an
every 100,000 flight hours. obligation as it depends on future circumstances.
• At the end of the lease, company C must have a However, case A gives rise to an obligation as the D check
Diagnosis check performed (or refund the costs to the must be carried out at the end of the lease irrespective of
lessor), irrespective of the actual number of flight the actual number of flight hours.
hours. As a result, in case A, company C has to recognize a
provision for the costs of the final D check (“present value
of the expected cost”) at the beginning of the lease term.
Case B At the same time, these costs must be included in the
• Company C leases an aircraft for a period of 10 years. cost of the right-of-use (ROU) asset pursuant to IFRS
The aircraft is delivered with 10,000 flight hours. 16.24 (d).
• A portion of the costs for the D check must be paid The right-of-use asset is depreciated in line with the
depending on use and the number of flight hours used provisions under IAS 16.
on returning the aircraft.
By contrast, in case B, the payments are variable as they
are solely dependent on use.
29
Example 7A: Variable lease payments that depend on an index
Example Solution
• Lease (10-year term) for a property At the commencement date, the lessee pays the first
• Annual lease payment is EUR 50,000 (in advance) installment and measures the lease liability at the present
value of the remaining nine lease payments (discounted
• Payment is adjusted every two years on the basis of at 5%). The present value is EUR 355,391.
the consumer price index (index at the
commencement date: 125) The lessee initially recognizes assets and liabilities as
follows:
• Lessee’s incremental borrowing rate is 5% p.a.
The consumer price index (CPI) climbs to 135 at the Lease
ROU asset EUR 405,391 cr. EUR 355,391
beginning of year 3. liability
Cash on
hand/bank
balances EUR 50,000
(payment for
year 1)
The lessee posts the following combined amounts during the first
two years of the lease:
Interest Lease
EUR 33,928 cr. EUR 33,928
expense liability
Depreciation EUR 81,078 ROU asset EUR 81,078
⃰ (405,391 ÷ 10 x 2 years)
35
Example 7A: Variable lease payments that depend on an index
Payment of the second installment at the beginning of year 2: Adjustment to the right of use is posted as follows:
Cash on Lease
Lease liability EUR 50,000 cr. hand/bank EUR 50,000 liability
balances
Present value before adjustment in line with the change in the Lease liability at the beginning of year 3:
index:
EUR 339,319 (present value of eight installments at EUR 50,000
discounted at an interest rate of 5% p.a. Interest Lease
EUR 34k payment Change EUR
[= EUR 355,391 + EUR 33,928 - EUR 50,000]). EUR 50k 27k
The lease payments for year 3 adjusted to the consumer price

index amount to Present
Present
EUR 54,000 (EUR 50,000 × 135 ÷ 125). value
value
At the beginning of year 3, the lessee remeasures the lease EUR 366k
EUR 355k
liability at the present value of the eight lease payments at EUR
54,000, discounted at an unchanged interest rate of 5% p.a.
Lease liability Lease liability
The new present value is EUR 366,464. before lease modification after lease modification
The lessee increases the lease liability (and by analogy the asset)
by EUR 27,145 (difference between the [old] present value and Payment of the lease for year 3:
[new] present value).
Cash on
Lease liability EUR 54,000 cr. hand/bank EUR 54,000
balances
47
Example 7B: Variable lease payments that depend on revenue
Example Solution
In addition to payments in the previous example, the Measurement at the commencement of the lease is the
lessee must make variable payments depending on same as in the previous example.
revenue earned during each year of the lease. The additional variable consideration is linked to future
The variable obligation amounts to 1% of revenue. revenue and thus does not meet the definition of a lease
The lessee generates revenue of EUR 800,000 during the payment.
first year of the lease. It is therefore not included.
Lease
liability
Cash on
hand/bank
balances EUR 50,000
(payment
for year 1)
The lessee has an additional expense to pay in

connection with the lease of EUR 8,000 (EUR 800,000 ×
1%),
which the lessee recognizes in the
income statement for the first year.
37
Example 7C: Variable lease payments that depend on revenue
Example Solution
Company A leases a hotel from company B. • The “fixed” payment must be included in the
The lease includes a fixed and a variable, revenue-linked measurement of the lease liability.
portion with minimum payments. • Variable components are not included in the
measurement of the lease liability under IFRS 16.
Problem
• In practice, a minimum amount is also often
contractually defined for variable components.
• In this instance, this minimum amount must also be
included as a fixed component of the minimum lease
payments.
38
Example 7D: Variable lease payments that depend on revenue - Problem areas
Example Problem area

Company A leases various vehicles from a leasing According to IFRS 16, purely variable lease payments are
company, including a Ferrari. This lease has a (non- not included in the measurement of the lease liability.
cancellable) term of three years, but requires only one As a “fixed” payment is not contractually stipulated in
payment based on the kilometers actually driven. this instance, a lease liability would not have to be
Company A, however, does not intend to use the Ferrari recognized based on a “literal” interpretation of the
much, instead it plans to park the vehicle at the entrance standard.
to the company to attract interest.
BUT:
It is questionable whether a lessor would enter into such
a contract. It should of course be questioned whether the
payments for the other vehicles are still at arm’s length
or whether perhaps excessively high payments were
agreed to cover the risk (or the actual depreciation).
View of leasing company:

Such a contractual arrangement is conceivable but the
per-km lease payments would drop very sharply, e.g.,
EUR 5,000 for the first 50 km,
EUR 4,000 for 51 km to 150 km, etc.
39
Judgemental areas and challenges
Do not depend
In substance fixed Depend on an index or rate on an index or
rate
► There is no genuine ► Included in initial

variability in the measurement of lease assets /
payments. The payments liabilities based on index / rate
contain variable clauses at commencement
that have no real ► Recognise as
► Lessees reassess variable incurred
economic substance lease payments each time
► Include in initial there is a change in cash flows
measurement of lease resulting from a change in the
assets and liabilities index / rate.

Key concepts
Discount rate
• Discount rate:
• Rule: Interest rate implicit in the lease (IRR)
• If no IRR can be readily determined: Incremental borrowing rate (lessees only)
• IRR = interest rate at which:
Present value of lease payments Fair value of underlying asset

+
Present value of residual value
= +
Initial direct costs
• Lessees reassess the discount rate upon:

• Lease modification
• Change to lease term
• Changes in estimates as to whether the lessee will exercise a purchase option

Determining an appropriate discount rate
Rate Implicit In the Lease (RIIL)

► Specific to the lessor
► Incorporates:
► PV of lease payments
► PV of unguaranteed residual value
► Fair value of the underlying asset
► Initial direct costs of the lessor Not readily determinable?
► Measures the lessor’s return on the

lease
► Determining a reliable estimate of Incremental Borrowing Rate
the residual value of the asset at (IBR)
the end of the lease may prove
challenging ► If the RIIL cannot be readily
determined, lessee shall use its
Incremental Borrowing Rate (IBR)

Determining the Incremental Borrowing Rate
The lessee’s incremental borrowing rate is the rate of interest that a lessee
would have to pay to borrow over a similar term, and with a similar security,
the funds necessary to obtain an asset of a similar value to the right-of-use
asset in a similar economic environment.
► The IBR definition requires it the rate ► Highlighted elements of the IBR
to be: definition require careful
consideration and may result in
► Entity specific (e.g. reflect the adjustments to funding curves
entity’s credit risk and economic
currently used
environment)
► Lease specific (e.g. reflect the ► Common practice of determining

duration, payment terms, value and an IBR involves determining the
currency of the contract) Base Rate and incorporating entity
and contract specific adjustments
► Collateral may be considered but will
depend on the nature of the ROU
asset, not the underlying asset

Question
► A lessee has Euro functional currency and

always raises financing in Euro.
► It enters into a lease of an aircraft, expressed in
US Dollars.
► Assuming the rate implicit in the lease is not
readily determinable, what should be the basis
for determining the IBR?
A. The currency of tin which lease payments are

made (US Dollars)
B. The currency in which the entity will raise

specific financing (Euro)
C. Either (a) or (b) based on an accounting policy Feedback

choice

Determining the IBR in a group scenario
► Can the subsidiaries use the parents External funding

IBR to measure their lease liabilities?
► What about their internal borrowing Parent
rate? central
treasury
► Subsidiaries participating in a Intergroup loans
centralised treasury function
should not default to their parent’s
IBR without careful consideration Sub 1 Sub 2
of their specific circumstances
► Financial guarantees or other
arrangements may result in an IBR
Retail
Bank
similar to that of the parent, but Sub 1.1 Sub 1.2 Sub 2.1
adjustments may be necessary, e.g.
to reflect the local economic
environment
Wholesale
Bank
Sub 1.1.1 Sub 1.2.1 Sub 1.3 Sub 2.1.1
APAC Europe MENA Americas

Lease payments
PM 5: Determination of discount rate for IFRS 16 purposes
Objective: BE POSITIVE!
Identify how various factors affect the incremental
borrowing rate of a lease used by lessees. When using an You can do IT! PM 5 HO 5
observable rate as a starting point to derive the
incremental borrowing rate of a lease, identify
adjustments that may be necessary in order to determine
the appropriate incremental borrowing rate under IFRS
16.
Instructions
• Work in table teams
• Review the fact pattern
• For question 1, document how various factors affect
the incremental borrowing rate of a lease used by
lessees. For question 2, identify adjustments that may
be necessary in order to determine the appropriate
incremental borrowing rate under IFRS 16
Time: 7 minutes
29
Key concepts
Initial direct costs
Initial direct costs (IDCs) are incremental costs that would not have been incurred if the lease had not
been executed (e.g., commissions).
• Consistent with IFRS 15 and IAS 17
• Lessees must include IDCs in the measurement of the right-of-use asset
• Lessors differentiate as follows:
Financing leases with Operating leases –

Finance leases without
recognized selling profit – recognize IDCs as an expense
recognized selling profit –
expense IDCs at lease over the lease term on the
include IDCs in net investment
commencement same basis as lease income

Key concepts
Fair value of the underlying asset
• The fair value model is used for purposes of lease classification and measurement.
• Fair value for purposes of lease accounting will be defined as in IFRS 13 in the future.
• IFRS 13 does not apply to leases at present.
• The definition of fair value in IFRS 13 is based on an exit price notion, which is different from a
transaction or entry price.
Under IAS 17, preparers have more flexibility to consider prices other than an exit price when
measuring fair value.

IFRS 16
04 Lease classification (lessors only)
Lease classification
Lessors only
• Lessees will apply the right-of-use model in the future (with certain exemptions)
• Lessors must continue to classify leases using the classification principle in IAS 17
Finance leases: Operating leases:

Finance leases – If substantially all the risks All other leases
and rewards of ownership transfer to the
lessee

Lease classification
Lessors only
Finance leases – “Indicators” from IAS 17:
• Lease automatically transfers ownership of the underlying asset

• Lessee has a bargain purchase option
• Lease term is for a major part of the economic life of the asset
• Present value of the lease payments amounts to substantially all of the fair value of the leased
asset
• Leased assets are of a specialized nature
• Lessee can cancel the lease and the lessor’s losses are borne by the lessee
• Gains or losses from fluctuation of fair value of the residual value fall to lessee
• Lessee has a bargain extension option

IFRS 16
05 Lessee accounting
Lessee accounting summary
Initial recognition and Measure right-of-use (ROU) asset1 and lease liability at present value
measurement of lease payments
Depreciate ROU asset based on IAS 16 Property Plant and Equipment

ROU
or use an alternative measurement basis under IAS 16 and IAS 40
asset
Subsequent Investment Property, if applicable
measurement Accrete liability based on the interest method, using a discount rate
Liability determined at lease commencement2. Reduce the liability by payments
made
Interest and depreciation are recognised and presented separately;

Profit and loss
generally front-loaded expense for an individual lease
1 Includes the lessee’s initial direct costs prepayments and restoration costs, less the lease incentives received (if any)
2 As long as a reassessment/remeasurement or a change in the discount rate have not occurred.
Lease payments Lease term

► Fixed payments ► Non-cancellable periods
► Variable lease payments that depend on an index or rate ► Lessee extension option to the extent it meets the
► Amounts expected to pay as a residual value guarantee ‘reasonably certain’ threshold (high threshold)
► Purchase options exercise price (if reasonably certain) ► Lessee termination option if the lessee is ‘reasonably
► Termination option penalties (consistent with the lease certain’ to terminate (high threshold)
term)

Polling question
Are you expecting to include non-recoverable VAT payments in the

measurement of the ROU asset (and the lease liability)?
a) No
b) Yes
c) We have not decided yet
d) We don’t expect the amount to be material

Lessee accounting
Recognition and measurement
• Recognize right-of-use asset and lease liability

Initial recognition and
• Measure in each case at the present value of lease payments
measurement
• IDCs are added to the right of use
Subsequent measurement
• Amortized cost
of lease liability
Subsequent measurement • Depreciate right-of-use asset on a straight-line basis over the shorter
of right-of-use asset of the lease term or expected useful life of the right-of-use asset
Profit and loss • Separate presentation of interest expense and depreciation charge

Lessee accounting
Presentation
Balance sheet Income statement Statement of cash flows
ROU asset: • Depreciation charge and • Principal payments within

• Separately from other assets • Interest expense not combined financing activities
• Or together with other assets, • Interest payments (pursuant to
providing relevant disclosures IAS 7)
in the notes to the financial • Payments for leases “not
statements included in the lease liability”
within operating activities
Lease liability: • Supplemental non-cash
disclosure of new leases
• Separately from other liabilities
• Or together with other
liabilities, providing relevant
disclosures in the notes to the
financial statements

Changes in estimates
Example 8: Initial recognition and measurement by the lessee
Example Solution
• Recognize liability at present value
• 10-year lease for a building floor
(after deduction of first payment) ó EUR 355,391
• Extension option for 5 years • Recognize right of use at present value (before deduction of
payment)
• Lease payments (in advance in each case):
plus initial direct costs
• Basic lease term: EUR 50,000 per year • Reduce right of use by reimbursement of estate agent’s fee
• Extension period: EUR 55,000 per year The lessee initially accounts for the following assets and liabilities
arising from the lease as follows:
• Initial direct costs of EUR 20,000, thereof
ROU asset EUR 405,391 cr. Lease liability EUR 355,391
• EUR 15,000 to the previous tenant
Cash on hand/bank
• EUR 5,000 to the estate agent balances (payment for EUR 50,000
year 1)
• Lessor reimburses EUR 5,000 of the estate agent’s fee
• Lessee contributes EUR 7,000 toward remodeling Cash on hand/bank
ROU asset EUR 20,000 cr. balances (initial direct EUR 20,000
costs costs)
• Exercise of the extension option initially not Cash on

reasonably certain ó Lease agreed for 10 years hand/bank
balances EUR 5,000 cr. ROU asset EUR 5,000
• Lessee’s incremental borrowing rate is 5% p.a. (incentive
payment)
The lessee accounts for the reimbursement for improvements by the

lessor in accordance with other applicable standards and not as
incentive payments under IFRS 16 because the initial costs for the
improvements by the lessee are not included in the cost for the right-of-
use asset.

Changes in estimates
Example 9: Subsequent measurement and accounting for changes in lease terms
Extended example Solution

At the end of year 6, the lease is The relocation of staff taken on in the business
extended to include another floor from year 7 acquisition to the
due to a business acquisition. same building presents the lessee with an
For this purpose, the lessee concludes a separate economic
eight-year lease for an additional floor in the incentive to use the extension option.
building already leased. The floor may be used at The acquisition is a significant event that is within
the end of year 7. the control of the lessee and affects whether the
lessee is reasonably certain to exercise the
extension option which was not previously
included in its determination of the lease term.
The original floor has a greater value in use for
the lessee (and thus a greater benefit) than an
alternative asset as additional costs would arise
from a relocation or employees would be
distributed across different buildings.
The lessee thus concludes at the end of year 6
that it is reasonably certain that it will exercise
the extension option.

Changes in estimates (contd.)
Example contd. Solution

Incremental borrowing rate at the end of year 6 is The ROU asset and the lease liability developed as
6.0 % p.a. following in years 1 to 6:
The lessee expects to obtain economic benefits
from the right of use evenly over the term of the
lease and amortizes the right of use on a straight-
line basis.
Year Lease liability ROU asset
Initial value Lease payment Interest Closing balance Initial value Depreciation Closing balance
expense
1 EUR 355,391 - EUR 17,770 EUR 373,161 EUR 420,391 (EUR 42,039) EUR 378,352
2 EUR 373,161 (EUR 50,000) EUR 16,158 EUR 339,319 EUR 378,352 (EUR 42,039) EUR 336,313

Before the change in term, the lease liability Due to remeasurement, the carrying amount of
comes to EUR 186,162 (present value of the lessee’s ROU asset is EUR 360,169
payments of EUR 50,000 for 4 years, discounted (= EUR 168,157 + EUR 192,012).
at the original interest rate of 5.0% p.a.). At the beginning of year 7, the lessee calculates
The lessee’s right of use is EUR 168,157. the interest expense for the lease liability at the
Lease liability is remeasured, including changed interest rate of 6.0% p.a.
four payments at EUR 50,000 and five payments EUR 378,174
of EUR 360,169
EUR 55,000, discounted at a rate of 6% p.a.
EUR 192,012
The present value is EUR 378,174. EUR 192,012
The lessee increases the lease liability by EUR
192,012, which is the difference between the
remeasured lease liability of EUR 378,174 and
the previous carrying value of EUR 186,192. EUR 168,157 EUR 168,157
EUR 186,612 EUR 186,612
ROU asset ROU asset Lease liability Lease liability

before lease after lease after lease before lease
Lease modification modification modification modification
liability

The ROU asset and the lease liability will develop as following in years 7 to 15:
Initial value Lease payment Interest Value at end of Initial value Depreciation Value at end of
expense lease lease
15 EUR 55,000 (EUR 55,000) - - EUR 40,018 (EUR 40,018) -

Identifying a lease
Lease modifications (recap)
Does it grant the lessee an additional

right of use?
NO
YES
Is the additional consideration

appropriate?
NO
YES
No new, separate lease
New, separate lease Lessee: Lessor:

• Adjust the ROU asset Finance lease: IFRS 9
Unmodified original lease • Adjust the liability Operating lease: effectively a
new lease

Lease modifications
Example 9: Change in scope due to extension
Example Solution
• Lease contract, 10-year term for 5,000 m2 of Remeasure the lease liability at the beginning of
office space year 7
• Annual lease payments, in arrears, of EUR on the basis of:
100,000 a.a remaining 8-year residual lease term
• Lessee’s incremental borrowing rate at b.annual lease payments of EUR 100,000 and
commencement c.an implicit interest rate of 7% p.a.
date: 6% p.a.
è Lease liability (new): EUR 597,130

Adjustment at beginning of year 7:
è Lease liability (old): EUR 346,511
• Extended by 4 years (overall 14 years)
• Lease payments unchanged at EUR 100,000
Difference of EUR 250,619 is recognized as a
• Lessee’s incremental borrowing rate at change in the ROU asset.
beginning of year 7: 7% p.a.

Lease modifications
Example 10: Modification reduces scope of lease
Example Solution
• Lease contract, 10-year term for 5,000 m2 of Remeasure the lease liability (at the beginning of year 6)
office space on the basis of:
a. a remaining 5-year residual lease term
• Annual lease payments, in arrears, of EUR
50,000 b. annual lease payments of EUR 30,000 and
c. an implicit interest rate of 5% p.a.
• Lessee’s incremental borrowing rate at
commencement New present value of the obligation: EUR 129,884
date: 6% p.a. • Proportionate reduction of the contract
(50% liability/ROU asset) results in income:
• 50% of the ROU asset before the change
Adjustment at beginning of year 6: (EUR 184,002) is EUR 92,001.
• 50% reduction in leased space • 50% of the lease liability before the change
(from the end of Q1 in year 6) (EUR 210,618) is EUR 105,309.
• Annual lease payments (from year 6 to year è Income: EUR 13,308 (= EUR 105,309 – EUR 92,001 /
10): EUR 30,000 at the beginning of year 6).
• Incremental borrowing rate at beginning of year • Difference between remaining lease liability
(EUR 105,309) and the adjusted lease liability
6: 5% p.a. (EUR 129,884 EUR 24,575) results in a
commensurate increase in carrying amounts.

Lease modifications
Example 10: Modification reduces scope of lease
+ EUR 24,575
+ EUR 24,575
EUR 129.8846
EUR 105,309
EUR 116,576
EUR 92,001
Income EUR 210,618

EUR 13,308
EUR 184,002
+ EUR 105,309
+ EUR 92,001
ROU asset ROU asset Lease liability after Lease liability before
before lease after lease lease modification lease modification
modification modification

Lease modifications
Example 11: Modification that both reduces and increases the scope
Example
• Lease contract, 10-year term for 2,000 m2 of office space
• Annual lease payments, in arrears, of EUR 100,000
• Incremental borrowing rate: 6% p.a.
Lease modification at beginning of year 6:

• Increase in office space leased from year 6 by a further 1,500 m²
• Term reduced from 10 to 8 years
• Annual fixed lease payments for the 3,500 m²: EUR 150,000 (in arrears)
• Incremental borrowing rate at beginning of year 6: 7% p.a.
Note:
• Consideration for the 1,500 m² increase in office space is not at arm’s length
è Extension of the right of use by 1,500 m² does not represent a separate lease

Lease modifications
Solution:
The ROU asset and the lease liabilities before modification are as follows:
Initial value Interest expense Lease payment Closing value Initial value Depreciation Closing value
1 EUR 736,009 EUR 44,160 (EUR 100,000) EUR 680,169 EUR 736,009 (EUR 73,601) EUR 662,408
6 EUR 421,236 EUR 368,004
After the modification (at the beginning of year 6), the lessee remeasures the lease liability on the following basis:
a. remaining lease term of 3 years
b. annual lease payments of EUR 150,000 and
c. an implicit interest rate of 7% p.a.
The changed lease liability comes to EUR 393,647, of which

a. EUR 131,216 results from the increase by EUR 50,000 in annual lease payments for years 6 to 8 and
b. EUR 262,431 relates to the three remaining annual lease payments of EUR 100,000 for years 6 to 8.

Lease modifications
Reduction in lease term Effect from the adjustment of the present value of an increase in
the interest rate from 6% to 7%
ROU asset (EUR 4,870 = EUR 267,301 - EUR 262,431)
• Before lease modification: EUR 368,004 recognized as an adjustment of the ROU asset.
• Remaining term reduced from 5 to 3 years:
EUR 220,802 (EUR 368,004 ÷ 5 × 3 years) Lease liability EUR 4,870 cr. ROU asset EUR 4,870
• Difference: EUR 147,202
Liability (present value): -EUR 5k
• Before lease modification: EUR 421,236 -EUR 5k
• New present value calculated from 3 payments à EUR 100,000, EUR 262k EUR 267k
discounted at the original interest rate of 6% p.a. ó EUR 221k EUR 216k
EUR 267,301 EUR 421k
EUR 368k
• Difference: EUR 153,935 Income
EUR 7k
-EUR 154k
Income: -EUR 147k
• EUR 153,935 – EUR 147,202 = EUR 6,733

ROU asset ROU asset after Lease liability Lease liability
before lease reduction in after reduction before
modification lease term in lease term lease
Lease modification
EUR 153,935 cr. ROU asset EUR 147,202
liability
Income EUR 6,733

Lease modifications
EUR 393k
Additional adjustment: EUR 347k
Increase in space leased

+EUR 131k
• Increase of 1,500 m² in office space leased
+EUR 131k
(beginning of year 6),
• Increase in lease liability and adjustment of the ROU asset due
to the increase in the scope of the lease in the amount of
EUR 131,216
(present value of the 3 annual lease payments each in the EUR 262k
EUR 262k
amount of EUR 216k EUR 216k
EUR 50,000, discounted at the changed interest rate of
7% p.a.)
ROU asset after ROU asset after Lease liability Lease liability
Lease reduction in increase in after increase after reduce in
ROU asset EUR 131,216 cr. EUR 131,216 lease term space leased in in space lease term
liability
leased
The ROU asset and lease liability, which have both changed due to the lease modification, develop as follows:
Initial value Interest expense Lease payment Closing value Initial value Depreciation Closing value
8 EUR 140,187 EUR 9,813 (EUR 150,000) - EUR 115,716 (EUR 115,716) -

Lease modifications
Example 12: Modification changes only consideration
Example Solution
• Lease contract, term: 10 years, for 5,000 m² of Remeasure lease liability on the basis of
office space a.a remaining 5-year lease term
• Annual lease payments: EUR 100,000, in b.an annual lease payment of
arrears EUR 95,000 and
• Incremental borrowing rate at lease c.an implicit interest rate of 7% p.a.
commencement is 6% p.a.
The difference between the carrying amount of
the changed lease liability (EUR 389,519) and the
Modification at beginning of year 6: lease liability directly before the modification
• Reduction in annual payment to EUR 95,000 (EUR 421,236) in the amount of
per year EUR 31,717 is treated as an adjustment to the
ROU asset.
• Incremental borrowing rate at beginning of year
6: 7% p.a.

Lessee accounting
Disclosures
Disclosure objective: To enable users of financial statements to assess the amount, timing and
uncertainty of cash flows arising from leases
• Lessees should usually present quantitative disclosures in a tabular format

• No specific qualitative disclosure requirements
• Sufficient information to satisfy overall disclosure objective
• Standard to include list of disclosure objectives and illustrative examples
• All lessee disclosures must be presented in a single location

Lessee accounting
Disclosure
• Right-of-use assets presented Both lease types: • Cash payments for the principal
either: • Lease related depreciation portion of the lease liability are
• separately from other assets (Operating) presented within financing
(e.g. owned assets); or activities.
• Lease-related interest expense
• together with other assets as (Finance cost) • Cash payments for the interest
if they were owned, with portion of the lease liability are
• Expense relating to short term presented based on an accounting
disclosures of the balance leases
sheet line items that include policy election in accordance with
right-of-use assets and their • Expenses relating to low-value IAS 7.
amounts. assets • Lease payments for short-term
• Right-of-use assets that meet the • Expense related to variable lease leases and leases of low-value assets
definition of investment property payments not included in the not recognised on the balance sheet
are presented as investment measurement of lease liabilities and variable lease payments not
property. included in the lease liability are
• Income from subleasing right-of-use
presented within operating
• Lease liabilities presented either: assets
activities.
• separately from other • Gain or losses arising from sale and
• Non-cash activity (e.g. the initial
liabilities; or leaseback transactions
recognition of the lease at
• together with other liabilities commencement) is disclosed as a
with disclosure of the balance supplemental non-cash item.
sheet line items that include
Page 72
lease liabilities and their IFRS 16 - Lease accounting workshop
amounts
Lessee accounting
Quantitative disclosures
Carrying amount of
Amortization expense for
right-of-use assets
right-of-use assets
(by class)
Short-term lease expense

Maturity analysis of
lease liabilities
Income from
subleases
Small ticket lease
expense
Variable lease Cash outflow for

expense leases
Interest on lease
liabilities
Gains and losses from

sale and leaseback
Additions to right-of-use assets
transactions

IFRS 16
06 Lessor accounting
Lessor accounting
Recognition and measurement
• Finance leases – similar to today’s finance leases

• Derecognize underlying asset, recognize net investment and selling profit
(if any)
• Recognize selling profit upon transfer of control from lessor perspective
• Operating leases – similar to today’s operating leases
• Subsequent measurement
• Finance leases – similar to today’s finance leases
• Recognize interest income on net investment, reduce net investment for lease payments
received (net of interest income)
• Recognize income for variable lease payments not included in net investment
• Operating leases – similar to today’s operating leases

Lessor accounting
Presentation
Finance leases: Both lease types: Both lease types:

• Lease assets (i.e., lease receivables • Depreciation charge and interest • Cash lease payments
and residual assets) presented income not combined received presented within
separately from other assets operating activities
• or, if presented together, disclosed Finance leases:
separately in the footnotes
• Profit or loss recognized at
commencement presented in
Operating leases: accordance with IAS 1
• Underlying assets presented in • Interest on net investment
accordance with other applicable presented as interest income
standards

Lessor accounting
Disclosures
Disclosure objective – to enable financial statement users to assess the amount, timing and
uncertainty of cash flows arising from leases
• Required lessor disclosures will include:
• Information about the nature of leases
• Significant assumptions and judgments made in accounting
• Information about management of risks related to residual values of assets
• Table of lease income recognized during reporting period
• Maturity analyses, as of the reporting date
• Undiscounted cash flows for finance leases with a reconciliation to lease receivables on the
balance sheet (or in footnotes)
• Undiscounted future lease payments to be received for operating leases
• Qualitative and quantitative explanations of significant changes in balance of net investment in
finance leases
• Information currently required under IAS 16 for assets under operating leases
• Lessors must use judgment to determine the appropriate level of aggregation or disaggregation

IFRS 16
07 Special aspects
Other considerations
Subleases
“Head lease” “Sub lease”
Owner Lessee/sublessor Sublessee
• Head lease (as lessee) and sublease (as lessor) are generally accounted for as two separate
leases
• Underlying asset of the sublease: ROU asset
• Balance sheet presentation: No offsetting of lease assets and liabilities
• Income statement presentation: Intermediate lessors’ revenue is generally presented gross
• Additional sublease disclosure requirements

Subleases
► A transaction for which an underlying asset is re-leased by a lessee

(intermediate lessor) to a third party, and the lease (head lease) between the
head lessor and lessee remains in effect.
► No change to its accounting for the head

Lessor
lease, unless exemption for low-value
assets lease was used
Head lease
► Sublease is classified, as follows:
Original lessee / ► If the short-term lease exemption is
sub-lessor elected for the head lease, the sublease is
classified as an operating lease
Sublease ► Otherwise, the sublease is classified by
reference to the ROU asset arising from
the head lease, rather than by reference
Lessee/sublessee to the underlying asset

Subleases
Sub-lessor Sub-lessee
► If sublease = operating lease, continue ► Account for the lease in the same
to account for lease liability and ROU manner as any other lease
asset on the head lease
► If sublease = finance lease:
► Derecognise head-lease ROU asset
► Continue to account for original
lease liability
► Recognise net investment in
sublease and evaluate for
impairment*
*May use discount rate used for the head lease (adjusted for any initial direct costs associated with
the sublease) to measure the net investment in the sublease, if the interest rate implicit in a
sublease cannot be readily determined.

Subleases
Example 13: Classification as a finance lease
Example Solution
Head lease: The intermediate lessor classifies the sublease as
An intermediate lessor enters into a lease to use a finance lease, taking into account the
office space of 5,000 m² for a five-year period requirements of IFRS 16.61 to 16.66.
(head lease) with company A (head lessor). If the intermediate lessor enters into an
intermediate lease, it must
Sublease: a.derecognize the right-of-use asset under the
head lease, which it transfers to the sublessee,
At the beginning of year 3, the intermediate and recognize a net investment in the sublease,
lessor leases out the office space of 5,000 m² to a
sublessee for the remaining three years of the b.recognize a difference between the right-of-use
head lease. asset and the net investment as a gain or loss,
and
c.continue to recognize the lease liability, i.e., the
lease payments owed to the head lessor, for the
head lease.
Over the sublease term, the intermediate lessor
recognizes the interest income from the sublease
and the interest expense for the head lease.

Subleases
Example 14: Classification as an operating lease
Example Solution
Head lease: The intermediate lessor classifies the sublease as
An intermediate lessor enters into a lease to use an operating lease, taking into account the
office space of 5,000 m² for a five-year period requirements of IFRS 16.61 to 16.66.
(head lease) with company A (head lessor). If the intermediate lessor enters into an
intermediate lease, it continues to recognize the
lease liability and the right-of-use asset under the
Sublease: head lease.
At commencement of the head lease, the Over the sublease term, the intermediate lessor
intermediate lessor leases out the office space of recognizes
5,000 m² to a sublessee for two years.
a.the amortization expense on the right-of-use
asset and the interest expense
for the lease liability; and
b.income from the sublease.

Business combinations
leases
A-AG B-GmbH
acquires
Acquirer “Target”
leases
Target is the lessee (of a truck)
• Initial measurement:
• Lease liability measured as if it is a new lease
• Adjustments for favorable or unfavorable terms
• Subsequent measurement follows requirements for all other leases
• Leases that have a remaining term of 12 months or less:
• ROU asset and lease liability are not recognized
• Does this also apply in the case of favorable or unfavorable terms?

Business combinations
Target is the lessor (of a car)
• Classification of the lease:

• Retrospectively, using contractual terms and conditions at lease commencement
• If contractual terms and conditions are modified, leases are classified using new terms and
conditions
• Recognition of a finance lease:
• Lease receivable is measured as if it is a new lease at acquisition date
• Residual asset measured as the difference between the acquisition date fair value of underlying
asset and lease receivable
• Recognition of an operating lease:
• Underlying asset is measured at fair value
• Favorable and unfavorable lease terms are included in the fair value
• Subsequent measurement follows requirements for all other leases

Sale and leaseback transactions
A sells property to B
A leases property back from B
A: Seller/lessee B: Buyer/lessor
• IAS 17 does not currently contain a definition of a “sale”

• In the future, the definition of a “sale” from IFRS 15 will be used
• Has B gained control of the underlying asset?
• If yes – sale and a lease
• If no – failed sale (i.e., accounted for as a financing)
• Presence of a leaseback does not preclude a “sale”
• “Sale” is precluded when seller-lessee has a substantive repurchase option

Seller accounting for the sale and leaseback
• Where necessary, adjust the contract purchase price/contractual rent for off-market terms
• Derecognize underlying asset
• Recognize lease liability and right-of-use asset
• Determine gains and losses on sale:
• Recognize loss immediately
• Immediately recognize gain on the portion related to the residual interest in the underlying asset
transferred to the lessor
• Account for remaining gain related to the leaseback as an adjustment to the right-of-use asset (and
therefore recognize it over the lease term)

Apply IFRS 15 to determine whether the transfer of the asset is a sale

(i.e. whether the customer obtained control of the asset)
Transfer of the asset is a sale Transfer of the asset is not a sale
Seller-lessee will: Seller-lessee will:

► Derecognise the underlying asset ► Not derecognise the underlying
► Recognise the sale at fair value asset
► Recognise only the gain/loss that ► Recognise a financial liability - IFRS
relates to the rights transferred to 9/IAS 39
buyer-lessor
► Recognise a ROU asset as proportion Buyer-lessor will:
of previous carrying amount of ► Not recognise the transferred asset
underlying asset ► Recognise a financial asset - IFRS
► Recognise a lease liability 9/IAS 39

Example 15: Sale and leaseback – Sale above market value
Example
A company (seller-lessee) sells a building in cash for EUR 2,000,000 (amortized cost:
EUR 1,000,000). (The conditions of IFRS 15 for a sale are deemed to have been met).
Leaseback agreement:
• Term: 18 years
• Annual lease payment (in arrears): EUR 120,000
• Fair value of the building upon sale: EUR 1,800,000
Excess of sale price over fair value of EUR 200,000 (EUR 2,000,000 – EUR 1,800,000) must be
recognized as additional financing.
The interest implicit in the lease is 4.5% p.a.
The present value of the annual lease payments (18 payments of EUR 120,000, discounted at 4.5%
p.a.) is
EUR 1,459,200, of which EUR 200,000 relates to the additional financing and EUR 1,259,200 to the
lease.
This corresponds to 18 annual payments of EUR 16,447 (for the financial liability) or EUR 103,553 (for
the lease).
The buyer-lessor classifies the lease for the building as an operating lease.

Sale and leaseback transactions (solution)
Example 15: Sale and leaseback – Sale above market value
Seller-lessee At the inception of the arrangement, the seller-lessee accounts

for the transaction as follows:
Recognizes the right-of-use asset of EUR 699,555
[EUR 1,000,000 (carrying amount of the building) ÷ EUR
Cash on
1,800,000 (fair value of the building) × EUR 1,259,200
hand/bank EUR 2,000,000
(discounted lease payments for the 18-year right of use)] balances
Recognizes a gain of EUR 240,335 from the transfer of rights of ROU asset EUR 699,555
EUR 800,000 (EUR 1,800,000 – EUR 1,000,000), of which
cr. Building EUR 1,000,000
a. EUR 559,645 relates to the seller-lessee’s retained right to use
the building Financial
EUR 1,459,200
(EUR 800,000 ÷ EUR 1,800,000 x EUR 1,259,200) and liability
b. EUR 240,335 relates to the rights transferred to the buyer- Gain

lessor from
transfer EUR 240,455
(EUR 800,000 ÷ EUR 1,800,000 × (EUR 1,800,000 –
red
EUR 1,259,200)). rights
Buyer-lessor At the inception of the arrangement, the buyer-lessor accounts
Splits the payment received of EUR 120,000 into for the transaction as follows:
Building EUR 1,800,000
§ a lease payment of EUR 103,553 and
§ a financing payment of EUR 16,447, which should be Financial asset EUR 200,000
considered
Cash on
a. as payments for the settlement of the financial asset of EUR cr. hand/bank EUR 2,000,000
200,000 and balances
b. recognized as interest income. x (18 payments of EUR 16,447, discounted at

4.5% p.a.)
90
IFRS 16
08 Effective date and transition
Effective date and transition
Overview
• Effective date: 1 January 2019 – earlier application is permitted if IFRS 15 is also applied
Transition requirements:
• Lessor: Continues to apply existing lease accounting
• Lessee:
• Existing finance leases:
• Continues to existing apply accounting
• Existing operating leases:
• Lessees are permitted to choose either full retrospective or modified retrospective approach
• Applied consistently across entire portfolio of former operating leases
• Definition of a lease in IFRIC 4 can be retained for existing leases

Lessees’ operating leases
Under modified retrospective approach, lessees:
• Do not restate comparatives (e.g., for 2018/2019)

• Recognize lease liabilities and right-of-use assets in the opening balance sheet for the year under
review (e.g., 1 October 2019)
• Lease liability: Measure at present value of remaining lease payments, discounted using lessee’s
incremental borrowing rate
• Choose between two measurement approaches for the right-of-use of asset:
• As if new standard had always been applied, OR
• At an amount equal to the lease liability (adjusted by previously recognized prepaid or accrued
lease payments)
• Recognize cumulative effect of initially applying the new standard in opening retained earnings
• Simplified disclosures in the footnotes:
• Incremental borrowing rate at initial application
• An explanation of differences at initial application between
• Discounted operating lease commitments reported under IAS 17
• The carrying amount of the recognized lease liabilities

Lessees’ operating leases
Under modified retrospective approach, lessees are permitted to:
• Apply a single discount rate to a portfolio of similar leases

• Adjust the right-of-use asset by the amount of any previously recognized onerous lease provisions
(alternative to impairment review)
• Apply recognition and measurement exemption for leases for which term ends within 12 months or
less of transition
• Not include initial direct costs in the measurement of the right-of-use asset
• Use hindsight in accounting (e.g., in determining if contract contains options to extend the lease)

Sale and leasebacks
Other exemptions under modified retrospective approach:
• Entities do not have to reassess historical sale and leasebacks

• Seller-lessees do not perform any retrospective accounting specific to sale and leaseback transactions
• Seller-lessee accounts for:
• Finance leasebacks on transition in same way as for any other finance lease ongoing at the date of
initial application
• Operating leasebacks
• on transition in same way as for any other operating lease ongoing at the date of initial
application
• Any deferred gains or losses are accounted for as an adjustment to the leaseback right-of-use
asset

IFRS 16
09 Effect on KPIs
Effects of IFRS 16 on financial KPIs
KPI What is measured? Standard calculation Anticipated impacts of Explanation

method IFRS 16
Leverage ratio Long-term solvency Liabilities Increase Liabilities increase;

Equity equity is expected to
decrease
Liquidity ratio Liquidity Current assets Decrease Current lease liabilities

Current liabilities increase; current assets
do not
Capital turnover rate Profitability Revenue Decrease Underlying assets are

Total assets recognized as a
component of total assets
Interest coverage ratio Long-term solvency EBITDA Depends on the lease EBITDA and interest
Interest expense portfolio expense increase under
IFRS 16;
the change in the interest
coverage ratio depends
on the characteristics of
the lease portfolio
EBIT Profitability Various methods – Increase Depreciation and

earnings excluding the amortization now
investment result, included are less than the
interest and tax effects lease expense for leases
which have been off-
balance sheet to date


method IFRS 16
EBITDA Profitability Earnings before interest, Increase Lease expense for leases
tax, depreciation and which have been off-
amortization balance sheet to date is
not included
EBITDAR Profitability Earnings before interest, No change All types of lease expense
tax, depreciation, are eliminated
amortization and lease
expense
Profit or loss Profitability in accordance with IFRSs Company-specific Depends on the

characteristics of the
lease portfolio and the
tax rate
Earnings per share (EPS) Profitability Profit or loss Company-specific Depends on profit or loss
Number of shares that is influenced by the
lease portfolio and the
tax rate
ROCE Profitability EBIT Company-specific EBIT and liabilities

Equity + financial increase on application of
liabilities IFRS 16, depending on
the characteristics of the
lease portfolio


method IFRS 16
Return on equity Profitability Profit or loss Company-specific Depends on profit or loss

Equity that is influenced by the
lease portfolio. If there
are no effects on profit or
loss, the return will be
higher because reported
equity will be lower.
Operating cash flows Profitability Various methods – cash Increase At least that portion of
flows from operating the lease payments that
activities contain no cash relates to repayment is
flows relating to equity reclassified to cash flow
and debt financing from financing activities.
Net cash flow Profitability and liquidity Net cash inflows and No change Cash remains unaffected
outflows

IFRS 16
10 Your questions
Your questions

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IFRS 16 Lease Accounting Workshop - EIB

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IFRS 16

Lease accounting workshop

2 Identifying a lease 8 Effective date and transition

3 Key concepts 9 Effect on KPIs

4 Lease classification (lessors only) 10 Your questions

All I want is a positive participation

What changes can we expect? Overview

2016 2017 2018 2019

Final revenue Full retrospective Modified

Managing the expectations of stakeholders while simultaneously implementing

Depreciation Depreciation – Depreciation - EUR Xm

Finance cost Interest – Interest - EUR Xm

Page 7 IFRS 16 - Lease accounting workshop

Scope: All leases

Page 9 IFRS 16 - Lease accounting workshop

Is there an identified asset? No

Neither; how and for what purpose the

The contract contains a The contract does not

Page 10 IFRS 16 - Lease accounting workshop

Right to control the use

what purpose the asset is used throughout the period

No lease (service) Lease

Page 11 IFRS 16 - Lease accounting workshop

Page 12 IFRS 16 - Lease accounting workshop

Page 13 IFRS 16 - Lease accounting workshop

• Costs of relocation are low Customer

Page 14 IFRS 16 - Lease accounting workshop

Page 15 IFRS 16 - Lease accounting workshop

the above provisions) Yes

Example Problem area

PM1 – Scope of IFRS 16

Option to account for short-term leases:

Example: Lease with a term of nine months + four months option

A: Exercise of option is reasonably certain = not short-term lease

Nine months Four months

B: Exercise of option is not reasonably certain = short-term lease

Nine months Four months

Non-cancellable lease term Optional extension period

Page 21 IFRS 16 - Lease accounting workshop

Option to group individual leases in a portfolio

Page 22 IFRS 16 - Lease accounting workshop

Do they have the same

Were contracts negotiated as a Are there interdependencies in

Combine leases Account for leases separately

Page 23 IFRS 16 - Lease accounting workshop

Inspection Paper, toner, inspection

• Lease and non-lease components must be separated

Page 24 IFRS 16 - Lease accounting workshop

Page 25 IFRS 16 - Lease accounting workshop

Inspection Consideration Lease

Page 27 IFRS 16 - Lease accounting workshop

• Non-cancellable periods are always part of the lease term

PM4 – Lease term

• Time: 10 minutes (5+5)

* Include only if reasonably certain of exercise.

Payments that depend on

• Included in the initial measurement • Recognize expense as incurred (lessees) or income as

Depreciation EUR 81,078 ROU asset EUR 81,078

The lease payments for year 3 adjusted to the consumer price

The lessee has an additional expense to pay in

Example Problem area

View of leasing company:

► There is no genuine ► Included in initial

Page 40 IFRS 16 - Lease accounting workshop