IFRS Masterclass 2018 Presentation

Deloitte Partners, Directors and
Principals thank you for your

attendance and support at The
2018 IFRS Masterclass and
Comprehensive IFRS technical
update with a special VAT
session held on 15th November
2018.
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Caveat
• These seminars are meant to provide high level presentations on various IFRS
standards.
• This training material does not provide official Deloitte Touche Tohmatsu
Limited interpretive accounting guidance.
• Financial Statements preparers and users are advised to seek professional

advice in applying and interpreting the IFRS Standards covered by these
presentations.
IFRS 9
IFRS 9 Financial Instruments
Financial Instruments
Marcelle Hazboun and Hammad Ul Ahad
Course agenda
A Classification & Measurement of Financial Assets - Overview
B Expected Credit Loss - Overview & Scope
C Expected Credit Loss - General Model
D Expected Credit Loss - Simplified Model
2018 IFRS Excellence

©2018 Deloitte & Touche (M.E.). All rights reserved. IFRS 9 Financial Instruments
© 2018. For information, contact Deloitte Touche Tohmatsu Limited. 62 3
Classification and
measurement of
Financial Assets
Overview
©2018 Deloitte & Touche (M.E.). All rights reserved. IFRS 9 Financial Instruments 63
Classification and measurement of Financial Assets
Overview
Usually
transaction
price
Fair
value
Amortized
FVTPL
cost FVTOCI
2018 IFRS Excellence 5

©2018
© 2017.Deloitte & Touche
For information, contact(M.E.). All rights
Deloitte Touche reserved.
Tohmatsu Limited. IFRS 9 Financial Instruments
Overview (contd.)
Classification is Contractual cash flow Business model test

determined using a characteristics test
• How is the financial asset/ group of

• Do cash payments/ receipts reflect financial assets managed?
Two step payments of principal and interest
test: only? • Consider activities undertaken to
achieve objective
SPPI test

©2018
Overview (contd.)
Decision tree
Are the contractual cash flows considered to be SPPI? YES
NO
What is the business model?
FVTPL Held to collect Held to collect

contractual cash contractual cash Other
flows flows and to sell
OR
Amortized cost FVTOCI FVTPL
FVTOCI
(for equity instruments only) OR OR
If certain Irrevocable
FVTPL criteria is FVTPL
designations
met

©2018
Overview (contd.)
Example – Accounting mismatch
KPJ buys a $50M fixed KPJ enters into an interest

interest rate bond rate swap to hedge against
changes in interest rate
Accounting
mismatch
Bond at FVTOCI Interest rate swap at FVTPL
$1M gain
$1M loss (from changes in $1M gain (from changes in

fair value) recorded in OCI fair value) recorded in P&L

©2018
Expected Credit
Loss
Overview & Scope
Expected Credit Loss
Overview & Scope
Certain
Written loan
Contract Lease financial
commitments
Financial assets in the scope of IFRS 9 assets receivables guarantees
(unless at
(IFRS 15) (IFRS 16) (unless at
FVTPL)
FVTPL)
Subsequent measurement ………….
FVTPL / FVOCI
Option for certain AC FVOCI
equity instruments
Outside the
scope of the
Within the scope of the impairment model
impairment
model

©2018
Overview & Scope (contd.)
Illustrative Corporate Balance Sheet
Trade & other receivable Impairment
Trade receivable
ECL impact
Balance sheet line item Contract assets
ASSETS Related party dues
Advance to suppliers
Bank balances Refundable security deposit
Pre-paid expenses
Trade and other receivables
Impact
Investments - Equity High
Low • Simplified approach

• Low credit risk exemption
Investments - Bonds
No impact
Inventory
Property, plant and equipment

©2018
Overview & Scope (contd.)
General model & simplified model
General model
• Lease receivables Policy
• Contract assets and trade choice
Stage Stage Stage
receivables with significant
1 2 3
financing component
Simplified model
Contract assets and trade
receivables without Stage Stage
significant financing
2 3
component
Special provisions
• No loss allowance on initial recognition
Purchased or originated credit-
impaired financial assets • Apply a credit-adjusted effective interest rate (based on Stage
(POCI) the expected cash flows at inception including expected 3
credit losses)

©2018
Expected Credit
Loss
General Model
General Model
The 3 stages
Changes in credit risk since initial recognition
Significant Objective
increase in evidence of
credit risk? impairment??
STAGE 1 STAGE 2 STAGE 3
Loss allowance 12 month ECL Lifetime ECL Lifetime ECL
Apply effective Gross carrying amount Gross carrying amount Net carrying amount
interest rate to ……..

©2018
General Model (contd.)
12 month vs life time
Stage 1 Stage 2
12-month expected losses Life time expected losses

• 12 month ECL reflects the • Lifetime ECLs are the total
cash shortfalls over the life of expected cash shortfalls
the loan arising from a arising from all possible
default in the next 12 months default events over the life of
• Most assets begin in this the loan
bucket • Assets migrate to this bucket
• Effect of the entire credit loss if the credit risk has
on a financial instrument increased significantly since
weighted by the probability initial recognition (unless ‘low
that this loss will occur in the credit risk’)
next 12 months Examples
• Loan of CU 10m • Loan of CU 10m
• Expected 2% probability to default in next 12 • Expected 12% probability to default over
months lifetime
• Entire loss that would arise on default is 10% • Entire loss that would arise on default is 15%
12 month ECL = CU 20,000 (10m x 2% x Lifetime ECL = CU 180,000 (10m x 12% x

10%) 15%)
Note: Discounting has been ignored in the simplified example

©2018
Transfer out of stage 1 – significant increases in credit risk
Significant increase
in credit risk?
Stage 1 Stage 2
Relative model
Credit risk on initial

compare Current credit risk
recognition
Initial recognition Reporting date

©2018
Significant increases in credit risk – A relative concept (Example)
Bank W uses an internal credit rating system of 1 to 10, with 1 denoting the lowest credit risk and 10 denoting the highest
credit risk.
W considers an increase of two rating grades to represent a significant increase in credit risk. It considers Grades 3 and
lower to be a ‘low credit risk’
At the reporting date W has two loans to Company X outstanding, as follows.

Grade at initial recognition Grade at reporting date
Loan A 2 5
Loan B 4 5
W assesses whether there has been a significant increase in credit risk in respect of the loans and reaches the following
conclusions
Significant credit risk increase? Recognize allowance equal to
…
Loan A Yes Lifetime expected credit losses
Loan B No 12-month expected credit losses
The loans each attract a loss allowance measured on a different basis because only the credit risk of Loan A has
increased significantly since initial recognition. The measurement basis for the loss allowance is different irrespective of
the fact that both loans have the same grade at the reporting date.

©2018
Significant increases in credit risk (Example)
Bank X provides a loan facility to Company Y.
At the time of origination of the loan though Y’s leverage was relatively high compared to others in the industry with
similar credit risk, it was expected that Y would be able to meet the covenants for the life of the instrument.
Subsequent to initial recognition, macroeconomic changes have had a negative effect on sales volume and Y
underperformed on its business plan for revenue and cash flow generation. Inventory increased but anticipated sales did
not materialize. To increase liquidity, Y has drawn down more on a separate revolving facility thereby increasing its
leverage ratio. Y is now close to breaching its loan covenants with Bank X.
Bank X determines that there has been a significant increase in credit risk since initial recognition due to:
• Expectation that deterioration in macro environment may continue in near future having further negative impact on Y
in terms of cash flow generation
• Y closer to breach of covenants that may need restructure or reset the covenants
• Trading price on Y’s bonds have decreased and credit margins on newly originated loans have increased and these
changes are not explained by changes in market environment.

©2018
No Significant increases in credit risk (Example)
Bank B provided a loan to Company C, holding company of a group that operates in cyclical production industry. At the
time of grant of loan due to global demand prospects for industry were positive. However, input prices were volatile and
potential decrease in sale was anticipated
Company C’s leverage is at a level acceptable by the creditors at the time of B’s loan to C. However creditors are
concerned about C’s ability to service interest using dividends it receive from its operating subsidiaries.
Subsequent to initial recognition, C announced 3 of its 5 key subsidiaries had a significant reduction in sales volume but
are expected to improve in line with anticipated cycle for the industry in the following months. C announced corporate
restructure to streamline its operating subs which will increase the flexibility to refinance existing debts and the ability of
operating subsidiaries to pay dividends to C.
Despite the expected deterioration in market, Bank B determines that there has been no significant increase in credit risk
since initial recognition due to:
• Although sales volumes have fallen, this was anticipated at initial recognition.
• Bank B view C’s corporate restructuring as being credit enhancing
• Bank B’s credit risk department determined that latest developments are not significant enough to justify a change in
its internal credit risk rating.

©2018
Expected Credit Loss Q&A IFRS 9.5.5.10.1

Use of credit rating to assess low credit risk
Entity A has a portfolio of debt instruments for which investment grade credit ratings (BBB and above) are available from
external rating agencies at the reporting date. Can Entity A rely on these credit ratings in determining whether the assets
have low credit risk at the reporting date?
Answer
Yes. Entity A can use external credit ratings to determine whether an instrument has low credit risk, provided that the credit
rating:
• is specific to the financial instrument being evaluated (i.e. takes into account all of the terms and conditions of the financial
instruments as required in IFRS 9.B5.5.23);
• does not reflect the value of any collateral and guarantee (as discussed in IFRS 9.B5.5.22, the assessment to be made is
whether the instrument has a low risk of default rather than whether it has a low loss given default); and
• is current at the reporting date, i.e. the rating must reflect the economic conditions prevailing at the reporting date. If there is
a time lag between the last update date and the reporting date, consideration should be given to whether economic events
affecting the issuer since the publication of the rating would not lead to a sub-investment grade assessment.
Also, any information (public and non-public) to which Entity A has access that is not reflected in the rating, should be considered
in its determination of whether the instrument has low credit risk.
The assessment of whether a debt instrument has low credit risk can be made on an instrument-by-instrument basis and is not an
accounting policy choice. [IFRS 9.BC5.184]

©2018
Expected Credit Loss Q&A IFRS 9: 5.5.9-7

Reflecting expectations about changes in credit risk when assessing SICR
Question
How should expectations about changes in credit risk be reflected when assessing significant increases in credit risk in
accordance with IFRS 9.5.5.9?
Answer
• IFRS 9.5.5.9: “[a]t each reporting date, an entity shall assess whether the credit risk on a financial instrument has increased
significantly since initial recognition. When making the assessment, an entity shall use the change in the risk of a default
occurring over the expected life of the financial instrument. To make that assessment, an entity shall compare the risk of a
default occurring on the financial instrument as at the reporting date with the risk of a default occurring on the financial
instrument as at the date of initial recognition.”
• An entity may look at the lifetime probability of default (PD) for a financial instrument (the cumulative PD that may be
derived from marginal 12-month PDs for each period).
• A marginal 12-month PD is the probability of default in the next 12 months at a particular point in time (PiT).
• The blue line represents the expectations of the 12 month (graph 1) PiT PDs and lifetime (graph 2) PDs across time as
determined at origination of the financial instrument.
• The green line represents the revised expectations of those metrics across time as determined at the reporting date.

©2018

Reflecting expectations about changes in credit risk when assessing SICR (contd.)
Answer (Contd…..)
• Lifetime PD as initially determined at origination decreases over time because, on a cumulative basis, there is less
time to default (blue line in Figure 2).
• The extent of this decrease is driven by expectations regarding marginal 12-month PD’s for the remaining periods as
initially determined at origination.

©2018

Reflecting expectations about changes in credit risk when assessing SICR (contd.)
Answer (Contd……)
• Even if marginal 12-month PD’s for later periods are higher than marginal 12-month PD’s for earlier periods as
predicted at origination this is not indicative of a SICR.
• Instead we consider whether the lifetime PD at the reporting date (green line in Figure 2) has increased compared to
the expected lifetime PD as estimated at initial recognition (blue line in Figure 2).
• If the expectations at initial recognition for a particular PiT (blue line Fig 2) have not changed at that PiT, the
expected lifetime PD is equal to the lifetime PD at the reporting date – there has been no SICR.
• If all of the marginal 12-month PD’s at the reporting date (blue line Fig 1) are higher than expected at initial
recognition (green line Fig 1), this will result in an increase in the lifetime PD which is the sum of the remaining 12-
month PD’s.
• The entity will need to assess whether this increase is significant based on the principles explained in IFRS 9.B5.5.9.

©2018
Transfer into Stage 3 – indicators that an instrument is credit impaired
Breach of contract
(e.g. past due or Lenders grant a
default) concession relating to
the borrower’s financial
difficulty
Significant financial
difficulty of the Credit
borrower
impaired
Probable bankruptcy
or other financial
reorganisation
Disappearance of an
active market for the
instrument

©2018

Macro economic factors – New information before the reporting date
Bank A has a 31 December year end and takes into account forecasts of future economic conditions when determining
significant increases in credit risk and when measuring expected credit losses. This process uses inputs and assumptions
that are developed in November each year in order to meet its financial reporting deadlines.
Bank A has a US dollar loan receivable from Entity B. Entity B’s local currency is pegged to the US Dollar. Entity B’s
revenue is predominantly earned in its local currency.
The central bank in Entity B’s jurisdiction has consistently issued policy statements that it will continue to support the US
dollar peg, and it confirms this policy publicly in November 20X0. In December 20X0, despite its November confirmation to
the contrary, the central bank in Entity B’s jurisdiction ceases to support the currency peg and the value of the currency
immediately falls relative to the US dollar.
Should Bank A incorporate the actions of the central bank in December 20X0 in its assessment of significant increase in
credit risk and the measurement of expected credit losses at 31 December 20X0?

©2018

Macro economic factors – New information before the reporting date (contd.)
Answer
IFRS 9.5.5.9 requires that the assessment as to whether there has been a significant increase in credit risk should be
performed at each reporting date and should consider reasonable and supportable information that is available without
undue cost or effort.
IFRS 9.5.5.17(c) requires that the measurement of expected credit losses should reflect reasonable and supportable
information available without undue cost or effort at the reporting date about past events, current conditions and
forecasts of future economic conditions.
Therefore, reasonable and supportable information of events and current conditions and forecasts of future economic
conditions that become available before the end of the reporting period are required to be reflected in the assessment of
significant increases in credit risk and the measurement of expected credit losses at the reporting date.
Any loan losses measured in advance using information prior to the reporting date should be updated to reflect conditions
at the reporting date.

©2018
Expected Credit Loss Q&A IFRS 9: 3.3.2 Ex-1

Incorporation of forward looking information in measurement of ECL
Is it permitted for an entity to use a single forward-looking economic scenario instead of multiple forward-looking
scenarios in measuring expected credit losses?
Answer
It depends. It would not be appropriate to use a single forward-looking economic scenario if such a scenario failed to reflect a
non-linear relationship between different forward-looking economic scenarios and their associated credit losses. In other words, if
the credit losses arising from different forward-looking scenarios are not normally distributed, then failure to reflect this non-
normal distribution would not result in an unbiased amount.

©2018
28
How to measure ECL – There is no specific method in IFRS 9
The The
The
probability of forecasted
forecasted
ECL forward defaulting if economic loss
X X exposure at
looking you haven’t if the default
each point in
already at happens at
time
time t time t
PD LGD EAD
To compute ECL an entity will require, at the minimum, estimates of the following:
• Probability of Default (PD)
• Loss Given Default (LGD)
• Exposure at Default (EAD)
• PD & LGD to be adjusted for change in forecasted macro economic variables

©2018
ECL for bonds
Presentation of simplified example
Scenario 1: Year 1 – No significant increase in credit risk
Bond
Time (years) 1 2 3 4 5
Coupon 50 50 50 50 50
Capital repayment 1000
Cash flows 50 50 50 50 1050
Effective interest rate 5% 5% 5% 5% 5%
DF (EIR) 0,95 0,91 0,86 0,82 0,78
EAD 1 050 1050 1050 1050 1050
1 000
CDS spread 0,50% 0,60% 0,70% 0,80% 0,90%
LGD 60% 60% 60% 60% 60%
Cumulative survival prob 99,17% 98,02% 96,56% 94,81% 92,77%
Periodic PD 0,83% 1,15% 1,46% 1,75% 2,03%
PD*LGD 0,50% 0,69% 0,88% 1,05% 1,22%
EAD 1 050 1 050 1 050 1 050 1 050
Expected loss per period 5,23 7,25 9,19 11,05 12,80
Expected loss per period (discounted at EIR) 4,98 6,57 7,94 9,09 10,03
12M expected loss 4,98
Debit Credit
1/01/2014
Financial Asset (AC) – B/S 1000
Cash – B/S 1000
Impairment loss – P/L 4,98
Loss Allowance – B/S 4,98
ECL for bonds
Presentation of simplified example
Scenario 2: Year 2 – Significant increase in credit risk
Bond (stress after 1 year)
Time (years) 1 2 3 4
Coupon 50 50 50 50
Capital repayment 1000
Cash flows 50 50 50 1050
Effective interest rate 5% 5% 5% 5%
DF (EIR) 0,95 0,91 0,86 0,82
EAD 1 050 1 050 1 050 1 050
1 000
CDS spread 1,20% 1,30% 1,40% 1,50%
LGD 60% 60% 60% 60%
Cumulative survival prob 98,02% 95,76% 93,24% 90,48%
Periodic PD 1,98% 2,26% 2,52% 2,76%
PD*LGD 1,19% 1,36% 1,51% 1,65%
EAD 1 050 1 050 1 050 1 050
Expected loss per period 12,47 14,24 15,87 17,36
Expected loss per period (discounted at EIR) 11,88 12,92 13,71 14,28
Lifetime expected Loss (discounted) 52,79
Debit Credit
31/12/2014
Impairment loss – P/L 47,81 (= 52,79 - 4,98)
Loss Allowance – B/S 47,81
Financial Asset (AC) –B/S 50
Interest revenue – P/L 50
Expected Credit
Loss
Simplified Model
Simplified Model
General model and simplified model
General model
• Lease receivables Policy
• Contract assets and trade choice
Stage Stage Stage
receivables with significant
1 2 3
financing component
Simplified model
Contract assets and trade
receivables without Stage Stage
significant financing
2 3
component
Special provisions
• No loss allowance on initial recognition
Purchased or originated credit-
impaired financial assets • Apply a credit-adjusted effective interest rate (based on Stage
(POCI) the expected cash flows at inception including expected 3
credit losses)

©2018
33
Simplified Model (contd.)
How to measure ECL – There is no specific method in IFRS 9
The The
The
probability of forecasted
forecasted
ECL forward defaulting if economic loss
X X exposure at
looking you haven’t if the default
each point in
already at happens at
time
time t time t
PD LGD EAD
Loss rate

©2018
Challenges in simplified approach
• Customer wise
What kind of payment history is available? • Invoice wise
• None (oops!)
• High? (4-5 years)

What is the level of data mining possible? • Medium? (3-4 years)
• Low? (up to 2 years only)
• Sophisticated e.g. ERP systems?

What is the quality of the data available? • Accounting software?
• Excel based manual accounting?
KDD Finance team presentation

Kuwait
Provision matrix for short term receivables
Facts:
 Manufacturer M with a portfolio of short term trade receivables (no financing component) from a large number of small
clients
Assessment:
 Loss allowance at an amount equal to Lifetime ECL (simplified approach for trade receivables)
 Entity creates a provision matrix that is based on its historical observed default rates over the expected life of trade
receivables and adjusts it for forward looking estimates.
Age Default rate Gross carrying ECL allowance
amount
A B AxB
Current 0.3% CU15,000,000 CU45,000
1-30 days PD 1.6% CU7,500,000 CU120,000
31-60 days PD 3.6% CU4,000,000 CU144,000
61-90 days PD 6.6% CU2,500,000 CU165,000
>90 days PD 10.6% CU1,000,000 CU106,000
CU30,000,000 CU580,000

©2018
Historical data mining
Historical benchmarks
*Default is defined by management as 180 days based on internal credit related measuring policies
KDD Finance team presentation

Kuwait
37
Recommended ECL Model for trade receivable
Simple provision matrix can be developed as follows to identify historical loss rates within each bucket
• Minimum of 3 years (36 months) analysis of ageing reports
• Customers to be segregated into different pools based on risk characteristics
• Loss rates to be arrived at separately for each pools
• Forward looking adjustments, based on regression analysis of correlation between identified macro economic variable
and loss rates, to be applied on the historical loss rates

©2018
Questions and insights?
Break
Served at Emirates Ballroom Foyer
Panel Discussion
IFRS 15
Revenue from Contract with Customers
Abbas Ali Mirza, Obada AlKowatly and Romil Andres

Contents
Introduction
01
Overview of IFRS 15
02 Scope
What’s included
The core principle
Transition rules
Disclosure requirements
03 Q&As and cases

Step by step
04 Other specific considerations

Warranties
Contract costs
Material rights
Transition
Disclosures
©2018 Deloitte & Touche (M.E.). All rights reserved. 2018 IFRS KSA Roadshow| IFRS 15 : Revenue from Contract from Customers
Introduction
Introduction
Scope
Q&As and cases
Other specific
considerations
Member firms and DTTL: Insert appropriate copyright Presentation title 43

[To edit, click View > Slide Master > Slide Master] [To edit, click View > Slide Master > Slide Master]
The Core Principle –
5 Step Revenue Recognition Model
The Core Principle –5 Step Revenue Recognition Model
Overview—the core principle
Recognize revenue to depict the transfer of goods or services to customers in

an amount that reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services.
Five-step model to apply the core principle:
Identify the Recognise

Identify Allocate the
performanc Determine revenue
the transaction
e the when each
contract price to the
obligations transactio performance
with a performance
in the n price obligation is
customer obligations
contract (Step 3) satisfied
(Step 1) (Step 4)
(Step 2) (Step 5)
Control approach
(differs from the risks and rewards approach under IAS 18)
Applying the 5 step model—Example
Determine the
transaction price
Identify the Identify the (Step 3) Recognise
contract performance revenue
obligations (Step 5)
(Step 1) Allocate the
(Step 2)
transaction price
(Step 4)
Deliver equipment CU 100 Point in time
Provide training
CU 5 Over time
Contract with services
customer
CU 110
Provide support
CU 4 Over time
services
Provide extended
CU 1 Over time
warranty
Step Step Step Step Step
The Core Principle –5 Step Revenue Recognition Model 1 2 3 4 5
Step 1: Identifying the contract
A legally enforceable contract (incl. oral or implied) must meet

all of the following requirements:
Contracts are approved and the

Each party’s rights can be identified.
parties are committed to perform.
Payment terms can be identified. Commercial substance.
It is probable that the entity will

collect the consideration to which it
will be entitled.
A contract is outside the scope if:
AND Each party can unilaterally terminate the

The contract is wholly unperformed
contract without compensation
Contract Identification
• TechCo sells (and delivers) goods to a customer on Day 1 with a cost
of $700 for consideration consisting of:
‒ A deposit received on Day 1 of $250; and
‒ $1,000 receivable on Day 360.
• Assume that collectability is not probable
How much revenue would be recognized, and during

which month(s)?
Contract Identification (continued)
Suggested Solution
• Total consideration is $1,250 ($250 on Day 1+ $1000 on Day 360)

• The full amount of revenue would be recognized in month 12 ($1,250).
NOTE: The above assumes that the entity did not reassess that collectability was probable at any
point during the 12-month period.
Step 2: Identifying performance obligations 1 2 3 4 5
Identify all (incl. implicit) promised goods/services in the contract
Is the good/service distinct?
CAPABLE OF BEING DISTINCT IN CONTEXT

DISTINCT OF CONTRACT
Can the customer benefit Is the good or service
from the good or service separately identifiable
on its own or together AND from other promises in the
with other readily contract?
available resources?
YES NO
Account for as a separate Combine two or more

performance obligation promised goods or
services
Distinct within the context of the contract
In April 2016, the IASB amended IFRS 15 to clarify when a promised good or service is
“separately identifiable” from other promises.
Factors that indicate that two or more promises to transfer goods or services to a customer
are not separately identifiable include but not limited to the following:
a) The entity provides a significant service of integrating the goods or services;
b) One or more of the goods or services do significantly modifies or customizes or are

significantly modified or customized by one or more of the other goods or services
promised in the contract;
c) The goods or services are highly dependent or highly interrelated.
Series of distinct goods and services that are substantially the same and have the same
pattern of transfer
If a series of distinct goods or services meets the criteria of paragraph 22 and 23 of IFRS 15,
an entity is required to treat that services as a single performance obligation (it is not
optional).
Example:
Monthly payroll services;
Monthly cleaning services;
IT outsourcing services;
Hotel management services;
Unbundling of contacts
Fact pattern
ManufactCo enters into a contract to sell a customer a pool filter system and a filter
cartridge that is delivered two weeks later.
• The pool filter system cannot filter without the filter cartridge.
• Both the pool filter system manufacturer and sellers of generic filter cartridges
sell the pool filter system and filter cartridges separately.
Day 1 Day 14
How many distinct performance obligation(s) can be identified?
Unbundling of contacts (continued)
Suggested solution
• ManufactCo identifies two distinct performance obligations: the pool

filter system and the filter cartridge:
o The customer can benefit from the goods either on their own or together
with other resources that are readily available to the customer (IFRS
15.27(a)); and
o ManufactCo's promise to transfer the goods or service to the customer is
separately identifiable from other promises in the contract (IFRS 15.27(b)).
In particular, ManufactCo does not provide a significant service of integrating
the cartridges with the filter system (IFRS 15.29(a)) into a combined output.
The cartridges are not significantly modified or customized by the filter
system (IFRS 15.29(b)). The cartridges are not highly dependent on, or
highly interrelated with, the filter system (IFRS 15.29(c)).
Contract Combination
• In 20X7, JavaCo enters into a contract to license its customer relationship

management software to a customer.
• Three days later, in another contract, JavaCo agrees to provide consulting services
to significantly customize the licensed software previously sold to function in the
customer’s IT environment.
• The customer is unable to use the software until the customization services are
complete.
Should JavaCo combine these two contracts and account for them as a single
contract under IFRS 15?
Contract combination (continued)
Suggested solution
These two contracts should be combined and accounted for as a single contract
under IFRS 15.17 because:
1) They were entered into at or near the same time with the same customer in accordance
with IFRS 15.17; and
2) The goods or services under the contracts constitute a single performance obligation.
This is because JavaCo is providing a significant service of integrating the license and
consulting service into the combined item for which the customer has contracted. In
addition, the software will be significantly customized by the consulting services.
Step 3: Determining the transaction price 1 2 3 4 5
What is the transaction price? What does it include?

Definition
Variable consideration
Consideration amount to which an entity
• Estimated and
expects to be entitled in exchange for
potentially constrained
• e.g., discounts, rebates,
transferring promised goods or services to a
refunds, etc. customer.
Fixed consideration
The amount is fixed and not
contingent on the outcome of
Consideration payable future events.
to customers
Transaction
Reduces transaction price
price unless payment is
Excluding credit risk
made for a distinct The transaction price would
good/service. not be reduced for the
effects of customer credit
risk.
Significant benefit of financing
• If identified, leads to adjustment in Non-cash consideration
transaction price. • Consideration in a form other than
• Practical expedient available. cash
• Shall be measured at FV
Step 3: Determining the transaction price (continued)
The following should be considered while determining the transaction price
1. Variable consideration
• Performance Bonuses, Incentives, Rights of return, Discounts
2. Consideration payable to customer

• Coupons, Vouchers, Volume Rebates, Shelf space payments
3. Non cash consideration
• Share considerations, Material equipment, labour
4. Time Value of Money
• Expected length of time between delivery and payment
• Difference between consideration promised and cash selling price
• Prevailing market interest rate
Variable consideration can only be recognised if it is highly probable that a significant

reversal in the amount of the cumulative revenue recognized will not occur.
Determine the transaction price (continued)
Selection of method for variable consideration
1. Expected Value Method

• This method may be appropriate when the entity has a large number of contracts with
similar characters and it is calculated as the sum of probability weighted amounts in a
range of possible consideration amounts.
• Outcome of each contract is independent of others.
2. Most Likely Method

• When the contact has only two possible outcomes. It is the single most likely amount in a
range of possible consideration amounts (single most likely outcome of the contact)
• Additional consideration receivable is based on performance bonus by meeting the criteria
set.
• Although Entity X has a large number of contracts, the outcomes are not independent
because they all depend on the same criterion.
Sales with a right to return
Right to return
In some contacts, an entity transfers control of a product to a customer and also grant
right to return the product for various reasons.
Revenue should not be recognised for the products expected to be returned.

• A refund liability for the amounts expected to be refunded (Debit sales and credit
Contact liabilities at the sale value);
• An asset, with a corresponding adjustment to cost of sales, for the entity’s right to
recover the products from customers on settling the refund liability (debit contact asset
and credit cost of sales at the original cost of inventory less cost to resell the items).
• Not applicable for exchange of products for another of the same type and price (size,
color difference, etc);
• Not applicable to return a defective products.
Cash discount for prompt payment
Revenue is CU 100 and if discount is taken it is CU 90. Discount is taken in 40% of the
transactions and the expected value will be calculated as follows:
CU 100 X 60% + CU 90 X 40% = CU 96
If the discount taken varies significantly, it may necessary to apply the constraint which
will result in the recognition of less revenue. Historically discount taken varies from month
to month and reaches the maximum of 70% and the long term average is 40%. Under
this scenario the seller should conclude 30% for not taking the discount to avoid
significant revenue reversal.
Revenue recognised should be restricted to the following:
CU 100 X 30% + CU 90 X 70% = CU 93
Consideration payable to a customer
1. Slotting fees
• Entity X contracts to sell products to Entity Y, a retailer. Entity Y promises to display
the products in a prime location within the store to encourage the sales. Any
payments made or discounts provided to Entity Y in exchange for such services
should be accounted for as a reduction of the transaction price recognised by Entity
X as the services provided by Entity Y are not sufficiently separable from Entity Y’s
purchases of products from Entity X.
2. Inclusion in retailer’s advertising circular or Website

• As part of the contract the retailer agrees to include the seller’s product in its weekly
circular. It should be accounted for as a reduction of the transaction price recognised
by the seller.
Identification of significant financing component
Circumstances that do not give rise to a significant financing component:

If any of the following factors exist:
1) The customer paid for the goods in advance and the timing of the delivery is at the discretion of the customer;
2) Substantial amount of the contract is variable and the amount or timing of that consideration varies on the
basis of the occurrence or non-occurrence of a future event that is not within the control of the customer or
the seller (sale based Royalty);
3) The difference between the promised consideration and the cash selling price of the good or service arises for
reasons other than the provision of finance to either the customer or the seller.
Withheld payment on a long term contract:

The contract provides that a specified percentage of each milestone payment is to be withheld by the customer
throughout the arrangement and paid to the entity only when the building is complete.
The contract does not include a significant financing component. The objective is to protect the customer from the
contractor failing to adequately complete its obligations under the contract.
Q&A
Deferred consideration: discounting on the basis of interest rate (Q&A IFRS 15:
64-EX-1)
Example
On 1 January 20X1, Entity B sells an item of equipment for CU100,000 under a financing agreement that has no
stated interest rate. On the date of sale, Entity B transfers control of the equipment to the customer, and Entity B
concludes that the contract meets the criteria in IFRS 15.9, including the collectability criterion. The first annual
instalment of CU20,000 is due on 31 December 20X1, one year from the date of sale, and each subsequent year
for five years. The policy of not charging interest is consistent with normal industry practice.
Entity B has separately determined that the transaction includes a significant financing component. To estimate
the transaction price by discounting the future receipts, Entity B uses a “rate that would be reflected in a
separate financing transaction between [Entity B] and its customer at contract inception”. Entity B determines
that the appropriate annual rate is 10 per cent. Assume that the receivable arising from the transaction is
measured at amortized cost after initial recognition.
Step A - Calculate the Net Present Value of the Stream of Payments
If there is no down payment and there are five annual instalments of CU20,000 with an interest rate of 10 per
cent, the net present value of the stream of payments forming the consideration is CU75,816. Therefore, upon
transfer of control of the equipment, CU75,816 is recognized as revenue from the sale of goods, and the related
receivable is recognized.
Q&A (continued)
64-EX-1)
Step B - Calculate the Amount of Interest Earned in Each Period
The difference between CU100,000 and CU75,816 (i.e. CU24,184) will be recognised
as interest revenue as it becomes due each year, as calculated below.
Step C — Record Journal Entries

On the date of sale, control of the equipment transfers to the customer and Entity B records the following
journal entry:
Q&A (continued)
64-EX-1)
Step C — Record Journal Entries (cont’d)

To record the first annual payment due one year from the date of purchase.
As of each subsequent year-end, Entity B should record the same journal entry by using the amounts from the table
above.
Note that this example does not take into account any impairment assessment that would be required in accordance
with IFRS 9 Financial Instruments (or IAS 39 Financial Instruments: Recognition and Measurement as required before
the adoption of IFRS 9).
Testing your knowledge: Question 1
When calculating variable consideration, which of the following

are factors that could increase the likelihood or the magnitude
of a revenue reversal (the effect of the constraint)?
Select all that apply
A The entity’s experience with similar types of contracts is limited
B The amount of consideration is not highly susceptible to factors

outside the entity influence
C The contract has a large number and broad range of possible

consideration amounts
D The uncertainty about the amount of consideration is expected

to be resolved after a short period of time
When calculating variable consideration, which of the following

are factors that could increase the likelihood or the magnitude
of a revenue reversal (the effect of the constraint)?
A The entity’s experience with similar types of contracts is limited
B The amount of consideration is not highly susceptible to factors

outside the entity influence
C The contract has a large number and broad range of possible

consideration amounts
D The uncertainty about the amount of consideration is expected

to be resolved after a short period of time
©2018 Deloitte & Touche (M.E.). All rights reserved.

Step 4: Allocating the transaction price 1 2 3 4 5
• Estimate the price if unobservable Maximize

• Acceptable methods： the use of
observable
Determine
> Adjusted market assessment approach inputs and
standalone > Expected cost plus a margin approach apply
selling price > Residual approach consistently
Only allowed in limited
circumstances
• Allocate the transaction price to each performance obligation

on a relative stand-alone selling price basis.
• Allocate discounts proportionally to all performance
obligations unless certain criteria are met.
Allocate the • Allocate variable consideration and changes in transaction
transaction price to all performance obligations.
price
• Do not reallocate changes in standalone selling price after
inception.
Step 4: Allocating the transaction price (continued)
Q&A
• TeleCo enters into a contract with a customer to provide a handset for a price of $400 and
24-month wireless services for a price of $10 per month. The customer can get the handset
or wireless services from any other telecommunications company. The price of the wireless
service is equal to its stand-alone selling price.
– TeleCo identifies two performance obligations—the handset and the wireless services.
– The handset is sold separately for $575.
• How much is the transaction price and what process should be performed to
allocate this to the performance obligations?
Q&A (continued)
• The stand-alone selling price of the wireless service is $240 ($10 x 24 months).
• The transaction price is $640 ($400 + $10 x 24 months), which is allocated to
the performance obligations based on their relative stand-alone selling prices
as follows:
Performance Standalone Price allocation

obligations selling price
Handset $575 $452 $640x(575/815)
Wireless $240 $188 $640x(240/815)

service
Total $815 $640
• In this example, no significant financing component has been identified by

TeleCo.
Q&A (continued)
Case 1 - Allocating transaction price – standalone selling prices
Maritime sells boats and provides mooring facilities for its customers. Maritime sells the boats for $30,000
each and provides mooring facilities for $5,000 per year. Maritime concludes that the goods and services are
distinct and accounts for them as separate performance obligations. Maritime enters into a contract to sell a
boat and one year of mooring services to a customer for $32,500. How should Maritime allocate the
transaction price of $32,500 to the performance obligations?
Analysis
Maritime should allocate the transaction price of $32,500 to the boat and the mooring
services based on their relative standalone selling prices as follows:
Boat: $27,857 ($32,500 x ($30,000 / $35,000))

Mooring services: $4,643 ($32,500 x ($5,000 / $35,000))
The allocation results in the $2,500 discount being allocated proportionately to the
two performance obligations.
Step 5: Recognizing revenue 1 2 3 4 5
Performance satisfied over time = Revenue recognised

over time
The seller does

The customer
not create an
The seller’s simultaneously
asset that has an
performance receives and
alternative use to
creates or consumes the
the seller and the
enhances an asset OR benefit of the OR
seller has the
controlled by the seller’s
right to be paid
customer. performance as the
for performance to
seller performs.
date.
IF NOT
Revenue recognized at a point in time

Step 5: Recognizing revenue 1 2 3 4 5
Revenue recognised at a point in time

Indicators that control is transferred include:
Present right to payment
Legal title of goods and services
Transferred physical possession
Significant risks and rewards of

ownership
The customer has accepted the asset
Step 5: Recognizing revenue (continued)
Performing obligations satisfied over time or at a point in time
During Feb 20X1, ToolCo, a manufacturer of gardening tools, enters into a contract with a
retailer to produce one million shovels.
• ToolCo produces the shovels and ships the first 100,000 units to the retailer in March,
followed by 250,000 units in each of April and May, and 200,000 units in each of June and
July.
• These shovels are produced according to standard specifications and could be sold to
other customers.
1 million units
March July
Does ToolCo recognize revenue at a point in time or over time? Why?

When should the entity recognize the revenue?
Step 5: Recognizing revenue (continued)
Performance obligations satisfied over time or at a point in time
Does ToolCo recognise revenue at a point in time or over time? Why?

The criteria for recognizing revenue over time are not met so ToolCo should recognize
revenue for each performance obligation at the point in time when the customer obtains
control of the promised asset and the performance obligation is satisfied.
When should ToolCo recognize the revenue?

ToolCo should recognize the revenue when its customer has obtained control of the asset.
ToolCo will therefore recognize the revenue in several tranches, when control of each
shipment of shovels is obtained by the customer.
Which of the following criteria if met, would

require an entity to recognise revenue over time?
A The entity’s performance creates an asset with an alternative

use to the entity
B The entity has an enforceable right to payment for performance

completed to date
C The entity has an enforceable right to payment in accordance

with a payment plan
The entity’s performance does not create an asset with an

D alternative use to the entity and the entity has an enforceable
right to payment for performance completed to date
IFRS 15 Pre-implementation Fac-led
2018 IFRS KSA Roadshow| IFRS 15 : Revenue from Contract from Customers
Which of the following criteria if met, would

require an entity to recognise revenue over time?
A The entity’s performance creates an asset with an alternative

use to the entity
B The entity has an enforceable right to payment for performance

completed to date
C The entity has an enforceable right to payment in accordance

with a payment plan
The entity’s performance does not create an asset with an

D alternative use to the entity and the entity has an enforceable
right to payment for performance completed to date
IFRS 15 Pre-implementation Fac-led
Highlight- Case Study Background Testing you Knowle dge:Question 2
Henley enters into contracts for sale of specific

apartment units constructed by them
If buyer terminates contract, Henley is entitled

to 100% of total purchase price
Jurisdictional laws stipulate that when sale

contract is terminated, buyers are liable to pay
up to 25% of total purchase price
Highlight - Case Study: When should Henley recognise revenue?
As sales contract does not satisfy any criteria in IFRS

15.35, revenue must be recognised
at a point in time
Exact point in time is identified in IFRS 15.33:
“… Control of an asset refers to the ability to direct the use of,

and obtain substantially all of the remaining benefits from, the
asset. Control includes the ability to prevent other entities
from directing the use of, and obtaining the benefits from
an asset.”
Key impact on revenue recognition
Step 5
Step 4
Recognise
Step 3 revenue
Allocate the when each
Step 2 transaction performanc
Determine price to e obligation
Step 1 the performanc is satisfied
Identify the transaction e
performanc price obligations
Identify the e
contract with obligations
a customer in the
contract
Unbundling Uncertain Allocation Recognition
Collectabilit of contracts revenue or of total of revenue
y contingent revenue to at a point in
revenue the time or
unbundled over time
parts
Life Science
Telecom Contract
Consumer
Healthcare Software & Industrial Telecom Manufactur
Products er
Technology Automotive
Real estate
2018 IFRS KSA Roadshow| IFRS 15 : Revenue from Contract from Customers
Contract costs
Contract Costs
Contract costs – General

1) Costs of obtaining a contact; and
2) Costs of fulfilling a contact.
Costs of obtaining a contact:

Costs to obtain a contract that would have been incurred irrespective of whether the
contract was obtained are recognized as an expenses when incurred unless those costs
are explicitly chargeable to the customer irrespectively of whether the contact is obtained
IFRS 15.93. (e.g. costs of preparing a proposal)
The incremental costs of obtaining the contact with a customer are recognized as an
asset of the entity expects to recover those costs. These costs would not have been
incurred if the contract had not been obtained IFRS 15.92 (e.g. a sales commission).
Contract Costs
Costs of fulfilling a contact:

If the costs incurred in fulfilling the contact with a customer are not within the scope of
another standard (e.g. IAS 2, IAS 16, IAS 38 Intangible assets), an asset is recognised for
the costs incurred to fulfil a contract only if those costs meet all of the following criteria:
a) The costs relate directly to a contract or to an anticipated contract that the entity can
specifically identify (e.g. cost of designing an asset to be transferred under a specific
contract that has not yet been approved; costs relating to services to be provided under
renewal of an existing contract).;
b) The costs generate or enhance resources of the entity that will be used in satisfying
performance obligations in the future; and
c) The costs are expected to be recovered.
Contract Costs
Costs of fulfilling a contact:

An entity enters into a service contact to manage a customer’s IT data Centre for five
years + two years renewable option. The initial costs incurred to set up the technology
platform for the entity’s internal use that inter faces with the customer’s system. The
platform is not transferred to the customer, but will be used to deliver services to the
customer.
Design services CU 40,000 (IFRS 15.95)
Hardware CU 120,000 (IAS 16)
Software CU 90,000 (IAS 38)
Migration and testing of data centre CU 100,000 (IFRS 15.95)
Total costs CU 350,000
Testing your Knowledge: Question 1
Which of the following criteria must be met to capitalise

the costs of fulfilling a contract in accordance with IFRS
15 (assuming the costs are not within the scope of
another standard)?
A The costs relate directly to a specifically identifiable contract
B The costs generate or enhance resources that will be used in

satisfying the contract
C The costs are expected to be recovered
D The costs relate to satisfied performance obligations
Testing your Knowledge: Question 1
Which of the following criteria must be met to capitalise

the costs of fulfilling a contract in accordance with IFRS
15 (assuming the costs are not within the scope of
another standard)?
A The costs relate directly to a specifically identifiable contract
B The costs generate or enhance resources that will be used in

satisfying the contract
C The costs are expected to be recovered
D The costs relate to satisfied performance obligations
Contract to Obtain a contract
Costs to obtain a
contract
Are the costs incurred YES Are the costs NO

only if the contract is recoverable?
obtained?
Practical YES
NO Expedient
Is the
NO amortisation
period > 1 year?
Are the costs explicitly YES
chargeable?
YES
NO
Recognize as an
asset
Expense as incurred
Costs to fulfil a contract
Are the costs within YES Apply

Costs to fulfill a the scope of other other
contract standards?
Are the costs incremental standards
(incurred only NO
if the
contract is obtained)?
Do the costs relate directly

to a contract or a specific
NO anticipated contract ?
YES
Recognised as an
Do theDo costs meet the
the costs generate or asset
criteria for capitalization?
enhance resources to be used in
N satisfying performance
obligations in the future?
O
YES
Expensed
NO Are the YES
as incurred
costs expected to be
recovered?
Other specific considerations
Other Provisions
Contract
Licensing
modifications
Principal
Warranties versus
Agent
Contract Modifications
Has the modification been approved? NO Do not account for the
modification until it is approved
YES
Does the modification

add distinct goods/services, and YES
Account for the modification as
does the increase in price reflect a separate contract.
their standalone selling price?
NO
Account for the modification as
YES the termination of the original
Are all of the remaining
contract and the creation of a
goods and services distinct? new contract (prospective
impact).
NO
YES
Are any of
the remaining goods and
services distinct?
NO
Account for the modification as part of the
original contract by assessing its impact on Account for these in a manner
the measure of progress through the consistent with the objectives
contract and adjusting cumulative revenue discussed above (combination of
if necessary prospective and retrospective).
(retrospective impact).
Principal Versus Agent
The Standard provides three indicators of when an entity controls the specified good or
service and is, therefore, a principal.
Indicators that an entity controls the good or service before it is transferred to the customer
include the following:
1) the entity is primarily responsible for fulfilling the promise to provide the specified goods
or service;
2) The entity has inventory risk before the specified good or service has been transferred to a
customer or after transfer of control to the customer (right of return);
3) The entity has discretion in establishing the price for the specified good or service.
The new standard does not carry forward some other indicators from IAS 18 (e.g. those
relating to exposure ro credit risk and the form of consideration as commission)
Licensing
Licensing - General
A license establishes a customer’s right to the intellectual property of an entity. It may
include the licenses of:
1) Software and technology;
2) Motion picture, music and other forms of media and entertainment;
3) Franchises; and
4) Patents, trademarks and copyrights
When to recognise revenue:

A) At a point in time when the license of the IP is given to the customer;
B) Over a period of time – duration of the period for which license is given for use.
Application Guidance: Licensing
Is the license distinct in a NO The entire bundle is
bundle of goods and accounted for as a single
services? performance obligation
YES
Is the entity obligated to NO

undertake activities that
will significantly change
the IP
YES
Is the customer NO
exposed to the effects of
those activities?
YES
Do those activities YES

result in the transfer of a
good or service as they
occur?
NO
Recognise at the point in
Recognise over time time at which the license is
(right to access IP) granted (right to use IP)
Warranties
Does the customer YES

Account for it as a
have an option to separate performance
purchase the warranty obligation
separately?
Revenue allocated to
warranty is recognised
NO over warranty period.
Does the warranty

The service element of
provide a service in YES the warranty should be
addition to assurance accounted for as a
of compliance with separate performance
laws and regs? obligation.
NO Note: If entity is unable to
account for the service
element separately from
assurance element =
Account for as a cost
Account as a Single
accrual in accordance
Performance Obligation.
with IAS 37.
Transition and
Disclosure
Transition Approaches
Two approaches are permitted on transition

• No restatement of comparatives; or
− Adjustment to equity at the start of the current year (2018)
• Full retrospective restatement (subject to limited practical expedients).
Whichever approach is adopted, the current year (2018) will be prepared as if

the new Standard had always been in force.
Transition Approaches (continues)
Jan Jan Jan

2014 2018 2020
Initial
application
Option 1:
Modified
Retrospective Adjust opening
balance of
Current GAAP equity as at IFRS 15
date of initial
Option 2: application
Fully
Retrospective
All restated under IFRS 15
Option 1
Modified Retrospective Approach
‒ Apply the new revenue guidance to contracts not completed as of the date of
adoption of IFRS 15, and
‒ Recognise the cumulative effect of the initial application in equity at the start of the initial
application period, e.g. January 1, 2018 (December 31 YE) or July 1, 2018 (June 30 YE).
• Disclosures in the year of adoption:
‒ The amount by which each financial statement line item is affected in the current period by the application
of IFRS 15 as compared with guidance in effect before the change; and
‒ An explanation of the significant changes identified in each financial statement line item.
Example:
January 1, 2018 2018 2017 2016
Initial Application Current Year Prior Year 1 Prior Year 2
Year
New contracts IFRS 15
Existing contracts IFRS 15 + Legacy GAAP Legacy GAAP

cumulative catch
up
Completed contracts Legacy GAAP Legacy GAAP
Option 2
Retrospective Approach (restate prior periods)

REMEMBER
‒ Recognise the cumulative effect of initial application in
equity at start of earliest comparative period If an entity elects to apply
presented. one or more of the
practical expedients, it
‒ Optional practical expedients: must be applied
1) An entity can use the transaction price at the date that consistently to all
contract was completed rather than estimating variable reporting periods
presented and the entity
consideration amounts in the comparative reporting
should disclose:
periods.
1) That it has used the
2) Completed contracts that began and ended during expedient; and
the same annual reporting period do not need to be 2) A qualitative
restated. assessment of the
estimated effect of
applying the expedient,
3) For all periods presented before the date of initial to the extent it is
application, an entity need not disclose the amount of reasonably possible.
Disclosure exemption
the transaction price allocated to the remaining
performance obligations nor an explanation of when it
expects to recognize the amount as revenue.
Transition options – Example
• NewCo applies the new revenue recognition guidance in its financial statements for the
years ending December 31, 2018 and December 31, 2017. Only one year of
comparatives is included in the 2018 financial statements.
• NewCo has the following contracts:
Contract Consideration Duration

A Fixed Jan 1, 2016 – Dec 15, 2016
B Fixed and variable July 15, 2015 – June 30, 2017
C Fixed and variable July 15, 2016 – June 30, 2017
D Fixed and variable May 1, 2017 – March 31, 2018
E Fixed and variable Jan 15, 2017 – Dec 15, 2017
Which contract(s) should NewCo reassess? Which practical expedients are available under
the retrospective approach?
A quick reminder on practical expedients – the retrospective approach
• For completed contracts, an entity need not restate

contracts that begin and end within the same annual
1 reporting period
• For completed contracts that have variable consideration,

an entity may use the transaction price at the date the
contract was completed rather than estimating variable
consideration amounts in the comparative reporting
2 periods
• For all reporting periods presented before the date of initial

application, an entity need not disclose the amount of the
transaction price allocated to the remaining performance
3 obligations and an explanation of when the entity expects
to recognise that amount as revenue.
Disclosures
© 2018 For information contact Deloitte Touche Tohmatsu Limited 104

Disclosures
Enable users to understand the amount, timing, and

uncertainty of revenue and cash flows.
Contracts with
customers
•Description of •Disaggregation of •Policy decisions –
significant revenue; time value of
judgments money and cost to
•Contract balances
applied/transaction (including reconciliation); obtain a contract;
price, allocation and
methods and •Information about
performance obligations; •Contract costs.
assumptions.
•Remaining performance
Significant obligations; and Others
judgments •Practical expedients.
IFRS 10, IFRS 11 and IFRS 12
Abbas Ali Mirza
IFRS 10, 11, 12
©2018 Deloitte & Touche (M.E.). All rights reserved. IFRS 10, IFRS 11 and IFRS 12 127
New Standards and amendments to existing Standards
Before After
IAS 27 Consolidated and Separate

IFRS 10 Consolidated Financial
Financial Statements Statements
SIC 12 Consolidation – Special IAS 27 Separate Financial

Purpose Entities
Statements
IFRS 12
IAS 28 Investments in Associates Disclosure
IAS 28 Investments in of Interests
SIC 13 Jointly Controlled Entities
– Non-monetary Contributions by Associates and Joint Ventures in Other
Venturers Entities
IAS 31 Interests in Joint Ventures IFRS 11 Joint Arrangements
All five Standards must be adopted at the same time

Effective date: 1 January 2013
IFRS 10
Consolidated Financial Statements
Fundamental principle
IAS 27/SIC 12 IFRS 10
 Consolidation is based on control  Consolidation is based on control

 IAS 27: control is the power to  Control may be obtained in
govern the financial and operating various manners, and not solely
policies of an entity so as to as a result of the power to direct
obtain benefits the financial and operating
 SIC 12 : in an SPE, exposure to policies
the majority of risks and rewards  Exposure to risks/rewards is one
may be the determining factor in of the factors necessary in order
establishing control control, but it is never the
determining factor
IFRS 10 requires extensive use of judgment

(IFRS 12 requires disclosure of areas of judgment)
Definition of control
An investor controls an investee when it is exposed, or has rights, to variable returns from
its involvement with the investee and has the ability to affect those returns through its
power over the investee
Broader
Power Substantive rights to direct « relevant activities »
Exposure (rights) to Potential variability to positive or negative returns

variable returns (broad definition of returns)
Ability of the investor to affect Need to determine whether the « decision-maker »

its returns through its power is an agent of another investor
Power
What is power?
Power arises from substantive rights to direct the relevant

activities
 Depends on nature of activities, legal structure and manner in which decisions
are taken
Rights  Voting rights, potential voting rights, contractual rights …
 Evaluate the impact of the various rights and their interaction
 Practical ability to exercise the rights

 Current ability to direct relevant activities
Substantive
 It is not necessary that the rights be actively exercised (a passive majority
owner has the power)
 Activities that significantly affect the returns

Relevant
 Examples: purchases/sales, financial assets management, acquisition/disposal
activities
of investments, R&D, financing
Power
Substantive rights
Factors to consider in establishing whether rights are substantive
 Existence of barriers (economic or otherwise) that prevent exercise

 Penalties that may prevent/deter exercise
 Exercise price
 Absence of an explicit mechanism allowing exercise
 Inability to obtain the information necessary to exercise
 Legal or regulatory constraints
 Other constraints making it unlikely that the rights will be
exercised
 When the exercise of the rights requires agreements of several
parties, mechanism allowing the collective exercise
 Benefits to be obtained from exercise
Power
Factors to consider in evaluating existence of power
 Relevance of voting rights held by shareholders in

directing relevant activities
Purpose and design
of the investee  If power is not exercised through voting rights,
identification of the risks (upside or downside) related to
the entity and how these risks are transferred to investors
 budgets, appointment and remuneration of key

Relevant activities management personnel
and how decisions  Including decisions that arise only in response to specific
are made with circumstances
respect to these  If different investors have ability to direct different
activities activities which activities most significantly affect
returns?
 Consider all substantive rights

Current ability to
 Protective vs participating rights
direct the relevant
activities  Direct and indirect rights (financing, guarantees,
operational ties)
Power
Assessing power: complex situations
Examples
 Voting rights are not the dominant factor
 Voting rights relate to secondary activities
 Analyze all contractual agreements in place
 Evaluate evidence of special ties between the investor and the entity
 Related parties
 Means to influence
 Key personnel in common
 Economical or technological dependence
Power
De facto control
 Not specifically addressed

 Specifically addressed
 Diversity in practice
Examples of situations where an investor may have power

with less than majority of voting rights
 Contractual arrangements between the investor and other vote holders
 Rights arising from other contractual arrangements, such as operational or
financial agreements that may provide significant substantive rights
 Relative size of the investor’s % of vote and dispersion of the voting rights
 Assess past attendance at shareholders’ meeting
 Potential voting rights of the investor and/or other investors
 See next slide
 Combination of others
Power Currently
exercisable
Potential voting rights or not
 Include in analysis only if  Include in analysis when they

currently exercisable are substantive
When are potential voting rights substantive?

 Must represent substantive rights (see previous slide) considering exercise
price, date, procedures
 Purpose and design of the instruments
 Combination of potential voting rights and other rights (voting or
contractual)
 Ability to exercise the potential voting rights when decisions about the
relevant activities are made
Exposure (rights) to variable returns
Extent of exposure to risks and rewards
Control can exist only if the

Control of an SPE generally investor is exposed to variable
requires exposure to the majority returns
of risks and rewards related to the But no specified threshold is
SPE required in order for control to
exist
Ability of the investor to affect its returns through its power
Agent – principal relationship
 An investor can exercise power

on behalf of another investor
 Not addressed  The agent does not control
 The principal must treat the
delegated rights as its own
When is the decision-maker an agent?

 Scope of the authority over relevant activities
 Degree of independence in the decision-making process
 Substantive rights held by other parties
 Kick-out right without cause
 Remuneration of the decision-maker
 Indexation based on returns
 Commensurate to service rendered and market conditions
 Exposure to variability of returns from other interests
 The greater the magnitude, the more likely the decision-maker is a principal
De facto agent
Examples of situations indicating that a party may be acting as « de facto » agent on behalf
of the investor
 Related parties
 Parties that received their interest as a contribution or loan from the investor
 Parties that cannot dispose of their interest without the prior consent of the investor
 Parties that cannot finance their activities without the support of the investor
 Parties that share key management personnel or members of the governing body with the investor
 Close business relationships
The investor must consider the rights held by the de facto agent and the agent’s
exposure to variable returns together with its own
Other issues
 Silo = group of specified assets and liabilities that must be

treated as a deemed separate entity
 Assets of the silo are the only source of payment for its
Consolidation liabilities
 No parties other than those with the specified liabilities have
of silos rights/obligations related to the specified assets or residual
cash flows from the assets
 In substance, the assets, liabilities and equity of the silo are
ring-fenced from the overall investee
Continuous  An investor shall reassess whether it controls an investee if facts

assessment of and circumstances indicate that there are changes to one or more
control of the elements of control
Consolidation
 No change
procedures
Transition
Retrospective application
Consolidation of an entity not previously consolidated
 Retrospective application of IFRS 3 from the date of

control
 If impracticable, apply IFRS 3 at the earliest possible date
 Impact on transition recognised in equity
De-consolidation of a previously consolidated entity
 Retrospective application from the date of loss of control

 If impracticable, application at the earliest possible date
 Application of IAS 27 (2004) or IAS 27 (2008) based on
the date at which control is lost
Bottom line
 No change to the fundamental principles but a much more detailed
 Extensive use of judgment required, numerous indicators and factors to consider
 Need to reconsider the assessment performed under IAS 27/SIC 12, in particular
when the following factors are present
 Potential voting rights
 Special purpose entities
 De facto control
 Different parties have rights over different activities
 Related parties
 Increased likelihood that reassessment will lead to change in accounting treatment

(consolidation vs significant influence) even though there is no change in voting rights
held => resulting in re-evaluation to fair value in P&L for previously held interest
IFRS 11
Joint arrangements
Background
 Establish a principle-based approach to the accounting for joint arrangements

 Under IAS 31, the legal structure is key
Objectives  Improve the quality of financial reporting by eliminating the choice between
proportionate consolidation and equity method
 Thereby converging with US GAAP
Overview of changes
 Two categories distinguished based on contractual rights and obligations of parties

 No accounting choice available
 Definition of “joint control” is largely the same as it was in IAS 31
Joint Ventures (IAS 31) Joint Arrangements (IFRS 11)

Jointly controlled
operations Joint operations
 Recognise own assets/liabilities  Rights/obligations to
and income/expenses assets/liabilities
 With or without separate vehicle
Jointly controlled assets  Recognise assets, liabilities,
 Recognise own assets/liabilities income, expenses
and income/expenses
Joint venture
Jointly controlled entities  Rights on net assets
 Choice between proportionate  Separate vehicle
consolidation (recommended)  Equity method
and equity method
How to determine the type of joint arrangement?
Is the arrangement conducted through a No

separate vehicle?
Yes
Legal form of
Does legal form give parties Yes
separate
vehicle
rights/obligations to assets/obligations?
Joint
No
operation
Terms of Yes
Do terms of arrangement give parties
contractual
arrangement rights/obligations to assets/obligations?
No
Is the design of the arrangement such that
Other facts & Yes
parties in effect have rights/obligations to
circumstances
assets/obligations?
No
Joint venture
How to account for joint arrangements?
Joint operations
Joint operators
Own assets, liabilities, revenue, expenses,
Others with rights/obligations to including share of those held jointly
assets/liabilities
Parties without right/obligation to

assets/liabilities Other IFRSs
Joint ventures
Joint venturers
Equity method (IAS 28)
Participants with significant
influence
Participants without significant

influence IAS 39 (or IFRS 9)
Transition
Before After As of beginning of first comparative period
1. Derecognise the equity method investment
Jointly 2. Recognise assets (incl. goodwill) and liabilities

controlled
Joint 3. Net assets recognised > equity method investment
entity
operation  reduce goodwill (if any) with any excess against
Equity retained earnings
method
4. Net assets recognised < equity method investment
 difference against retained earning
1. Derecognise assets (incl. goodwill, if any) and

Jointly liabilities
controlled
entity
Joint Venture 2. Recognise equity method investment
Proportionate
consolidation 3. Perform impairment loss test on opening balance
method of investment and impairment loss, if any,
recognised as adjustment of retained earnings
The bottom line
 All investors in a joint arrangement (including those that do not

have joint control) may be impacted
 The elimination of the proportionate consolidation = reduction in

the revenue (and gross margin)
 Include income(loss) from equity method investees as part of

operating profit?
 The elimination of the proportionate consolidation = reduction in

debt
 Will also improve return on assets…
 Entities may wish to maintain use of the proportionate

consolidation method for internal reporting purpose
 And therefore for IFRS 8 segment information (with

appropriate reconciliation)
IAS 27 and IAS 28
Amendements to IAS 27 and IAS 28
IAS 27 (2011)
 Addresses only individual financial statements
IAS 28 (2011)
 Addresses the application of the equity method to associates

and interests in joint ventures
 Partial disposal of an associate or a joint venture : IFRS 5 only

applies to the portion sold
 Partial disposal resulting in a joint venture becoming an

associate: gain/loss only with respect to the portion sold
 SIC 13, incorporated in IAS 28 and therefore applies to non-

monetary contributions to associates and to joint ventures
‒ Conflict with IAS 27 (2008) and IFRS 10 is unresolved
IFRS 12
Disclosure of Interests in Other Entities
Background
Subsidiaries
Joint arrangements
Pulls together disclosure related
to
Associates
Unconsolidated
structured entities
Objective Establish the information necessary to evaluate
Nature of, and risks associated with, interests in

other entities
Effects of those interests on the financial position,

financial performance and cash flows
Extensive information to be provided on ….
• Significant judgments and assumptions, including
 How the entity determined that it controls (or does not control) another
entity
• Subsidiaries, including
 NCI (distinct information for material non-controlling interests)
 Ability to transfer cash to or from other entities in the group
 Risks associated with consolidated structured entities (including current

intentions to provide financial support)
• Joint arrangements and associates
• Interest in unconsolidated structured entities, including
 Nature of the interest: Quantitative and qualitative information, income

from the structured entity and carrying amount of assets transferred
 Nature of the risks: quantitative information, tabular format
IFRS 11
Joint Arrangements
Anish Mehta and Sachin Bhandari
Introduction
Increase
Joint control
comparability by
definition based on
removing the use of
the principle of
proportionate
control in IFRS 10
consolidation
Broaden
the focus for
classifying a joint
arrangement
©2018 Deloitte & Touche (M.E.). All rights reserved. IFRS 11 Join Arrangements 2
Identifying whether joint control
exists
Identifying whether joint control exists–Definition of control
An investor controls an investee when it is exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to affect those returns through its power over the
investee
Power Substantive rights to direct “relevant activities”
Potential variability to positive or negative returns (broad

Exposure (rights) to
definition of returns)
variable returns
Ability of the investor to Need to determine whether the ”decision-maker” is an

affect its returns through its agent of another investor
power
Identifying whether joint control exists
Considerations…..
Does the contractual arrangement give all of the parties Outside of

(or a group of the parties) control of the arrangement No the scope
collectively? of IFRS 11
Yes
Do the decisions that affect the returns of the
arrangement (i.e. relevant activities) require the Outside of
No the scope
unanimous consent of all of the parties (or group of the
parties) that collectively control the arrangement? of IFRS 11
Yes
Existence of a joint
arrangement
Example
Background
• Entity Z is owned by five shareholders (A to E) with holdings of 50%, 20%, 10%, 10% and 10%,
respectively
• In order for decisions on relevant activities to be made agreement of 75% is required
• The arrangement does not specify which parties must agree
Question
• Does this arrangement meet the definition of a joint arrangement?
Example
Answer
• In order for decisions to be made an agreement of 75% is required
• It means that there are a variety of possible voting combinations
• As it will not necessarily be the same group of shareholders that determines each decision, there is no
unanimous consent
• This arrangement does not meet the definition of a joint arrangement
Identifying whether an arrangement
is a joint venture or a joint operation
How to account for joint arrangements?
Joint operations
Joint operators Own assets, liabilities, revenue,

expenses, including share of those held
Others with rights/obligations jointly
to assets/liabilities
Parties without
right/obligation to Other IFRSs
assets/liabilities
Joint ventures
Joint venturers
Equity method (IAS 28)
Participants with significant
influence
Participants without
significant influence IAS 39 (or IFRS 9)
©2018 Deloitte & Touche (M.E.). All rights reserved. IFRS 11 Join Arrangements
144 9
Identifying whether an arrangement is a joint venture
IAS 31 Jointly controlled Jointly controlled Jointly controlled

entities operations assets
Joint operations
Joint ventures
IFRS 11
The parties that have joint

The parties that have
control have rights to the
joint control have rights
assets and obligations for the
to the net assets of the
liabilities relating to the
arrangement
arrangement
Recognise own assets,

liabilities, revenue, expenses,
Equity method
including share of those held
jointly
145 10
©2018 Deloitte & Touche (M.E.). All rights reserved. IFRS 11 Join Arrangements
Identifying whether an arrangement is a joint venture or a joint operation
Is the arrangement conducted No

through a separate vehicle?
Yes
Legal form of Does legal form give parties Yes

separate rights/obligations to assets/liabilities?
vehicle
Joint
No
operation
Terms of Yes
Do terms of arrangement give parties
contractual
arrangement
rights/obligations to assets/liabilities?
No
Does the design of the arrangement result
Other facts & Yes
circumstances
in parties in effect having
rights/obligations to assets/liabilities?
No
Joint venture
• Understanding the legal framework under which the separate vehicle

operates….
Despite the existence of a separate

Does the separate vehicle confer
vehicle, do the parties have direct
separation between the parties
rights to assets and direct
and the separate vehicle?
obligations for liabilities?
Understanding of contractual provisions and modifications….
Joint venture Joint operation

• The assets brought into the joint • The parties share all interests in the
Rights to
arrangement are the joint arrangement’s arrangement’s assets in a specified
assets assets proportion
• The joint arrangement is liable for debts

and obligations of the arrangement
Obligation • The contractual arrangement establishes
• The parties are liable only to the extent of
that the parties to the joint arrangement
s for their respective investments
share all liabilities, obligations, costs and
liabilities • Creditors do not have rights of recourse
expenses in a specified proportion
against any party for debts or obligations
of the joint arrangement
Revenue • The contractual arrangement establishes • The contractual arrangement establishes

each party’s share in the profit or loss the allocation of revenues and expenses
and relating to the activities of the on the basis of the relative interest of
expenses arrangement each party to the joint arrangement
• The provision of guarantees, or the commitment by the parties to provide them, does
Guarantees not, by itself, determine that the joint arrangement is a joint operation
Key learning points
• No single party to an arrangement should be able to act

unilaterally at any point of time to control the activity of the
Identifying whether joint
arrangement when joint control exists
control exists
• Potential voting rights of parties and rules around casting votes
should be considered to assess whether joint control exists
• Joint arrangements can be establised using many forms and

Identifying whether a structures
joint arrangement is a • The use of a separate vehicle can make the determination of the
joint venture or joint type of the joint arrangement more difficult
operation • The underlying rights and obligations of the parties need to be
considered in the context of contractual arrangement and other
facts and circumstances
IFRS 12
Disclosure of Interests in Other Entities
Sunder Nurani
Background
Subsidiaries
Joint arrangements
Pulls together disclosure related
to
Associates
Unconsolidated
structured entities
Objective Establish the information necessary to evaluate
Nature of, and risks associated with, its interests in

other entities
Effects of those interests on its financial position,

financial performance and cash flows
©2018 Deloitte & Touche (M.E.). All rights reserved. 2018 IFRS Master Class Update| IFRS 12 : Disclosure of Interests in Other Entities 2
Significant judgements and assumptions
An entity shall disclose information about Entity shall disclose, for example, significant
significant judgements and assumptions judgements and assumptions made in
it has made (and changes to those determining that:
judgements and assumptions) in
determining:
a) that it has control of another entity, ie an a) it does not control another entity even
investee as described in paragraphs 5 though it holds more than half of the
and 6 of IFRS 10 Consolidated voting rights of the other entity.
Financial Statements;
b) it controls another entity even though it
b) that it has joint control of an holds less than half of the voting rights of
arrangement or significant influence the other entity.
over another entity; and
c) it is an agent or a principal (see
c) the type of joint arrangement (ie joint paragraphs B58–B72 of IFRS 10).
operation or joint venture) when the
arrangement has been structured through d) it does not have significant influence even
a separate vehicle. though it holds 20 per cent or more of the
voting rights of another entity.
e) it has significant influence even though it

holds less than 20 per cent of the voting
rights of another entity.
PowerPoint Timesaver 152
Extensive information to be provided on ….
2 Joint arrangements and associates
1 3
Subsidiaries, including: Interest in unconsolidated structured
 NCI (distinct information for entities, including
material non-controlling interests)  Nature of the interest:
 Ability to transfer cash to or from Quantitative and qualitative
Objective
other entities in the group information, income from the
 Risks associated with consolidated structured entity and carrying
structured entities (including amount of assets transferred
current intentions to provide  Nature of the risks: quantitative
financial support) information, tabular format
Judgment is essential in providing disclosures under IFRS 12 such as:

• Summarized financial information for subsidiaries with material non-controlling interests
• Summarized financial information for material associates/joint ventures
Key implementation issues
Scenarios:
Scenario
1 Summarized financial information:
What is Material?
Scenario
2 Aggregation of information
3
Scenario Summarized financial
information: Group
1. Summarized financial information: What is Material?
Threshold to be
applied
Total Assets or
Liabilities / Net
Assets?
How to
NCI %?
Profit or Loss?
determine
what is
material?
An entity should disclose for each of its subsidiaries which have MATERIAL non-controlling interest (NCI),
summarized financial information of the subsidiary that enables users to understand the interest that non-
controlling interests have in the group's activities and cash flows.
1. Summarized financial information: What is Material?
Accounting response
Considerations in determining what is material:
1 Objective of the disclosures 2 Contribution
Enables users to understand and Contribution of the subsidiaries

evaluate future profit or loss and with NCI to the group in terms of:
cash flows of subsidiaries with  Profit or loss
material NCI, by identifying:
 Assets/liabilities
 The assets and liabilities that
are held by those subsidiaries
Consideration
 Risk exposures
group entities
of particular
points: 3 Threshold
Threshold to be applied in
 Those subsidiaries that determining what is material
generate significant cash flows (consider both quantitative and
qualitative factors), which
depends on the specific facts and
circumstances
Judgment is essential! DOCUMENT the basis used
2. Aggregation of information
Consider this scenario:
Key Facts:
A  A has an interest in associates B, C, D and E

 B and C each represent material interests to A;
D and E each represent immaterial interests to A
 For B and C
• B and C are each involved in the
manufacture of children’s toys in Country X
B C D E • B and C have a similar customer base and
pricing strategy
• B and C are subject to the same
government regulation for product quality
 For D and E
• D and E are both involved in commercial
real estate development in the same city
Question:
Can summarized financial information relating to A’s interests in B and C be aggregated for IFRS 12 disclosure
purposes? Can summarized financial information relating to A’s interests in D and E be aggregated for IFRS 12
disclosure purposes?
2. Aggregation of information (cont’d)
Accounting response
• Disclose, including summarized financial information “for each joint
venture and associate that is material to the reporting entity” [IFRS
B C 12.21(b)(ii) and IFRS 12.B12]
• This implies that this information should be disclosed on an individual basis
• Although IFRS 12.B2-B6 permits aggregation of disclosures for similar
entities, absent further guidance from the IASB, it is not apparent that this
guidance overrides the requirement in IFRS 12.21(b)(ii) and IFRS 12.B12
• “… disclose, in aggregate, the carrying amount of its interests in all

individually immaterial joint ventures or associates that are accounted for
D E
using the equity method” [IFRS 12.B16]
• Separate disclosure is required for interests in associates and interests in
joint ventures
• Consider whether the investments in the associates meet the criteria for
aggregation in IFRS 12.B2-B6
• Provided the aggregation criteria in IFRS 12.B2-B6 are met, aggregation
would appear to be appropriate
3. Summarized financial information: Group
A Key Facts:
Ltd • A Ltd is a listed company located in jurisdiction H
• A Ltd has a material associate, C Plc, located in jurisdiction L
• A Ltd is required to provide summarized financial information
of its interest in C Plc in its annual financial statements
• For the financial year ended 31 December 2018, A Ltd will be
publishing its annual financial statements in mid-March 2019
whereas C Plc will only be publishing its annual financial
statements in April 2019
• A Ltd decides not to make the summarized financial
C information of C Plc available in its annual financial
statements on the basis that it is only available after C Plc
Plc publishes its financial statements.
Question:
Is it appropriate for A Ltd. to exclude the summarized financial information of C Plc in its
annual financial statements?
3. Summarized financial information: Group (cont’d)
Accounting response
1 IFRS 12 does not provide

any exemption to the
2 Consider the statutory and
legal requirements
disclosure requirements
which applies to this scenario
Consideration
points:
3 Consider the arrangements

that could be made in order
for A Ltd to provide the
required disclosures in its
annual financial statements
ALWAYS seek CONSULTATION when in doubt!
IFRS 16
Overview of Leases
Abbas Ali Mirza, Obada AlKowatly and Devina Ramdass
Course agenda
Course agenda
A Introduction
B Classifying lease contracts
C Lease accounting
D Getting yourself ready
©2018 Deloitte & Touche (M.E.). All rights reserved. 2018 IFRS Master Class Update| IFRS 16 : Leases 2
Introduction
Introduction
Timeline to transition
1 January 2017 1 January 2018 1 January 2019
Retrospective application Effective date

With restatement
Introduction
Two main changes are………..
Lessor Determination
and of whether a
Lessee contract
contains/ or is
a lease
Lessee One single
measurement
model
Lessor accounting largely unchanged
Introduction
IFRS 16 vs IAS 17 Key accounting focus areas
Definition of
a lease
Focus on
lessees
All leases now on

Measuring the
the statement of
lease liability
financial position
Introduction
IFRS 16 vs IAS 17 Expected impact
Treatment under Contracts that are or Significant judgment was

IAS 17 contain a lease applied
Expected
conclusion under Generally, the same Possibly different
IFRS 16
Introduction
IFRS 16 vs IAS 17 Separating components
1
Operating
lease and
service
IAS component
both
17 recognized on
Leases
recognized on
2
income statement of
statement financial
IFRS position
16 Service
contracts
recognized on
income
statement
Identified and accounted for Non-lease

PRACTICAL
separately from the lease component component
EXPEDIENT
Introduction
IFRS 16 vs IAS 17 Single measurement model
IAS 17 IFRS 16
Statement of Statement of
Financial Position Financial Position
Right to use underlying
leased asset
Off-balance Lease assets XXX
sheet
Lease liabilities XXX Obligation to make lease
payments
Income statement Income statement

Lease payments XXX
- Depreciation on lease
EBITDA XXX EBITDA XXX assets
Depreciation XXX - finance cost of lease
Finance cost XXX liability
Profit before tax XXX Profit before tax XXX

IFRS 16
Classifying lease
contracts
Classifying lease contracts
Lingering thoughts What might be on your minds
What is a lease Has the definition of a

component? lease changed?
Do I have to Are there any

reassess the exemptions available?
classification
of all existing
lease Can a contract have both
contracts? lease and non-lease
components?
IFRS 16 vs IAS 17 Identification of a lease
IFRS 16 retains IFRS 16 changes
Definition of a lease Application of the definition
A contract, or part of a contract,

that conveys the right to use an Concept of control is introduced
asset for a period of time in
exchange for consideration
Identifying a lease may require significant judgment
Identifying a lease contract Definition
A lease is defined as a contract, or part of a

contract, that conveys the right to control
What is a lease?
the use of an identified asset for a period of
time in exchange for consideration.
To assess whether a contract conveys the right

to control the use of an identified asset for a
period of time, an entity shall assess whether,
throughout the period of use, the customer has
How do you assess whether a contract
both of the following:
conveys the right to control the use of an
a. the right to obtain substantially all of
identified asset? the economic benefits from use of the
identified asset, and
b. the right to direct the use of the
identified asset.
©2018 Deloitte 2018 IFRS Master Class Update| IFRS 16 : Leases 12

©2017 Deloitte&&Touche (M.E.).All
Touche (M.E.). Allrights
rights reserved.
reserved. 5
2017 IFRS Master Class Update| IFRS 16 : Leases
IFRS 16 vs IAS 17 Consideration factors
whether the customer has the right to control the use of an

Is it a lease? identified asset for a period of time.
and Right to control the

Identified asset use of identified
asset
Right to obtain substantially all

economic benefits from use
Right to direct the use
Flowchart for identifying lease
No
Is there an identified asset?
Yes
No
Does the customer have the right to obtain substantially all of the
economic benefits from use of the asset throughout the period of use?
Yes
Supplier
Customer
Does the customer, the supplier or neither party have the right to direct how
and for what purpose the asset is used throughout the period of use?
Neither; predetermined
Does the customer have the right to operate the asset throughout the period
of use, without the supplier having the right to change those operating
Yes
instructions?
No
No
Did the customer design the asset in a way that predetermines how and for
what purpose the asset will be used throughout the period of use?
Yes
The contract does
The contract not contain a
contains a lease lease
Example Identifying a lease contract
• Market-Fresh Ltd enters into an agreement (Contract A) for 5

Question
years to use a retail unit (unit 16) in a retail park owned and
operated by Alpha Ltd (the supplier).
Does Contract A contain a
lease? • Market-Fresh has a right to open and close its store between
6am and 11pm, the hours that the retail park has security
present. It is not required to open for this whole period, and
cannot open outside this period.
• Market-Fresh can choose what products to sell in the retail unit,

and can choose its own pricing.
• Alpha Ltd can ask Market-Fresh to relocate to another floor

during the 5 years, in which case Alpha Ltd will pay its
relocation costs. However, Market-Fresh has the choice whether
or not to move location.
No
Yes
No
Yes
Supplier
Customer
Yes
instructions?
No
No
Yes
The contract does
Identified Asset
What to consider
Is it an identified
asset?
Substantive
Portions of assets
substitutions rights
Identified Asset
Portions of assets
Is it an identified asset?
Physically distinct
Capacity portion
portion
e.g., a floor of a building
Substantially all of the

capacity?
e.g., 100% capacity of a

e.g., 20% capacity of a
specified unit within a
storage facility
storage facility
Physically distinct single asset or capacity portion of an asset
Firstly determine whether the contract specifies a single asset or a capacity portion of
an asset.
Single asset Capacity portion of an asset
 It is physically distinct; or
 It represents substantially all of
the capacity of the asset and the
customer has the right to obtain
substantially all of the economic JUDGEMENT
benefits.
Contract A: Is the retail unit a physically distinct capacity portion of the whole
retail park?
Yes. The contract specifies that Market-Fresh can use retail unit 16, which is physically
distinct from the rest of the retail park.
Substantive right to substitute an asset
A supplier’s right to substitute an asset is substantive only if both of the following

conditions exist:
Economic
The supplier has the Benefit
practical ability to
substitute alternative The supplier would
assets throughout the benefit economically
period of use. from the exercise of JUDGEMENT
its right to substitute
Practical the asset.
Ability
Contract A: Does Alpha Ltd have a substantive right to substitute Unit 16 to

another retail unit?
No. Alpha can request that Market-Fresh relocates, but Market-Fresh can choose not to
Is there an identified asset? (cont’d)
Substantive right to substitute an asset Key considerations
Do the supplier’s rights to substitute apply for the full period

of use?
• Yes  substitution right is substantive
• No  substitution right is not substantive
1
What are the facts and circumstances at the inception of the
contract?
• Exclude consideration of future events that are not likely to occur
at the inception date.
2
What are the expected costs of substitution?

• If the expected costs of substitution exceed the benefits of
substituting the asset, the substitution right is less likely to be
substantive.
3
Substantive right to substitute an asset What if……
What if?
Two additional clauses of Contract A

 Alpha Ltd has the right to relocate Market-Fresh to a new unit if retail unit 16 requires significant
repairs or maintenance.
 Alpha Ltd has the right to relocate Market-Fresh to a different retail unit of the same size. Alpha Ltd is
required to pay both Market-Fresh’s relocation costs and a large disturbance fee.
Note:
• The substitution would only be economically beneficial to Alpha if it could identify another tenant who would be
willing to pay above-market rates for retail unit 16.
• At the date of inception of the lease, Alpha Ltd did not consider it is likely that it would identify such a tenant.
Will the above clauses affect the assessment of Alpha Ltd’s substantive right
to substitute an asset?
No. Neither of these clauses would create a substantive substitution right.
Retail unit 16 is an identified asset in Contract A.
Identified Asset
Substitution rights of supplier
Substantive substitution rights
• Does the supplier have the practical ability to substitute alternative assets?
and
• Would the supplier economically benefit from exercise of right to substitute?
Supplier has a substantive If customer cannot readily Supplier does not have
substitution right determine, presume that a substantive
supplier does not substitution right
have substantive substitution
right

It is not an

It is an

It is an
identified asset identified asset identified asset
Identified Asset
Example 1 – Rail Cars
Background
• Contract between Customer and Supplier requires Supplier to transport a specified quantity of goods by using a specified type of rail car in
accordance with a stated timetable for a period of five years.
• The timetable and quantity of goods specified are equivalent to Customer having the use of 10 rail cars for five years.
• Supplier provides the rail cars, driver and engine as part of the contract.
• Contract states the nature and quantity of the goods to be transported (and the type of rail car to be used to transport the goods).
• Supplier has a large pool of similar cars that can be used to fulfil the requirements of the contract.
• Similarly, Supplier can choose to use any one of a number of engines to fulfil each of Customer’s requests, and one engine could be used to
transport not only Customer’s goods, but also the goods of other customers.
• The cars and engines are stored at Supplier’s premises when not being used to transport goods.
Answer
The contract does not contain a lease of rail cars or of an engine.
The rail cars and the engines used to transport Customer’s goods are not identified assets. Supplier has the substantive right to substitute the rail cars
and engine because:
a. Supplier has the practical ability to substitute each car and the engine throughout the period of use.
b. Supplier would benefit economically from substituting each car and the engine.
Accordingly, Customer does not direct the use, nor have the right to obtain substantially all of the economic benefits from use, of an identified car or
an engine. Supplier directs the use of the rail cars and engine by selecting which cars and engine are used for each particular delivery and obtains
substantially all of the economic benefits from use of the rail cars and engine. Supplier is only providing freight capacity.
Identified Asset
Example 2 – Concession space
Background
• A coffee company (Customer) enters into a contract with an airport operator (Supplier) to use a space in the airport to sell its goods for a three-
year period.
• Contract states the amount of space and that the space may be located at any one of several boarding areas within the airport.
• Supplier has the right to change the location of the space allocated to Customer at any time during the period of use.
• There are minimal costs to Supplier associated with changing the space for the Customer: Customer uses a kiosk (that it owns) that can be
moved easily to sell its goods.
• There are many areas in the airport that are available and that would meet the specifications for the space in the contract.
Answer
The contract does not contain a lease.
Although the amount of space Customer uses is specified in the contract, there is no identified asset. Customer controls its owned kiosk. However, the
contract is for space in the airport, and this space can change at the discretion of Supplier. Supplier has the substantive right to substitute the space
Customer uses because:
a. Supplier has the practical ability to change the space used by Customer throughout the period of use.
b. Supplier would benefit economically from substituting the space.
No
Yes
No
Yes
Supplier
Customer
Yes
instructions?
No
No
Yes
The contract does
Does the customer have the right to obtain substantially all of the economic
benefits from use of the identified asset?
Consider all facts and circumstances at the inception of the contract.
Are benefits obtained

Either by using, holding or sub-leasing the asset
directly or indirectly?
JUDGEMENT
What is the defined
scope Consider the impact of protective rights and the benefits
of the contract? from use of asset within the defined scope of contract
What about
payments to the Still considered to be part of the benefits obtained by the
supplier? customer
Does Market-Fresh have the right to obtain substantially all of the

economic benefits from use of the retail unit?
Yes. The restriction on opening hours does not impede on Market-Fresh’s exclusive
use of the asset and its right to receive all the consideration from sales made
during these hours.
2018 IFRS Master Class Update| IFRS 16 : Leases 27 187
economic benefits from use of the identified asset?
What if?
What if…
Contract A had some further clauses

 Alpha Ltd requires Market-Fresh to pay Alpha Ltd 5% of its net sales, in addition to
its fixed monthly rent.
 Market-Fresh entered into a sub-lease to lease approx. 10% of the retail unit 16 to
a local organic fruit and vegetable retailer. The retailer is solely responsible for
ensuring that stocks are managed and replenished.
Would these contract terms prevent Market-Fresh from obtaining

substantially all of the economic benefits from use of the asset?
No. Neither of these clauses affect Market-Fresh from obtaining the benefits.
 Paying Alpha Ltd a portion of cash flows from use of an asset does not preclude
Market-Fresh from obtaining all the economic benefits.
 Economic benefits from use of asset include benefits derived from sub-leasing the
asset to a third party.

Control the use of the identified asset
Right to obtain economic benefits
Economic benefits over the life of the asset
Economic benefits within the

scope of rights to use
Not the economic benefits from
ownership
Substantially all
Examples:
• Primary output and by-products
• Using asset in commercial transactions with

third parties
Identified Asset
Example 3 – Fibre-optic cable
Background
• Customer enters into a 15-year contract with a utilities company (Supplier) for the right to use three specified, physically distinct dark fibres
within a larger cable connecting Hong Kong to Tokyo.
• Customer makes the decisions about the use of the fibres by connecting each end of the fibres to its electronic equipment (ie Customer ‘lights’ the
fibres and decides what data, and how much data, those fibres will transport).
• If the fibres are damaged, Supplier is responsible for the repairs and maintenance.
• Supplier owns extra fibres, but can substitute those for Customer’s fibres only for reasons of repairs, maintenance or malfunction (and is obliged
to substitute the fibres in these cases)
Answer
The contract contains a lease of dark fibres. Customer has the right to use the three dark fibres for 15 years
There are three identified fibres. The fibres are explicitly specified in the contract and are physically distinct from other fibres within the cable. Supplier
cannot substitute the fibres other than for reasons of repairs, maintenance or malfunction.
Customer has the right to control the use of the fibres throughout the 15-year period of use because:
• Customer has the right to obtain substantially all of the economic benefits from use of the fibres over the 15-year period of use. Customer has
exclusive use of the fibres throughout the period of use.
• Customer has the right to direct the use of the fibres.
Although Supplier’s decisions about repairing and maintaining the fibres are essential to their efficient use, those decisions do not give Supplier the
right to direct how and for what purpose the fibres are used. Consequently, Supplier does not control the use of the fibres during the period of use.
Identified Asset
Example 4 – Fibre-optic cable
Background
• Customer enters into a 15-year contract with Supplier for the right to use a specified amount of capacity within a cable connecting Hong Kong to
Tokyo.
• The specified amount is equivalent to Customer having the use of the full capacity of three fibre strands within the cable (the cable contains 15
fibres with similar capacities).
• Supplier makes decisions about the transmission of data (ie Supplier lights the fibres, makes decisions about which fibres are used to transmit
Customer’s traffic and makes decisions about the electronic equipment that Supplier owns and connects to the fibres)
Answer

Supplier makes all decisions about the transmission of its customers’ data, which requires the use of only a portion of the capacity of the cable for each
customer.
The capacity portion that will be provided to Customer is not physically distinct from the remaining capacity of the cable and does not represent
substantially all of the capacity of the cable.
Consequently, Customer does not have the right to use an identified asset.
No
Yes
No
Yes
Supplier
Customer
Yes
instructions?
No
No
Yes
The contract does
Does the customer have the right to direct the use of the identified
asset throughout the period of use?
A customer has the right to direct use of an asset throughout the period of use
only if either:
DEFINITION
• It can direct how and for what purpose the asset is used, or
• The relevant decisions about how and for what purpose the asset is used
are predetermined and:
i. The customer has the right to operate the asset, without the supplier
having the right to change those operating instructions throughout the
period of use, or
ii. The customer designed the asset in a way that predetermines how and
for what purpose the asset will be used throughout the period of use.

Does the customer have the right to direct the use of the identified
asset throughout the period of use?
How and for what purpose is the asset used?
Who has the decision-making rights that are most

relevant to determining how and for what purpose the
asset is used?
JUDGEMENT
What type?
Which decision-making rights1

When &
affect the economic benefits derived from the asset?
where?
1 Rights to operate and maintain the asset are not decision-making rights
How much?
Does Market-Fresh have the right to direct the use of retail unit 16 in
Contract A?
Yes. Market-Fresh can choose what products to sell and determine its own pricing so
it has the decision-making rights to affect the economic benefits derived from the
retail unit 16.
Contract A is a lease contract
©2018 Deloitte & Touche (M.E.). All rights reserved. 2018 IFRS Master Class Update| IFRS 16 : Leases 34 194
Control the use of the identified asset
Right to direct the use
Are decisions predetermined?
Yes No
Does customer have right Does the customer • Relevant decisions?

to operate the asset have the right to direct
without the supplier how and for what • Type, when, where,
having the right to purpose the asset is whether output
change operating used throughout the is produced?
instructions? period of use?
Or • Decisions determined
Did the customer design during and before the
the asset to predetermine period of use?
how and for what
(This is not about rights to
purpose?
operate and maintain the
asset)
©2018 Deloitte & Touche (M.E.). All rights reserved. 2018 IFRS Master Class Update| IFRS 16 : Leases 35 195
Identified Asset
Example 5 - Contract for energy/power
Background
• Customer enters into a contract with Supplier to purchase all of the power produced by an explicitly specified power plant for three years.
• The power plant is owned and operated by Supplier.
• Supplier is unable to provide power to Customer from another plant.
• The contract sets out the quantity and timing of power that the power plant will produce throughout the period of use, which cannot be changed
in the absence of extraordinary circumstances (for example, emergency situations).
• Supplier operates and maintains the plant on a daily basis in accordance with industry-approved operating practices.
• Supplier designed the power plant when it was constructed some years before entering into the contract with Customer—Customer had no
involvement in that design
Answer

There is an identified asset because the power plant is explicitly specified in the contract, and Supplier does not have the right to substitute the
specified plant.
Customer has the right to obtain substantially all of the economic benefits from use of the identified power plant over the three-year period of use.
Customer will take all of the power produced by the power plant over the three-year period of use.
However, Customer does not have the right to control the use of the power plant because it does not have the right to direct its use. Customer does
not have the right to direct how and for what purpose the plant is used. Customer has no right to change how and for what purpose the plant is used
during the period of use. Customer has no other decision-making rights about the use of the power plant during the period of use and did not design
the plant.
Identified Asset
Example 6 - Contract for energy/power
Background
• Customer enters into a contract with Supplier to purchase all of the power produced by an explicitly specified power plant for 10 years. The
contract states that Customer has rights to all of the power produced by the plant (ie Supplier cannot use the plant to fulfil other contracts).
• Customer issues instructions to Supplier about the quantity and timing of the delivery of power. If the plant is not producing power for Customer,
it does not operate.
• Supplier operates and maintains the plant on a daily basis in accordance with industry-approved operating practices
Answer
The contract contains a lease. Customer has the right to use the power plant for 10 years.
There is an identified asset. The power plant is explicitly specified in the contract and Supplier does not have the right to substitute the specified plant.
Customer has the right to control the use of the power plant throughout the 10-year period of use because:
a. Customer has the right to obtain substantially all of the economic benefits from use of the power plant over the 10-year period of use
b. Customer has the right to direct the use of the power plant
Although the operation and maintenance of the power plant are essential to its efficient use, Supplier’s decisions in this regard do not give it the right
to direct how and for what purpose the power plant is used. Consequently, Supplier does not control the use of the power plant during the period of
use. Instead, Supplier’s decisions are dependent upon Customer’s decisions about how and for what purpose the power plant is used.
No
Yes
No
Yes
Supplier
Customer
Yes
instructions?
No
No
Yes
The contract does
What if the decision-making rights are predetermined?
Additional two considerations
Example: Example:
• A customer signs a contract for delivery • A utility entity leases from a power
services, where the supplier has only entity for the electricity generated by a
one truck. specified solar farm in a 20 year
• The destinations and the cargo are period.
specified in the contract. • The solar farm was designed by the
• The customer can choose how to utility entity, but is owned by the
complete the journey (the driver, route, power entity.
speed, when to take rest breaks, etc.) • The utility entity designs the solar farm
The customer has the right to operate that predetermines how and for what
the asset purpose the asset will be used.
Recap - Identifying a lease contract
Key considerations
• Does the contract specify the asset?

• Is a capacity portion of the asset an
Is there an identified asset? identified asset?
• Does the supplier have the substantive
right to substitute the asset?
Does the customer have the right to • What is the defined scope of the
obtain substantially all of the customer’s right to use the asset?
economic benefits from use of the • Is the customer making any usage-based
asset throughout the period of use? payments to the supplier?
• What are the decision-making rights that

affect how and for what purpose the
asset is used?
Does the customer have the right to
• Does the customer or supplier have the
direct the use of the identified asset right to make relevant decisions through
throughout the period of use? the whole period of use?
• Are the terms of use of the asset pre-
determined?

Lease contracts
Combining or separating contracts
Combine two or Identify separate Identify separate

more contracts lease components lease components
Non-
lease
Account for as a single contract Account for each component Account for separately from non-
separately lease components of a contract
or
Elect not to separate
(by class)
Lease contracts (cont’d)
Allocation of consideration
Lessee:
Component
Component
Contract
consideration
Component
Lease component: Relative stand-alone price

Non-lease component: Aggregate stand-alone price
If no observable data, estimate maximising the use of observable information
Lessor: allocate consideration in accordance with IFRS 15
IFRS 16
Lessee accounting
Lessee accounting
Recognition and measurement
Right-of-use asset and lease liability recognised on lease commencement under single model
Right-of-use asset Lease liability
• Initially measured at amount of lease liability • Initially measured at present value of lease
plus initial direct costs. payments discounted using the rate implicit in
the lease.
• Adjusted for lease incentives, payments at or
prior to commencement and • If the implicit rate cannot be readily
restoration obligations. determinable, the lessee should use its
incremental borrowing rate.
• Subsequently measured at cost less depreciation
and impairment (unless investment property • Subsequently, a lessee will:
that is fair valued or belongs to class of PPE that
is revalued). − Increase the lease liability to reflect the
interest accrued (and recognized in
• Test for impairment under IAS 36 (instead of profit or loss).
onerous lease provisions).
− Deduct lease payments made from the
liability, and
− Re-measure the carrying amount to reflect

any reassessment, lease modification, or
revision to in-substance fixed payments.
Lessee accounting (cont’d)
A comparison of balance sheet and income statement – The “Before” and “After”
Balance sheet Income statement
Charts were excerpted from the IASB’s IFRS 16

Effects Analysis
Lease payments
• Include in-substance fixed payments, net of any lease incentives

Fixed payments
• In-substance payments can be variable but are in reality unavoidable
Index or rate • Any variable lease payments not related to an index or a rate will be recognized
linked variable in profit or loss as incurred (e.g., variable lease payments related to future
payments performance)
• Amounts expected to be payable by lessee under residual value guarantees

Residual value
• Potential disclosure includes reason for providing residual value guarantees;
guarantee
magnitude of exposure; nature of underlying assets, and other operational and
amount
financial effects
• Only include if lessee is reasonably certain to exercise the option

Purchase option • Reasonably certain factors include but not limited to market rates, significant
exercise price leasehold improvements undertaken, termination costs, importance of underlying
asset and conditionality
Lease
termination • Only include if lessee is reasonably certain to exercise an option to terminate
penalty the lease
payments
Exemptions for lessees
Recognition exemptions allowing short-term leases and low value assets to be accounted for by simply
recognizing an expense, typically straight-line, over the lease term
• Does not include a purchase option

Short-term
• Has a lease term at commencement date of 12 months or less
leases
• Must be applied consistently for each class of underlying leased asset
• Applies in absolute terms rather than by reference to the size of the reporting
Leases of entity (new asset value < U.S.$ 5K)
“Low value” • Applies to leased assets that are not highly dependent on, or highly interrelated
asset with, other assets
• Applied on a lease by lease basis
• Examples expected to qualify include office furniture, phones,

personal computers and tablets
• Vehicles not expected to qualify as “Low value”
Some practical expedients
• IFRS 16 only requires lessees to bring the leasing component of a contract

on-balance sheet; any payments for services such as maintenance are expensed
Separating as incurred
lease vs. non-
• Allocation between the lease and service components is made on the basis of
lease
relative stand-alone prices  may require considerable judgment to estimate
components
• Lessees can elect to treat entire contract as a single lease, removing the need for
an unbundling exercise but increasing the liability
• Lease portfolios with similar risk characteristics may be accounted for on a

portfolio basis using estimates and assumptions for the portfolio, if it is not
expected to result in materially different accounting
• Likely to apply to leases for items such as vehicles where they are all part of a
Portfolio
master agreement
• However, it may be difficult to use the portfolio approach due to differing
counterparties, dates, terms, etc. which may result in materially different cash
flow implications
Lease term extension and termination options
‘Reasonably certain’
Non-cancellable period Option to extend
Option to terminate
Consider all facts and circumstances that

create an economic incentive, including
expected changes:
• Contractual terms for optional periods
• Significant leasehold improvements
• Costs of termination and return
• Importance to operations (specialised, location,
alternatives)
• Conditionality associated with option
Reassess significant event or change in circumstances that lessee controls and affects whether exercise
‘reasonably certain’.
Revise: change in non-cancellable period.
Example
Initial measurement of the right of use asset and the lease liability
Lessee enters into a 10-year lease of a floor of a building. Lease payments are $50,000 per year during the initial lease term and
$55,000 per year during the optional period. The rent is payable at the beginning of each year. To obtain the lease, Lessee incurs initial
direct costs of $20,000. Lessor agrees to reimburse to Lessee the real estate commission of $5,000.
The interest rate implicit in the lease is not readily determinable. Lessee’s incremental borrowing rate is 5% per annum, which reflects
the fixed rate at which Lessee could borrow an amount similar to the value of the right of use asset, in the same currency, for the 10-
year term, and with similar collateral.
Lessee initially recognizes right of use assets and liabilities in relation to the lease as follows:
Right of use asset $405,391

Lease liability $355,391
Cash (Lease payments for first year) $50,000

Cash (Initial direct costs) $20,000
Cash (Lease incentives) $5,000

Lessee accounting
Recognition and measurement
• Straight-line operating lease expense replaced Change in overall expense

with front-loaded expense profile for any
profile upon adoption of IFRS
individual lease
16 for an individual lease
• Portfolios with spread of maturities impacted less
• Operating lease expense replaced with

depreciation and interest so EBITDA increases
• Consider impact on KPIs, lending covenants,
Amount
earn-outs, bonus schemes etc.
• Tax rules may change before implementation
• Stakeholder communication important
Time
Operating lease expense
IFRS 16 expense (depreciation + interest)
Types of lessee reassessment
Change Lessee
Allocating Contract Consideration Reallocate contract consideration on a
contract modification that is not accounted
for as a new lease or reassessment of the
lease term
Lease Term Reassess upon the occurrence of significant

events or changes that are within the
Lessees control
Variable lease payments that depend on an Remeasure the lease liability upon change in
index expected payments
or rate
Amounts expected to be payable under Remeasure the lease liability upon change in
residual value guarantees expected payments
Discount Rate Reassess upon a change in the lease term or

change in the assessment of a lease option
Lease Classification Not applicable as there is no lease

classification
for leases
Measurement
Subsequent measurement – Reassessments
Re-measurement of lease liability
Original discount rate (Unless changes result from floating interest rates) if changes in:
• Residual value guarantees expectation
• Payments due to changes in an index or rate (when they take effect)
Revised discount rate if:
• Change in the lease term
• Significant change in circumstances within the control of the lessee regarding an option to purchase
Lease liability
Any change in
lease liability Right of
leads to an use asset
adjustment
to the
If right-of-use asset is reduced
right-of-use
to zero, any remaining re-
asset
measurement goes to P&L
Example
Variable lease payments dependent on an index
Lessee enters into a 10-year lease of property with annual lease payments of $50,000 payable at the beginning of each year. The contract
specifies that lease payments will increase every two years on the basis of the increase in the Consumer Price Index for the preceding 24
months. The Consumer Price Index at the commencement date is 125. The rate implicit in the lease is not readily determinable. Lessee’s
incremental borrowing rate is 5% per annum, which reflects the fixed rate at which Lessee could borrow an amount similar to the value of the
Right of use Asset, in the same currency, for a 10-year term, and with similar collateral.
At the commencement date, Lessee makes the lease payment for the first year and measures the Lease Liability at the present value of the
remaining nine payments of $50,000, discounted at the interest rate of 5% per annum, which is $355,391.
Initial journal entry will remain the same as the previous example, however, Lessee expects to consume the Right of use Asset’s future
economic benefits evenly over the lease term and, thus depreciates the Right of use Asset on a straight-line basis:
Lease Liability $50,000

Cash $50,000
Interest Expense $33,928
Depreciation Charge $40,539 ($405,391/10 years)
Right of use Asset $40,539
Example 2 (cont’d)
At the beginning of the third year, the Lease Liability is $339,319 (the present value of eight payments of $50,000 discounted at the interest
rate of 5% annum = $355,391 + $33,928 – $50,000).
At the beginning of the third year of the lease the Consumer Price Index is 135.
The payment for the third year, adjusted for the Consumer Price Index, is $54,000 ($50,000 *135/125). The Lessee re-measures the Lease
Liability to reflect those revised lease payments, i.e., the Lease Liability now reflects eight annual lease payments of $54,000.
At the beginning of the third year, Lessee re-measures the Lease Liability at the present value of eight payments of $54,000 discounted at an
unchanged discount rate of 5% per annum, which is $366,464. The corresponding adjustment is made to the Right of use Asset, recognized as
follows:
Right of use Asset $27,145

Measurement
Lessee – Modifications
No
Has the modification been agreed to by Do not account for the modification
both parties? until it is agreed to
Yes
Yes
Account for modification as a
separate lease
Scope increased by adding the right to use of

underlying assets
And
Increase in consideration is commensurate
with stand-alone price for the increase in scope
Re-measure the lease liability

(based on increase or decrease
No in scope)
Measurement (cont’d)
Lessee – Modifications
Account for lease modification as a Account for lease modification by remeasuring

separate lease the lease liability using the discount rate at that
date
Original lease Modification Modification increases Modification

scope decreases scope
Only when: Decrease right-of-use

asset to reflect partial
• Modification increases scope, and Corresponding adjustment
termination and gain/loss
• Consideration is commensurate to stand- to right-of-use asset
to reflect the decrease in
alone price for increase in scope scope
Identified asset (cont’d)
Example 1 - Modifications
Background
• Lessee enters into a 10-year lease for 2,000 square metres of office space.
• At the beginning of Year 6, Lessee and Lessor agree to amend the original lease for the remaining five years to include an additional 3,000 square
metres of office space in the same building.
• The additional space is made available for use by Lessee at the end of the second quarter of Year 6.
• The increase in total consideration for the lease is commensurate with the current market rate for the new 3,000 square metres of office space,
adjusted for the discount that Lessee receives reflecting that Lessor does not incur costs that it would otherwise have incurred if leasing the same
space to a new tenant (for example, marketing costs).
Answer
Lessee accounts for the modification as a separate lease, separate from the original 10-year lease.
This is because the modification grants Lessee an additional right to use an underlying asset, and the increase in consideration for the lease is
commensurate with the stand-alone price of the additional right-of-use adjusted to reflect the circumstances of the contract.
In this example, the additional underlying asset is the new 3,000 square metres of office space. Accordingly, at the commencement date of the new
lease (at the end of the second quarter of Year 6), Lessee recognises a right-of-use asset and a lease liability relating to the lease of the additional
3,000 square metres of office space. Lessee does not make any adjustments to the accounting for the original lease of 2,000 square metres of office
space as a result of this modification.
Background
• The annual lease payments are CU100,000 payable at the end of each year.
• The interest rate implicit in the lease cannot be readily determined.
• Lessee’s incremental borrowing rate at the commencement date is 6 per cent per annum.
• At the beginning of Year 7, Lessee and Lessor agree to amend the original lease by extending the contractual lease term by four years.
• The annual lease payments are unchanged (ie CU100,000 payable at the end of each year from Year 7 to Year 14). Lessee’s incremental borrowing
rate at the beginning of Year 7 is 7 per cent per annum
Answer
At the effective date of the modification (at the beginning of Year 7), Lessee remeasures the lease liability based on:
(a) an eight-year remaining lease term,
(b)annual payments of CU100,000 and
(c) Lessee’s incremental borrowing rate of 7 per cent per annum.
The modified lease liability equals CU597,130. The lease liability immediately before the modification (including the recognition of the interest
expense until the end of Year 6) is CU346,511.
Lessee recognises the difference between the carrying amount of the modified lease liability and the carrying amount of the lease liability immediately
before the modification (CU250,619) as an adjustment to the right-of-use asset.
Background
• At the beginning of Year 6, Lessee and Lessor agree to amend the original lease for the remaining five years to reduce the lease payments from
CU100,000 per year to CU95,000 per year.
• The interest rate implicit in the lease cannot be readily determined.
• Lessee’s incremental borrowing rate at the commencement date is 6 per cent per annum.
• Lessee’s incremental borrowing rate at the beginning of Year 6 is 7 per cent per annum.
• The annual lease payments are payable at the end of each year.
Answer
At the effective date of the modification (at the beginning of Year 6), Lessee remeasures the lease liability based on:
(a) a five-year remaining lease term,
(b)annual payments of CU95,000 and
(c) Lessee’s incremental borrowing rate of 7 per cent per annum.
Lessee recognises the difference between the carrying amount of the modified liability (CU389,519) and the lease liability immediately before the
modification (CU421,236) of CU31,717 as an adjustment to the right-of-use asset.
IFRS 16
Lessor accounting
Lessor accounting
Classification • Classify a lease as either an operating or finance lease
• Recognize at the commencement date and present as a receivable at an amount equal to the net
investment in the lease
• Net investment measured as the sum of both:
Finance
− The lease receivable measured at the present value of the lease payments, and
leases
− The residual asset, measured at the present value of any residual value accruing to the lessor
• Subsequently, recognize finance income over the lease term, based on a pattern reflecting a constant
periodic rate of return on the lessor’s net investment in the lease
Operating • Recognize lease payments as income on either a straight-line basis or another

leases systematic basis
• Additional disclosures about a lessor’s leasing activities, in particular exposure to residual value risk
Presentation • Disclose information about
and − Assets subject to operating lease separately from asset owned and held for
disclosure other purposes
− How it manage residual value risk
Lessor accounting (cont’d)
IFRS 16 vs. IAS 17
Lessor accounting largely unchanged
Main changes are…
1 3
Initial direct
costs
Definition
consistently
of a lease
defined with
concepts in
IFRS 15
2 Enhanced
disclosures 4 Additional
guidance
on
subleases
IFRS 16
Presentation and
disclosure
Presentation and disclosure
Balance sheet
Balance sheet 20xx $

Lease assets Xxx Present separately
(except if
investment
property)
Lease liabilities Xxx
OR
Balance Sheet 20xx $

Property, plant Xxx Present in the line Disclose the line
item it would have item in which
and equipment
been if it was they are included
owned
Other liabilities Xxx
Presentation and disclosure (cont’d)
Income statement
Income statement 20xx $

Variable lease payments, re- Xxx
measurement gains/losses, short
term, low value leases Present interest expense separate from
Depreciation Xxx depreciation
Finance cost Xxx (Interest is a component of finance cost
Profit before tax Xxx under IAS 1)
Cash flow statement
Cash flow statement 20xx $ Short-term or low-value lease payments and

Operating activities Xxx variable lease payments not included in the
measurement of the lease liability in operating
Financing activities Xxx activities
Cash payments for principal portion of the lease

liability within finance activities
Apply IAS 7 to cash payments for interest portion

of the lease liability (finance or operating)
In the notes
Revalued
Investment RoU
property leases assets
(IAS 16)
Lease liabilities
Single note/
separate
section
IFRS 16
Transition
Transition
Definition of a lease – Practical expedient
Entities can choose to grandfather the definition of all its leases

Only apply definition of a lease under IFRS 16 to leases entered into on or after date of
initial application (DIA)
…to apply IFRS 16 to

contracts previously
identified as a lease
Not required to reassess,

Definition of a lease
entities are permitted…
…not to apply IFRS 16 to

contracts that were not
previously identified as
a lease
Transition (cont’d)
Approaches – Lessees
Transition
Full retrospective
Modified retrospective
(as if always applied)
Do not restate
comparatives
(Adjust opening
retained earnings)
Specific disclosure
requirements
Approaches – Lessees
OPTION 1 Full retrospective approach
Restate Prepare All balances

opening comparatives are prepared
retained for FY19 according to
earnings as if according to IFRS 16.
IFRS 16 had IFRS 16.
been applied.
Jan 1, 2018 Dec 31, 2018 / Jan 1, 2019 Dec 31, 2019
No impact on Restate Results for

retained opening FY19 are
earnings (state retained prepared
according to earnings under IFRS 16
IAS 17). as if IFRS 16
Comparatives
had been
are prepared
applied.
under IAS 17.
OPTION 2 Partially retrospective approach
Broad considerations for lessees
Financial reporting Board level considerations
• Bringing a large financial liability onto the • Gearing and covenant compliance
balance sheet
• Management KPIs
• Volatility for some in the income statement and
balance sheet • Transparency and communication
• Higher income statement cost in earlier years of • Bring increased focus on corporate real estate
leases costs and strategy
• Impact on management information needs • Tax risk
• Implication of the accounting process for • Potential for impact on capital requirements and
large groups covenants
Practicalities
• Significant workload to calculate liabilities
• Availability of information, data integrity and collection (initial and reassessment)
• Resourcing and reporting lines
• Preparing the market/shareholders
IFRS 16
Summary of judgements,
policy choices
and exemptions
Summary
Key judgements, policy choices and exemptions
Judgement, policy choice or exemption Topic
Judgement: Identifying a lease will sometimes require a significant amount of Identifying a lease
judgement based on the elements of the definition of a lease
Judgement: Determining whether it is reasonably certain whether an extension or Lease term

termination option will be exercised
Judgement: Identifying the appropriate rate to discount the lease payments will Incremental borrowing rate
require significant judgement
Exemption: Short-term leases (by class of asset) or low-value leases Recognition

(lease-by-lease basis)
Summary (cont’d)
Key judgements, policy choices and exemptions
Judgement, policy choice or exemption Topic
Policy choice: Full retrospective approach or modified retrospective approach, definition Transition
of a lease – Choice to grandfather all or not, initial direct cost in measurement of RoU
asset – Choice lease by lease and other practical expedients on transition
Policy choice: Lessee may elect not to separate non-lease components from lease Components
components by class of asset
Policy choice: Lessee may, but is not required to, apply IFRS 16 to leases of intangible Scope
assets
IFRS 16
Getting yourself ready
Key considerations
Accounting Operational
Commercial
Key considerations - commercial
Changes
to metrics Cost of borrowing
Compliance Procurement
with loan strategy:
covenants lease or buy?
Terms and
conditions of
Compensation
new lease
arrangements
contracts
Key considerations - accounting
 Transition approach  Deferred tax
• Elect to use practical expedients for • Impact on deterred tax.

classification and measurement? • Consult with tax specialists.
 Classifying contracts  Disclosures
• Identify contracts not previously assessed in • Determine the required disclosures and to
accordance with IAS 17 and IFRIC 4. what extent the disclosures aggregated.
 Identify key contract features  Documentation
• Determine lease terms, value of lease • New accounting policies.

payments, the implicit interest rate. • Documentation for key judgments applied.
 Contracts with multiple components  Application of exemptions
• Identify stand-alone selling prices. • Determine the threshold for low-value assets.
• Determine whether to apply the practical • Determine whether to apply low-value assets
expedients. and short-term leases exemption.
Key considerations - operational
Training of finance teams and other relevant departments.
Review of IT systems.
Determining what information is readily available.
Review of the completeness and accuracy of the contract data.
Review control procedures and lease approval processes.
Internal controls over lease processes and accounting.
Communication of changes and ensure project plan in place.
Questions to consider
1 6
Do you know which of the entity’s contracts are, or Do you know what discount rates you will be using for
contain, a lease? your different leases?
2 7
Are your systems and processes capturing all the Have you considered the impact of the changes on
required information? financial results and position?
3 8
Are systems and processes capable of monitoring leases How will you communicate the impact to affected
and keeping track of the required ongoing assessments? stakeholders?
4 9
Have you considered the potential use of IFRS 16’s Have you planned when you will consider the tax
recognition exemptions and practical expedients? impacts(if applicable)?
5 10
Do you know which transition reliefs are available, and Have you considered whether your leasing strategy
whether you will apply any of them? requires revision?
VAT in
VAT in GCC
GCC
Updates and key considerations
Michael Towler and Mausumi Saikia
GCC tax reform
GCC VAT Framework Treaty
In 2017, the GCC member states published a common VAT Framework Agreement that sets out the main VAT principles to be adopted in the GCC.
Bahrain Qatar
UAE
KSA Kuwait Oman
• Each member state must develop its own domestic legislation to implement the Treaty. The Treaty serves as a binding guideline to the GCC member
states when designing their domestic VAT legislation.
• The Treaty does not provide a means, form nor method to achieve the principles and requirements.
• Laws in KSA and UAE confirms policy decisions in discretionary areas: oil sector, healthcare and education, real estate, and local transportation sectors.
• VAT Law released in Bahrain appears to be fundamentally similar to the legislation in UAE
©2018 Deloitte & Touche (M.E.). All rights reserved. VAT in GCC 2
VAT implementation in the GCC Countries
Where are we today?
Where we are today
GCC VAT Bahrain to Oman and Remaining

Agreement implement Qatar States
signed by all six from 1 expected to implement
Member States January 2019 implement in
in January 2017 Q3 of 2019
‘17 ‘18 ‘19 2019

2017
Domestic
UAE & KSA Arabic legislation in
implemeted version of the the other All GCC countries
on 1 January Bahrain VAT Member are expected to
2018 Law released States to be implement by
in October released?? 2019, except
Kuwait who have
indicated 2021
Executive Regulations issued in UAE and KSA provide rules and requirements under the law in greater
detail. However, there are still areas which needs clarification on practical implementation
VAT framework in the UAE
Broad Overview
• VAT was implemented with effect from 1 January 2018
• All supply of goods and services in the course or furtherance of business in the UAE are
taxable [5% (standard rated) or 0% (zero rated)] unless exempt by law such as certain
financial services, residential supplies etc.
• Certain supplies are considered outside the scope of VAT, though the term is not defined
in the law or regulation - no VAT applicable on such supplies.
• Deemed supply of goods and services shall also be subject to VAT.
• Importation of goods and services from outside the UAE are also subject to VAT at point
of import (via reverse charge mechanism). Reverse charge is applicable at the same VAT
rate applicable had the said goods or services been purchased from the a local supplier.
• Supply of goods and service relating to Designated Zones have special rules.
• VAT should not represent a cost of doing business – unless your acquisitions comprise
blocked items, items used for personal use, or you are making exempt supplies (certain
financial services, bare land, residential accommodation and local transportation)
• VAT is expected to be a cost to the final consumer
VAT in the UAE
Key Public Clarifications
Input tax –
Entertainment
Services
Use of exchange Profit Margin

rates and Scheme – Eligible
requirements of goods
tax invoices
Outside VAT - Zero rating – Farm

Compensation- land, public
type payment, transportation,
liquidated labour camp
damages etc.
VAT Public Clarifications issued by the FTA
VAT in the UAE
Key Industry Challenges
Fixed Establishment -
Year end apportionment
sufficient human and
based on actual use
technology resources
Supplies by healthcare
Zero rating of services sectors
Guidance
required
Supply of bare land Financial services

sector
Determination of use
Long-term contracts – and enjoyment of
transitional issues supply
Option to request for clarification from the FTA
Upcoming VAT Compliances
Key Public Clarifications
Input tax –
Entertainment
Services
Use of exchange Profit Margin

rates and Scheme – Eligible
requirements of goods
tax invoices
Outside VAT - Zero rating – Farm

Compensation- land, public
type payment, transportation,
liquidated labour camp
damages etc.
VAT Public Clarifications issued by the FTA
Compliance under VAT
Building a value strategy
An apportionment of input tax is required to be completed to end of

Input tax December 2018 where the VAT incurred it is used to make both
apportionment taxable and non-taxable supplies
Request for Option to seek approval for alternate method

approval of Testing of such methods to substantiate accuracy and reasonableness
alternate method of seeking approval
apportionment
Documentation and records as prescribed are required to be

Maintenance of maintained for 5 years or more
Records
Subject to scrutiny by the FTA and audit of additional

documents and information. However, no on-site audit has
VAT Refund been observed as of now
Audit expected to be introduced in the due course. In KSA quarter wise

VAT Audit assessment already initiated
VAT action required in case of error or omission
To notify the FTA of an error or omission in their tax return, tax assessment, or tax refund application.
Voluntary disclosure
3 Incorrectly filed VAT return resulting in an underpayment of tax

more than AED 10,000
Incorrectly filed VAT return resulting in an overpayment of tax where

there is no tax return to correct the error
Incorrectly filed tax refund applications resulting in a refund that is higher than or
less than what it should have been.
The voluntary disclosure must be made within 20 business days of discovering the error or penalties may apply!
Doing business post 1 January 2018
Areas for consideration from accounting perspective
Compliance governance –
VAT payment VAT return
filing deadlines, penalties
Point of supply for VAT vs.
VAT asset/liability balance
revenue recognition in
at year end
financials
Additional financial
statement disclosures?? Relevant processes and
Contingent liability on Risk Areas controls for VAT accounting
account of any VAT and reporting
dispute??
High value contracts with

many moving parts, often VAT clearing account – net
including cross border VAT position, accruals to
supplies - construction exclude VAT
contracts a classic
Reconciliation between
example
financials and VAT returns
Doing Business post 1 January 2018
Areas for consideration
Organizational Financial
Group structure including: VAT recovery

– intra-corporate group recharges and sales – not always possible, resulting in a cost to
– shared services the business
– joint ventures – mitigation strategies such as VAT
– operational units grouping should be considered
– agency
– routing of costs (where taxable costs Product pricing/margin
enter group, where taxable supplies are – increase in demand prior to VAT
made etc.) introduction/decrease
– is VAT a cost to the customer, can they
Organization structure recover it
– who will be responsible for VAT
– VAT function Cash-flow
Operational – impact on working capital due to:
Governance – extended payment terms on sales
– the need to develop VAT policy - Contracts: pricing/margins for – pre-financing of VAT on purchases (i.e. pay
– frameworks to ensure oversight and new/existing contracts VAT, and wait until next VAT return to
responsibility - VAT liabilities: requirement to charge potentially recover it)
– appropriate processes and controls and recover VAT – net-repayment position due to zero-rated sales
- Processes: impact of VAT on O2C, P2P and (how long will cash refunds take as opposed to
R2R process credits)
- IT: capabilities of current IT systems
(including procurement/billing platforms) for
VAT determination reporting
- Bookkeeping: set-up of VAT administration
and accounting framework
- Master Data: additional supplier/customer
©2018 Deloitte & Touche (M.E.). All rights reserved. data requirements VAT in GCC 11
VAT and Technology
ERP VAT System Considerations
System Tax determination Tax reporting

architecture process requirements
• Each transaction must • The ERP should support
• Business efficient receive the correct tax appropriate tax reporting
treatment for Accounts including:
• Supports legal tax Payable, Accounts ‒ Invoice production
requirements Receivable, Intercompany, ‒ Returns preparation
etc.
‒ Tax accounting (sales
• Inventory locations and purchase ledger)
• Sufficient data elements
‒ Customs declarations
• Mirrors the organizational need to be incorporated in
structure the logic to support complex
scenarios (e.g., delivery • The output should meet
–Including indirect tax legal requirements for
terms, ship from, bill to,
registrations content and format
etc.)
including currencies,
languages, etc.
• Partial recovery schemes
• Exemptions
In a nutshell, determine that you mirror your tax footprint (architecture),
(semi) automate the tax determination process for business scenarios
and enable the tax reporting functionalities
VAT Technology
Master Data Reporting

Capabilities
Accurate Training &

Invoicing Change
Functionality Management
System Critical
Success Factors
Thorough
Controls & Scenario
Compliance Testing in
System
Handling
Special VAT
Rules i.e. System
Partial Migrations
Exemption
VAT Technology
Create awareness
Plan your system in business users
IT VAT and make them
compliance business ready to
requirements as handle system
earliest as challenges, e.g.
possible producing correct
tax documents
Master data Assess your

cleansing in the system
system to reflect capabilities to
correct details handle VAT to
such as relevant determine gaps
information like in your tax
legal name, determination,
address, tax tax reporting,
registration invoicing and
numbers, etc. data capability
Identify and
assess the impact
on custom
objects (i.e.
reports,
interfaces,
workflows, etc.)
well ahead of the
VAT
implementation 14
VAT in GCC
Deloitte VAT Leader
Dedicated Team of Tax Professionals
Mark Junkin Bruce Hamilton

Middle East Indirect Tax Leader Partner, Indirect Tax
majunkin@deloitte.com brucehamilton@deloitte.com
Jason Riche
Michael Camburn
Partner, Indirect Tax
Partner, Indirect Tax
jriche@deloitte.com
mcamburn@deloitte.com
Robert Tsang Michael Towler

Partner, Indirect Tax Senior Executive Consultant
robtsang@deloitte.com Indirect Tax
mtowler@deloitte.com
Thank you for attending
and We look forward to
seeing you in 2019!

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Headline Verdana Bold

• Financial Statements preparers and users are advised to seek professional

A Classification & Measurement of Financial Assets - Overview

B Expected Credit Loss - Overview & Scope

C Expected Credit Loss - General Model

D Expected Credit Loss - Simplified Model

2018 IFRS Excellence

2018 IFRS Excellence

2018 IFRS Excellence 5

Classification is Contractual cash flow Business model test

• How is the financial asset/ group of

2018 IFRS Excellence 6

Are the contractual cash flows considered to be SPPI? YES

FVTPL Held to collect Held to collect

Amortized cost FVTOCI FVTPL

2018 IFRS Excellence 7

KPJ buys a $50M fixed KPJ enters into an interest

$1M loss (from changes in $1M gain (from changes in

2018 IFRS Excellence 8

2018 IFRS Excellence

Subsequent measurement ………….

2018 IFRS Excellence 10

Investments - Equity High

Low • Simplified approach

Property, plant and equipment

2018 IFRS Excellence 11

2018 IFRS Excellence 12

2018 IFRS Excellence

STAGE 1 STAGE 2 STAGE 3

Loss allowance 12 month ECL Lifetime ECL Lifetime ECL

2018 IFRS Excellence 14

12-month expected losses Life time expected losses

12 month ECL = CU 20,000 (10m x 2% x Lifetime ECL = CU 180,000 (10m x 12% x

2018 IFRS Excellence 15

Credit risk on initial

Initial recognition Reporting date

2018 IFRS Excellence 16

At the reporting date W has two loans to Company X outstanding, as follows.

2018 IFRS Excellence 17

Bank X provides a loan facility to Company Y.

2018 IFRS Excellence 18

2018 IFRS Excellence 19

General Model (contd.)

2018 IFRS Excellence 20

General Model (contd.)

2018 IFRS Excellence 21

General Model (contd.)

2018 IFRS Excellence 22

General Model (contd.)

2018 IFRS Excellence 23

2018 IFRS Excellence 24

General Model (contd.)

2018 IFRS Excellence 25

General Model (contd.)

2018 IFRS Excellence 26

General Model (contd.)

2018 IFRS Excellence 27

2018 IFRS Excellence 28

2018 IFRS Excellence

2018 IFRS Excellence 32

2018 IFRS Excellence 33

• High? (4-5 years)