FINANCIAL REPORTING GUIDE to IFRS 16: LEASES Helping Lessees Navigate the Standard CONTENTS

FINANCIAL REPORTING GUIDE TO IFRS 16: LEASES Helping lessees navigate the standard CONTENTS

Section 1 Introduction 4

Section 2 Will more contracts be accounted for as leases under IFRS 16? 6

Section 3 When and what should be recognised at the commencement date? 8

Case Study Part 1 Measurement of the lease liability and right-of-use asset 10

Section 4 When and what should be recognised in subsequent years? 12

Case Study Part 2 Subsequent measurement of the lease liability and right-of-use asset 13

Section 5 How are modifications treated? 14

Case Study Part 3 Subsequent measurement and accounting for change in the lease term 16

Section 6 Are there any exceptions and practical expedients? 18

Section 7 What are the new disclosure requirements? 19

Section 8 What are the transition models and are there any reliefs? 20

How can RSM help? 22 How will the changes affect the financial position and performance? For companies with leases classified as operating leases under IAS 17, there may be a significant impact on the Statement of Financial Position as these assets and corresponding liabilities will have to be recognised. This will impact on current gearing levels and potentially on covenants provided to lenders and others. It is important to determine the impact sufficiently early to ensure that stakeholder expectations are managed.

There will also be an impact on the profit or loss. On adoption of IFRS 16, EBITDA is likely to rise because the lease expense (ie the rent) under IAS 17 for operating leases will be removed and replaced with additional depreciation and finance costs. The profit profile of the business will also change as more expense is recognised in earlier periods and less in later periods compared to the constant amount which was usually recognised under IAS 17.

ACCOUNTING TREATMENT FOR LESSEES

Financial IAS 17 IFRS 16 INTRODUCTION statement

IFRS 16 comes into effect for periods commencing on or after 1 January 2019. Lessees with Operating leases Statement of •• No liability recognised •• Lease liability is recognised at contracts that are currently treated as operating leases in their financial statements (ie the Financial Position the present value of the future •• No asset recognised business pays rent) will definitely be affected by the forthcoming changes. lease payments •• Corresponding right-of-use asset This guide will take you step by step through the lessee accounting provisions that will apply to current is recognised operating lease contracts when IFRS 16 is adopted for the first time, along with the new disclosures which will need to be made.

This guide focusses solely on the changes that will affect lessees as changes arising from IFRS 16 for Income •• Total rentals are expensed •• Interest expense in relation to the lease lessors are minor. If you are also a lessor you may want to seek advice on the additional information to be Statement (usually on a straight line basis) liability is allocated using the effective disclosed in financial statements. over the life of the lease interest method • Depreciation is charged over the 1Why the change? • shorter of the lease term and the useful The International Accounting Standards Board (“the IASB”) believes that the leasing of assets is of economic life importance to many entities. Leases can be used to provide access to assets without significant upfront costs, and the use of those assets is of value to the entity. Without entities recognising these leased assets in their financial statements (along with the corresponding liability) users can neither see all the Finance leases Statement of •• Lease liability is recognised at •• Lease liability is recognised at the present assets that the entity is benefiting from, nor easily compare their financial position to entities which have Financial Position the present value of the future value of the future lease payments chosen to either buy the asset outright, or have entered into alternative financing arrangements. lease payments •• Corresponding right-of-use asset What are the main changes? •• Actual asset recognised at the is recognised IAS 17 Leases, the predecessor to IFRS 16, requires entities to classify their contracts as either operating inception of the lease leases or finance leases, based on the extent to which risks and rewards incidental to ownership of the leased asset lie with the lessor or the lessee. However, IFRS 16 removes the ‘operating’ and ‘finance’ lease classifications and replaces them with the concept of ‘right-of-use’ assets and associated financial liabilities. Put simply, this change results in the recognition of a lease liability on the balance sheet for Income •• Interest expense in relation to the •• Interest expense in relation to the lease operating leases (which reflects the present value of the future rental payments) and a corresponding Statement lease liability is allocated using the liability is allocated using the effective asset which is referred to in the standard as a right-of-use asset. effective interest method interest method •• The asset is depreciated over •• The right-of-use asset is depreciated the shorter of the lease term over the shorter of the lease term and and the useful economic life the useful economic life

4 5 No Is there an identified asset? The asset may be explicitly or implicitly specified.

Ye s

Does the customer have the right to obtain No substantially all the economic benefits from the use of the asset throughout the period of use? Economic benefits can be obtained directly or indirectly, for example through use of, holding or sub-leasing the asset.

Ye s

Supplier Who has the right to direct how and for what purpose Customer the asset is used throughout the period of use? WILL MORE CONTRACTS BE ACCOUNTED Consider who can make the decisions which could affect the FOR AS LEASES UNDER IFRS 16? economic benefits that can be derived from use of the asset.

IFRS 16 largely retains the definition of a lease given in IAS 17. However, the guidance ie how and for what purpose Neither the asset will be used is setting out how to apply that definition has changed. This means that potentially more predetermined. contracts will be brought into the scope of the new Standard, and some contracts which were considered to contain a lease under IAS 17 may be scoped out. Does the customer have the right to operate the asset throughout the period of use, without Ye s As illustrated in the following flowchart, whether a contract is, or contains, a lease is now driven much the supplier having the right to change those 2more by the question of which party to the contract controls the usage of the underlying asset for the operating instructions? period of use. It is not sufficient for a customer to have the right to obtain substantially all the benefits This also includes the right to direct others to operate the asset in from the use of an asset any more, the customer must also have the ability to direct the use of the asset. a manner that it determines.

Did the customer design the asset in a way that No predetermines how and for what purpose the asset Ye s will be used throughout the period of use? This also applies if the customer designed specific aspects of the A contract, or part of a contract, that conveys the asset which predetermines the use. right to use an asset (the underlying asset) for a period of time in exchange for consideration.

Definition of a lease under IFRS 16

The contract does The contract NOT contain a lease contains a lease

6 7 Variable payments that are in substance fixed Some payments are labelled as or appearing to be variable (in form), may in substance be fixed because, realistically, they are unavoidable. Examples include: •• Payments that are dependent on the right- of-use asset operating throughout the lease; Step 2: Calculating the future lease payments •• payments that only occur if a certain event happens, but that event has no genuine Fixed lease payments (made over the lease possibility of not occurring; and term) (including variable payments that are in X WHEN AND WHAT SHOULD BE RECOGNISED substance fixed) •• the provision of more than one set of payments but only one of those sets is realistic and the payments flowing from that AT THE COMMENCEMENT DATE? Receivable lease incentives (X) set are fixed. At the commencement date (the date on which a lessor makes the underlying asset available for use by Variable payments which are not included in the a lessee) you need to recognise: Optional payments that are likely to be made measurement of the lease liability: (such as fees to take an option to extend X • Payments linked to production output or •• A lease liability for the present value of future lease payments made over the lease term that are a lease) • economically unavoidable (‘lease liability’); and usage, such as a fee per unit produced or mile driven; and •• a right-of-use asset at cost. Variable payments that rely on an index or rate X 3 •• payments linked to performance, such as What is ‘reasonably certain’? rental payments for a property based on a Step 1: Calculating the lease term In determining whether an option to extend or Future lease payments X percentage of sales made from that property. terminate a lease will be exercised, an entity must Non-cancellable period of the lease X assess all facts and circumstances that create a financial/economic incentive to do so. Discount to reflect the time value (X) What discount rate do I use for the lease liability? Period covered by an option to extend the lease If there is a discount rate implicit in the lease, use that X The following are examples, but not an exhaustive (the rate of interest which reconciles the present (if reasonably certain) Lease liability at commencement date X list, of factors that may create a financial/economic value of the lease payments and any residual incentive for the lessee to exercise an option to Period covered by an option to terminate the guaranteed value to the fair value of the underlying extend the lease or not to exercise an option to lease (if reasonably certain not to exercise X asset and any initial direct costs of the lessor). terminate: Step 3: Calculating the right-of-use asset at cost: the option) If that rate cannot be readily determined, use your •• Leasehold improvements made to a rental Lease liability at commencement date X incremental borrowing rate (the rate of interest that Lease Term X property; you would have to pay to borrow a similar amount of money to fund a similar right-of-use asset for a •• prohibitive costs to exit the lease (such as similar length of time with similar securities). exit fees, relocation costs, costs of sourcing a Payments made before commencement date X replacement asset etc); •• favourable costs, including rental payments, Initial estimate of any restoration costs X of extending the lease compared to equivalent anticipated market rates if entering a new lease; •• asset is significant to your operations; Any lease incentives received (X) •• lack of availability (and convenience of) an equivalent or replacement asset; and Cost of right-of-use asset X •• conditions attaching to the options are likely to be fulfilled. 8

9 CASE STUDY PART 1 – MEASUREMENT OF THE

LEASE LIABILITY AND RIGHT-OF-USE ASSET Step 2: Determine the right-to-use asset at the commencement date. Lessee A enters into a 5 year lease on a building. At the commencement date, Lessee A concludes To obtain the lease, Lessee A incurs initial costs of that it is not reasonably certain to exercise Lease liability £177,300 £30,000. £20,000 relates to a payment made to the option to extend the lease and, therefore, a former tenant occupying the property and the determines that the lease term is 5 years. First lease payment £ 50,000 remaining £10,000 is paid to the estate agent for Initial direct costs £ 30,000 arranging the lease. The interest rate implicit in the lease is not readily Incentives received £ (5,000) determinable, however, Lessee A’s incremental The contract sets out a minimum lease term of 5 years borrowing rate is 5 per cent per annum, which Right-of-use asset £252,300 with the option to extend it for a further 5 years. reflects the fixed rate that Lessee A would pay, should it borrow an amount equivalent to the value Lessee initially recognises assets and liabilities in relation to the lease as follows. The payment schedule is as follows: of the right-of-use asset, in the same currency, for a 5 year term, and with similar collateral. •• First 5 years - £50,000 per annum in advance DR CR At the commencement date, Lessee A also receives •• Optional 5 year period - £55,000 per annum £5,000 of lease incentives from the Lessor. Right-of-use asset £252,300 in advance

The initial costs of £30,000 are added to the cost Lease liability £177,300 In practice, such payments are likely to be payable of the right-of-use asset as the costs incurred quarterly in advance. However for the purposes of are initial direct costs defined as “the incremental Cash (lease payment) £50,000 this case study, payments are assumed to be paid costs of obtaining a lease that would not have been annually in advance for simplicity of illustration. incurred if the lease had not been obtained”. Cash (initial direct costs) £30,000

Cash (lease incentive) £5,000 Step 1: Determine the lease liability at commencement date by determining the present value of the remaining minimum lease payments, discounted at an interest rate of 5%.

YEAR CASH FLOW DISCOUNT FACTOR PRESENT VALUE

2 50,000 0.952 47,600

3 50,000 0.907 45,350

4 50,000 0.864 43,200

5 50,000 0.823 41,150

177,300

10 11 CASE STUDY PART 2 - SUBSEQUENT MEASUREMENT OF THE LEASE LIABILITY AND RIGHT-OF-USE ASSET

The example assumes no modifications to the lease or reassessments of assumptions made at commencement of lease.

LEASE LIABILITY RIGHT-OF-USE ASSET

INTEREST DEPRECIATION PERIOD B/F LIABILITY PAYMENTS C/F LIABILITY B/F ASSET C/F ASSET AT 5% CHARGE

£ £ £ £ £ £ £

1 177,300 0 8,865 186,165 252,300 (50,460) 201,840

2 186,165 (50,000) 6,808 142,973 201,840 (50,460) 151,380 WHEN AND WHAT SHOULD BE RECOGNISED 3 142,973 (50,000) 4,647 97,620 151,380 (50,460) 100,920 IN SUBSEQUENT YEARS? 4 97,620 (50,000) 2,380 50,000 100,920 (50,460) 50,460

You will need to continue to recognise the right-of-use asset (using either 5 50,000 (50,000) 0 0 50,460 (50,460) 0 the cost or fair value model) and the carrying amount of the lease liability. Right-of-use asset COST MODEL FAIR VALUE MODEL •• Cost less any accumulated depreciation and any •• An entity that has a fair value through profit and loss accumulated impairment losses; accounting policy for its investment properties must measure any right-of-use asset that meets the •• Adjusted for any re-measurement of the lease liability in definition of an investment property at fair value. 4respect of a modification (see page 14). •• If right-of-use assets relate to a class of PPE to which •• Depreciated from the commencement date to the end the revaluation model applies, an entity may elect to of the useful life if: apply the revaluation model to all of the right-of-use »» Ownership of the underlying asset is transferred to assets that relate to that particular class. the lessee by the end of the lease term; or »» the cost of the right-of-use asset reflects that the lessee will exercise a purchase option. •• Depreciated over the lease term in other circumstances in accordance with IAS 16 Property, Plant and Equipment (PPE).

Lease Liability Carrying amount: •• The periodic rate of interest applied is the interest rate implicit in the lease, unless that cannot be readily •• Increased to reflect interest on the lease liability; and determined. In such circumstances, the lessee’s incremental borrowing rate should be used. Guidance on determination •• reduced to reflect the lease payments made. of this rate is given below. Additional guidance is provided if •• Re-measured to reflect: the lease is re-assessed (see page 9). »» Any reassessment; or •• Interest on the lease liability is recognised in profit »» certain lease modifications; or and loss unless the costs are included in the carrying value of another asset in accordance with another »» revised in-substance fixed lease payments (see page 9). accounting standard. Note: •• Variable lease payments not included in the measurement of the lease liability are recognised in profit •• Interest on the lease liability is calculated to be the and loss in the period in which the event or condition amount that produces a constant periodic rate of interest that triggers those payments occurs, unless the costs on the outstanding lease liability. are included in the carrying value of another asset in accordance with another accounting standard.

12 13 How is the lease liability remeasured? If there is a reassessment of the lease liability, either because the assumptions made about the lease term or the lease costs have changed, or because there has been a modification (which is not indicative of a new lease) then the liability will be remeasured as follows:

HOW ARE MODIFICATIONS TREATED? Change in lease term? Determine the lease payments Determine a revised discount eg option to extend that was based on the revised lease term. rate and apply this rate to IFRS 16 distinguishes lease modifications from a reassessment of a lease (eg whether previously reasonably certain don’t forget to remove any option calculate the present value to be taken is now unlikely to be fees that were previously included of the recalculated lease or not you are reasonably certain to exercise an option to extend an existing lease). taken or an option to terminate in the lease payments calculation. payments. the lease that was expected to Lease modifications change the scope of the lease or change the consideration for the lease by be taken has not been. comparison with that detailed in the original terms and conditions of the contract. If the modifications, in substance, mean that the original lease has been terminated and a new lease created, then the lessee will account for the revised terms as a new lease. 5A lease modification should be accounted for as a separate lease if: •• The modification adds the right to use one or more underlying assets; and •• the consideration for the lease increases by an amount that is proportionate to the stand-alone price of the additional asset(s).

What about modifications that don’t need to be accounted for as a separate lease? Change to the lease payments? Determine the revised lease Apply the original discount When assessing the lease, a number of decisions must be made. For example, is an option to extend eg a change to lease payments payments based on the rate to calculate the present the lease reasonably certain to be taken? Are we reasonably certain that we won’t want to exercise the based on an index or rate used remaining lease term. value of the recalculated option to terminate the lease? As time goes by, the answers to those questions may change. to determine the payment, such if changes are based on an index lease payments. as a market rent review, or a movement or rate revisit the Changes to the contract may also be made. Maybe a rent review takes place, and the fixed rental change in the amount to be paid forecast movements included in payments increase going forward? Or an extension to the lease is successfully negotiated? under a residual value guarantee. this calculation to make sure they continue to be appropriate. Where these changes do not indicate a new lease agreement, the amount recognised for the lease liability and the right-of-use asset will need to be revisited.

After initial recognition, the right-of-use asset (unless it is an investment property or within a class of property, plant and equipment which is measured at fair value) is measured at cost less depreciation and any impairment in line with IAS 16 Property, Plant and Equipment. However, the cost will also be adjusted for any remeasurement of the lease liability.

14 15 CASE STUDY PART 3 —SUBSEQUENT MEASUREMENT AND ACCOUNTING FOR A CHANGE IN THE LEASE TERM Subsequent measurement of the lease liability and right-of-use asset following re-assessment. At the end of year 3, Lessee A starts considering location and at the end of year 3 concludes that it whether he should extend the existing lease or is now reasonably certain that the option to extend move to new premises. The area surrounding the the lease for a further 5 years will be exercised. LEASE LIABILITY RIGHT-OF-USE ASSET property has become very trendy over the last Lessee A’s incremental borrowing rate at the end INTEREST DEPRECIATION PERIOD B/F LIABILITY PAYMENTS C/F LIABILITY B/F ASSET C/F ASSET couple of years and this has been reflected in of year 3 is 7% reflecting the fixed rate of interest AT 7% CHARGE the rental prices of similar properties in the area. that a bank would lend at for a similar amount in £ £ £ £ £ £ £ To manage overheads, Lessee A has to choose the same currency, for a 7 year period and with the whether to stay in the current location and benefit similar collateral. Lessee A expects to continue to 3 142,973 (50,000) 4,647 97,620 151,380 (50,460) 100,920 from reduced rentals in comparison to other market consume the right-of-use asset’s future economic (original at 5%) 209,867 209,867 rentals or move location. For business purposes, benefits evenly over the lease term. 307,487 310,787 Lessee A believes it is beneficial to stay in the same 4 307,487 (50,000) 18,025 275,512 310,787 (44,398) 266,389

The lease liability and the right-of-use asset from period 1 to 3 is as follows: 5 275,512 (50,000) 15,785 241,297 266,389 (44,398) 221,991 6 241,297 (55,000) 13,040 199,337 221,991 (44,398) 177,593 LEASE LIABILITY RIGHT-OF-USE ASSET 7 199,337 (55,000) 10,104 154,441 177,593 (44,398) 133,195 B/F INTEREST C/F DEPRECIATION PERIOD PAYMENTS B/F ASSET C/F ASSET 8 154,441 (55,000) 6,961 106,402 133,195 (44,398) 88,797 LIABILITY AT 5% LIABILITY CHARGE 9 106,402 (55,000) 3,598 55,000 88,797 (44,398) 44,399 £ £ £ £ £ £ £ 10 55,000 (55,000) 0 0 44,399 (44,399) 0 1 177,300 0 8,865 186,165 252,300 (50,460) 201,840

2 186,165 (50,000) 6,808 142,973 201,840 (50,460) 151,380

3 142,973 (50,000) 4,647 97,620 151,380 (50,460) 100,920

The lease liability is re-measured by calculating the present value (PV) of the future lease payments at the new incremental borrowing rate of 7%. The previous carrying value (CV) of the lease liability is then increased to the re-measured amount, with a corresponding adjustment to the right-of-use asset to reflect the cost of the additional right of use, as follows:

PERIOD CASH FLOW DISCOUNT FACTOR AT 7% PRESENT VALUE

£ £

4 and 5 50,000 1.935 96,729*

6 to 10 55,000 3.832 210,758*

PV of future lease payments at new incremental borrowing rate 307,487

Previous CV of lease liability 97,620

Adjustment to CV of liability and right-of-use asset 209,867

*These numbers have been calculated using the discount factor which hasn't been rounded.

16 17 ARE THERE ANY EXCEPTIONS AND PRACTICAL EXPEDIENTS? WHAT ARE THE NEW DISCLOSURE REQUIREMENTS?

Not all leases need to be calculated using the lease liability and right-of-use asset The objective of the disclosure requirements in IFRS 16 is for lessees to provide information method. There are some exemptions available as well as some practical expedients. that will assist users of the financial statements to assess the effect that leases have on the financial position, performance and cash flows of the business. CONDITIONS TO EXEMPTION DETAILS POSSIBLE EXAMPLES TREATMENT USE EXEMPTION The following information is required to be presented in a tabular format unless another format is Short-term Short-term leases are •• Election must be made; •• Hire vehicle for use considered to more appropriate: lease leases of 12 months or less while main vehicle is with no purchase option at •• election will apply by being repaired. •• By class of underlying asset: the end. class of underlying asset to which the right of use •• 3 month storage lease to »» Depreciation expense relates; and expand capacity to hold stock in advance of peak »» Carrying value of right-of-use assets 6 •• any subsequent change or season. modification of the lease is •• Additions to right-of-use assets treated as a new lease. •• Lease of equipment specifically for a one Recognise the lease 7 •• Interest expense on lease liabilities off project that will be payments associated with completed in 6 months. the lease as an expense in •• Other expenses relating to: the income statement on Low value ‘Low value’ is not defined •• Election must be made; •• Mobile phone contract. a straight-line (or other »» Short-term leases where the practical expedient has been applied (need not include leases with a underlying but a value of less than systematic) basis. This is the lease term of one month or less); assets US$5,000 was anticipated •• election must be made on •• Office equipment rental. same treatment as applies a lease-by-lease basis; in the Basis of Conclusions •• PC or tablet rental. to an operating lease under »» leases of low-value assets; and to IFRS 16. and IAS 17. •• assets must not be »» variable lease payments not included in the lease liability. dependent on, or highly interrelated with, other •• Accounting policy for short-term leases and low value assets if the exemptions are taken underlying assets. •• Sub-letting income from right-of-use assets The exemption may be taken even if the low-value •• Total cash outflow for leases assets are material to the accounts in aggregate. •• Gains and losses on sale and lease back transactions •• Costs that the lessee has included in the carrying amount of another asset. Practical expedients Additional qualitative and quantitative disclosures will also be necessary about the entity’s leasing •• Portfolio application – IFRS 16 can be applied to a portfolio of leases with similar characteristics, if the activities if they are considered necessary to meet the overall disclosure objective set out above. This effect on the financial statements is not materially different to accounting for the leases separately. may include for example, details of the leasing activities entered into, the variability of future cash •• Account for as a single lease component – instead of separating non-lease components (services) outflows, restrictions or covenants imposed by the lessor. from lease components of a contract the lessee can choose, by class of underlying asset, to account for the whole contract as a single lease.

18 19 Cumulative catch-up approach - practical expedients Measurement of lease liability Entities are not required to go back to the start of the lease and amend for any modifications. As an Discount at the alternative, entities can calculate the lease liability At present value lessee's incremental Measurement of by discounting the remaining lease payments of remaining lease borrowing rate lease liability using the incremental borrowing rate at the date payments at date of initial of initial application. application

Measurement of the right-of-use asset Entities can choose to measure the right-of- OR use asset at the same value as the lease liability adjusted to take into account any prepayment/ accrued lease payments that were previously recognised. This means that no adjustment will need to be made to equity at the initial Measurement of ROU asset = lease Retrospectivly application date. However, this is likely to mean right of use asset liability that the future depreciation expense will be higher than if this practical expedient was not applied. For this reason, it may be beneficial not to apply this practical expedient to low volume, high value contracts but to apply it to low value, WHAT ARE THE TRANSITION MODELS high volume contracts. AND ARE THERE ANY RELIEFS? Leases with a remaining lease term of less than There is no requirement to reassess whether a •• An explanation of any difference between the Leases less than Can treat as short- Measure and disclose 12 months contract is, or includes a lease (this is given as a operating lease commitments disclosed for 12 months life leases in same way An entity can choose not to restate these leases practical expedient). IFRS 16 will only be applied to the corresponding period discounted using ie continue to treat them in the same way as the contracts that were previously identified as a the incremental borrowing rate and the lease operating leases under IAS 17. lease under IAS 17 and IFRIC 4. If contracts are not liabilities recognised on initial application of reassessed, this should be disclosed and applied to IFRS 16; and all such contracts at the date of initial application. Portfolio discount rate •• The weighted average incremental borrowing IFRS 16 permits an entity to apply a single rate that has been applied to lease liabilities There are two transition models that are available, discount rate to a portfolio of leases that have 8 recognised at the date of initial application. Apply single discount reasonably similar characteristics ie. leases with however, one model must be selected and applied Portfolio rate to leases with remaining lease terms that are similar and relate consistently to all leases. Under this approach there is also the option of discount rate similar characteristics applying some additional practical expedients. to a similar class of underlying asset in a similar Full Transition Method These can be applied on a lease by lease basis economic environment. Under the full transition method, IAS 8 is applied and entities can select which ones (if any) they in full, meaning that the financial position at the wish to apply. beginning of the comparative period is restated Hindsight to reflect the carrying value of the right-to-use Other transitional provisions - previously Hindsight can be applied when applying IFRS 16 assets and the financial liabilities as if IFRS 16 had recognised business combinations for the first time. For example, if a lease has been been applied from the inception of each lease. If an asset or liability was previously recognised eg determining the Hindsight extended or terminated, this known information relating to a favourable or an unfavourable lease lease term can be used in determining the lease term. Cumulative Catch Up Approach under IFRS 3 Business Combinations, the lessee Under the cumulative catch up approach, the must derecognise that asset or liability and initial application date is determined to be the adjust the carrying value of the right-of-use Onerous leases first day of the financial period in which IFRS 16 asset by a corresponding amount at the date of If an onerous lease assessment has been is being applied. This means that corresponding initial application. performed in a previous period, the standard amounts are presented having applied IAS 17. permits this to be used as an alternative to an Whilst this method may be considered to be easier Onerous lease Value of onerous impairment review. In such circumstances, the to apply than the full transition method, the prior assessment may be lease provision may onerous lease amount replaces any impairment period financial position and results will not be Onerous leases used as an alternative be used to adjust loss and hence is adjusted against the value of the comparable with the performance and position to an impairment value of ROU asset right-of-use asset. The reason this is permitted presented for the current period. For this reason, review is that onerous lease provisions will cease to exist entities are required to disclose the effect of going forward as all lease obligations will already applying this approach including: be recognised in the balance sheet. 20 21 HOW CAN RSM HELP?

Develop an implementation Assess the impact of plan to ensure a smooth the new standard on and cost effective transition your key performance and project manage the indicators, loan and implementation process. employee agreements.

Assess whether your existing Help you understand systems will be able to cope the impact of with the implementation of the implementation on your new standard and advise on a financial statements and selection of software vendors. your business.

Establish an appropriate business process and system Identify, collate and of internal control over the analyse the data required accounting for leases. to help you determine what financing decisions, if any, you need to make.

Assess the impact of any modifications to the lease terms and how they will be accounted for.

22 23 rsmuk.com

The UK group of companies and LLPs trading as RSM is a member of the RSM network. RSM is the trading name used by the members of the RSM network. Each member of the RSM network is an independent accounting and consulting firm, each of which practices in its own right. The RSM network is not itself a separate legal entity of any description in any jurisdiction. The RSM network is administered by RSM International Limited, a company registered in England and Wales (company number 4040598) whose registered office is at 50 Cannon Street, London EC4N 6JJ. The brand and trademark RSM and other intellectual property rights used by members of the network are owned by RSM International Association, an association governed by article 60 et seq of the Civil Code of Switzerland whose seat is in Zug.

RSM UK Consulting LLP, RSM Corporate Finance LLP, RSM Restructuring Advisory LLP, RSM Risk Assurance Services LLP, RSM Tax and Advisory Services LLP, RSM UK Audit LLP and RSM UK Tax and Accounting Limited are not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services because we are members of the Institute of Chartered Accountants in England and Wales. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide. Baker Tilly Creditor Services LLP is authorised and regulated by the Financial Conduct Authority for credit-related regulated activities. RSM & Co (UK) Limited is authorised and regulated by the Financial Conduct Authority to conduct a range of investment business activities. Whilst every effort has been made to ensure accuracy, information contained in this communication may not be comprehensive and recipients should not act upon it without seeking professional advice.