Applying IFRS A closer look at IFRS 16 Leases Updated December 2020 Contents Overview 4 1. Objective and scope of IFRS 16 5 1.1 Objective of IFRS 16 5 1.2 Scope of IFRS 16 5 1.3 Recognition exemptions 6 2. What is a lease? 7 2.1 Determining whether an arrangement contains a lease 7 2.2 Identifying and separating lease and non-lease components of a contract and allocating contract consideration 27 2.3 Contract combinations 36 3. Key concepts 37 3.1 Inception of a contract 37 3.2 Commencement date of the lease 37 3.3 Lessee involvement with the underlying asset before the commencement date 38 3.4 Lease term and purchase options 39 3.5 Lease payments 47 3.6 Discount rates 55 3.7 Initial direct costs 58 3.8 Economic life 60 3.9 Fair value 60 4. Lessee accounting 61 4.1 Initial recognition 61 4.2 Initial measurement 64 4.3 Subsequent measurement 66 4.4 Remeasurement of lease liabilities 71 4.5 Lease modifications 73 4.6 Other lessee matters 80 4.7 Presentation 81 4.8 Disclosure 83 5. Lessor accounting 89 5.1 Lease classification 89 5.2 Key concepts applied by lessor 91 5.3 Finance leases 92 5.4 Operating leases 102 5.5 Lease modifications 104 5.6 Other lessor matters 109 5.7 Presentation 109 5.8 Disclosure 110 6. Subleases 112 1 December 2020 Applying IFRS - A closer look at IFRS 16 Leases 6.1 Definition 112 6.2 Intermediate lessor accounting 112 6.3 Sub-lessee accounting 115 6.4 Presentation 115 6.5 Disclosure 115 7. Sale and leaseback transactions 116 7.1 Determining whether the transfer of an asset is a sale 116 7.2 Transactions in which the transfer of an asset is a sale 119 7.3 Transactions in which the transfer of an asset is not a sale 126 7.4 Disclosure 127 8. Business combinations 128 8.1 Acquiree in a business combination is a lessee 128 8.2 Acquiree in a business combination is a lessor 129 9. Effective date and transition 130 9.1 Effective date 130 9.2 Transition 130 9.3 Lessee transition 131 9.4 Lessors 141 9.5 Other considerations 142 9.6 Disclosure 143 Appendix A: IFRS 16 Defined terms 145 Appendix B: Key differences between IFRS 16 and IAS 17 148 Appendix C: Key differences between IFRS 16 and ASC 842 155 Appendix D: Summary of lease reassessment and remeasurement requirements 162 2 December 2020 Applying IFRS - A closer look at IFRS 16 Leases What you need to know • IFRS 16 Leases requires lessees to put most leases on their balance sheets. • Lessees apply a single accounting model for all leases, with certain exemptions. • For lessors, the accounting is substantially unchanged from the accounting under IAS 17 Leases. • IFRS 16 is effective for annual periods beginning on or after 1 January 2019, with limited early application permitted. 3 December 2020 Applying IFRS - A closer look at IFRS 16 Leases Overview IFRS 16 Leases requires lessees to recognise assets and liabilities for most IFRS 16 requires lessees leases. The International Accounting Standards Board (IASB or the Board) to recognise most issued the standard after joint deliberations with the Financial Accounting leases on their balance Standards Board (FASB), which issued a similar standard (ASC 842 Leases). sheets. However, there are significant differences between the IASB and FASB standards (e.g., lessees classify leases as finance or operating leases under the FASB standard). These differences will result in certain transactions being accounted for differently under IFRS and US GAAP. Appendix C of this publication summarises the key differences between IFRS 16 and ASC 842. IFRS 16 replaces IAS 17 Leases. It requires lessees to recognise most leases on their balance sheets and provides enhanced disclosure requirements. The IASB believes this will result in a more faithful representation of lessees’ assets and liabilities and greater transparency of lessees’ financial obligations and leasing activities. Under IFRS 16, leases are accounted for based on a ‘right-of-use model’. The model reflects that, at the commencement date, a lessee has a financial obligation to make lease payments to the lessor for its right to use the underlying asset during the lease term. The lessor conveys that right to use the underlying asset at lease commencement, which is the time when it makes the underlying asset available for use by the lessee. Entities will need to focus on whether an arrangement contains a lease or a service agreement because there are significant differences in the accounting. Although IFRS 16 changes how the definition of a lease is applied, we believe that the assessment of whether a contract contains a lease will be straightforward in most arrangements. However, judgement may be required in applying the definition of a lease to certain arrangements, particularly those that include significant services. Lessor accounting under IFRS 16 is substantially unchanged from the accounting under IAS 17. Lessors continue to classify all leases as operating or finance leases. IFRS 16 is effective for annual periods beginning on or after 1 January 2019. Early application is permitted, provided the new revenue standard, IFRS 15 Revenue from Contracts with Customers, has been applied, or is applied at the same date as IFRS 16. This publication discusses how IFRS 16 is applied and is intended to help companies consider the effects of adopting and applying it. We encourage preparers and users of financial statements to read this publication carefully and consider the potential effects of the new standard. The views we express in this publication represent our perspectives as of December 2019. We may identify additional issues as we continue to analyse the standard and entities interpret it, and our views may evolve during that process. 4 December 2020 Applying IFRS - A closer look at IFRS 16 Leases 1. Objective and scope of IFRS 16 1.1 Objective of IFRS 16 IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases. The objective is to ensure that lessees and lessors provide relevant information in a manner that faithfully represents those transactions. This information gives a basis for users of financial statements to assess the effect that leases have on the financial position, financial performance and cash flows of an entity. IFRS 16 requires an entity to consider the terms and conditions of contracts and all relevant facts and circumstances, and to apply the standard consistently to contracts with similar characteristics and in similar circumstances. 1.2 Scope of IFRS 16 Extract from IFRS 16 3 An entity shall apply this Standard to all leases, including leases of right-of- use assets in a sublease, except for: (a) leases to explore for or use minerals, oil, natural gas and similar non- regenerative resources; (b) leases of biological assets within the scope of IAS 41 Agriculture held by a lessee; (c) service concession arrangements within the scope of IFRIC 12 Service Concession Arrangements (d) licences of intellectual property granted by a lessor within the scope of IFRS 15 Revenue from Contracts with Customers; and (e) rights held by a lessee under licensing agreements within the scope of IAS 38 Intangible Assets for such items as motion picture films, video recordings, plays, manuscripts, patents and copyrights. 4 A lessee may, but is not required to, apply this Standard to leases of intangible assets other than those described in paragraph 3(e). IFRS 16 applies to all leases, including leases of right-of-use assets in a sublease, except for the following: • Leases to explore for, or use, minerals, oil, natural gas and similar non- regenerative resources • Leases of biological assets within the scope of IAS 41 Agriculture held by a lessee • Service concession arrangements within the scope of IFRIC 12 Service Concession Arrangements. Entities should evaluate the applicability of IFRIC 12 before evaluating whether an arrangement contains a lease. • Licences of intellectual property granted by a lessor within the scope of IFRS 15 • Rights held by a lessee under licensing agreements within the scope of IAS 38 Intangible Assets for such items as motion picture films, video recordings, plays, manuscripts, patents and copyrights 5 December 2020 Applying IFRS - A closer look at IFRS 16 Leases A lessee is not required to apply IFRS 16 to leases of intangible assets not covered by the exceptions above. However, a lessee could choose to account for leases of such intangible assets under IFRS 16. There are differing views about whether a licence of software is excluded from the scope of IFRS 16 based on interpretations of paragraph 3(e) of IFRS 16. If an entity determines that a licence of software is not excluded from the scope of IFRS 16, paragraph 4 of IFRS 16 permits, but does not require, an entity to account for the licence of software as a lease. If a cloud computing arrangement contains a lease of an asset other than a licence of software (or the entity has determined that a licence of software is not excluded from the scope of IFRS 16 and has elected to account for leases of intangible assets under IFRS 16), an entity should apply the provisions of IFRS 16 to the cloud computing arrangement. This includes identifying and separating lease and non-lease components and allocating contract consideration, which is discussed at 3.2 below. 1.3 Recognition exemptions IFRS 16 allows a lessee to elect not to apply the recognition requirements to: a) Short-term leases; and b) Leases for which the underlying asset is of low value.