In November 2020, the International Accounting Standards Board (IASB) published the Exposure Draft Lease Liability in a Sale and Leaseback. The Exposure Draft specifies the method a seller-lessee uses in initially measuring the right-of-use asset and lease liability arising in a sale and leaseback transaction and how the seller-lessee subsequently measures that liability.
THE CHANGES PROPOSED IN THE EXPOSURE DRAFT WOULD AMEND IFRS 16 TO
- Specify the method a seller-lessee uses to measure initially the right-of-use asset and the liability arising in sale and leaseback transactions in which the transfer of the asset satisfies the requirements to be accounted for as a sale of the asset;
- specify that the lease liability recognized for the leaseback reflects the expected lease payments and includes variable lease payments, including those that do not depend on an index or rate;
- add subsequent measurement requirements for the lease liability arising in these sale and leaseback transactions; and
- require a seller-lessee to apply the amendment retrospectively to sale and leaseback transactions entered into after the date of initial application of IFRS 16.
COMMENTS ON THE PROPOSALS ARE REQUESTED BY 29 MARCH 2021
INITIAL MEASUREMENT OF THE RIGHT-OF-USE ASSET AND THE LEASE LIABILITY
|EXISTING REQUIREMENTS UNDER IFRS 16||The existing requirements of IFRS 16 specify that when the transfer of an asset in a sale and leaseback transaction satisfies the requirements of IFRS 15 Revenue from Contracts with Customers to be accounted for as a sale, the seller-lessee initially measures the right-of-use asset arising from the leaseback at the proportion of the previous carrying amount of the asset that relates to the right of use retained by the seller-lessee.|
|THE PROPOSED AMENDMENT||The Exposure Draft proposes to specify that this proportion is determined by comparing the present value of the expected lease payments (discounted using the interest rate implicit in the lease, if it can be readily determined, or otherwise the lessee’s incremental borrowing rate), to the fair value of the asset sold.
Furthermore, the Board proposes to specify that the lease liability is initially measured at the present value of the expected lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease, if it can be readily determined, or otherwise the lessee’s incremental borrowing rate. The expected lease payments would comprise the following payments relating to the right to use the asset during the lease term at market rates:
a) Fixed payments (including in-substance fixed payments), less any lease incentives;
b) Variable lease payments (regardless of whether they depend on an index or a rate);
c) Amounts expected to be payable by the seller-lessee under residual value guarantees; and
d) Payments of penalties for terminating the lease, if the lease term reflects the seller-lessee exercising an option to terminate the lease.
SUBSEQUENT MEASUREMENT OF THE RIGHT-OF-USE ASSET AND THE LEASE LIABILITY
|RIGHT-OF-USE ASSET “NO CHANGE”||The seller-lessee would subsequently measure the right-of-use asset arising from the leaseback transaction applying the same subsequent measurement requirements as for right-of-use assets unrelated to sale and leaseback transactions.|
|LEASE LIABILITY||The lease liability arising from the leaseback would subsequently be measured by increasing the carrying amount to reflect interest on the lease liability and reducing the carrying amount to reflect the expected lease payments for the reporting period as determined at the commencement date (or if applicable the revised expected lease payments for the reporting period as determined at the date of remeasurement). Therefore, the carrying amount would be reduced to reflect both the amount of those payments and when they were expected to be paid as at the commencement date.
The seller-lessee would generally recognize any difference between the actual payments made for the lease (excluding any above-market terms) and the expected lease payments for the reporting period in profit or loss.
The proposed amendment would apply to all sale and leaseback transactions but is expected to particularly affect sale and leaseback transactions that include variable lease payments not dependent on an index or rate.
EFFECTIVE DATE AND COMMENT PERIOD:
The effective date of the amendment will be decided after exposure. Earlier application is proposed to be permitted. Comments on the proposals are requested by 29 March 2021.
About the Author
|Ziad Hamdy, CPA, CMA, ESAA “Audit and Advisory Partner”
Ziad is the audit services partner at Nearshore Middle East. He also heads the advisory services team in addition to the IFRS adoption team. He has extensive experience in dealing with audit and advisory clients in various sectors. His client base covers all types and sizes of companies. He has also conducted several financial due diligence engagements in Egypt and the Middle East, and he has helped many clients to convert to (IFRS).