Tools,practiceaidsandpublicationsIndepthandPracticalguidesIFRS16Aneweraoflease

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Tools, practice aids and publications In depth and

Practical guides
IFRS 16 A new era of lease accounting: PwC In depth
INT2016-01
IFRS 16 A new era of lease accounting: PwC In depth INT2016-01
Publication date: 03 Feb 2016

InJanuary2016theInternationalAccountingStandardsBoard(IASB)issuedIFRS16,
Leases,andtherebystartedaneweraofleaseaccountingatleastforlessees.Whereas,
underthepreviousguidanceinIAS17,'Leases',alesseehadtomakeadistinctionbetween
afinancelease(onbalancesheet)andanoperatinglease(offbalancesheet),thenew
modelrequiresthelesseetorecognisealmostallleasecontractsonthebalancesheet;the
onlyoptionalexemptionsareforcertainshort-termleasesandleasesoflow-valueassets.
ForlesseesthathaveenteredintocontractsclassifiedasoperatingleasesunderIAS17,this
couldhaveahugeimpactonthefinancialstatements.
This Indepth (pdf,0.98MB)providesasummaryofIFRS16andthemaindifferences
betweenIFRS16andtheexpectednewguidanceinUSGAAPareincludedintheAppendix
At a glance
InJanuary2016theInternationalAccountingStandardsBoard(IASB)issuedIFRS16,
Leases,andtherebystartedaneweraofleaseaccountingatleastforlessees!Whereas,
underthepreviousguidanceinIAS17,Leases,alesseehadtomakeadistinctionbetween
afinancelease(onbalancesheet)andanoperatinglease(offbalancesheet),thenew
modelrequiresthelesseetorecognisealmostallleasecontractsonthebalancesheet;the
onlyoptionalexemptionsareforcertainshort-termleasesandleasesoflow-valueassets.
ForlesseesthathaveenteredintocontractsclassifiedasoperatingleasesunderIAS17,
thiscouldhaveahugeimpactonthefinancialstatements.
Atfirst,thenewstandardwillaffectbalancesheetandbalancesheet-relatedratiossuchas
thedebt/equityratio.Asidefromthis,IFRS16willalsoinfluencetheincomestatement,
becauseanentitynowhastorecogniseinterestexpenseontheleaseliability(obligationto
makeleasepayments)anddepreciationontheright-of-useasset(thatis,theassetthat
reflectstherighttousetheleasedasset).Duetothis,forleasecontractspreviously
classifiedasoperatingleasesthetotalamountofexpensesatthebeginningofthelease
periodwillbehigherthanunderIAS17.Anotherconsequenceofthechangesin
presentationisthatEBITandEBITDAwillbehigherforcompaniesthathavematerial
operatingleases.
Thenewguidancewillalsochangethecashflowstatement.Leasepaymentsthatrelateto
contractsthathavepreviouslybeenclassifiedasoperatingleasesarenolongerpresented
asoperatingcashflowsinfull.Onlythepartoftheleasepaymentsthatreflectsintereston
theleaseliabilitycanbepresentedasanoperatingcashflow(dependingontheentitys
accountingpolicyregardinginterestpayments).Cashpaymentsfortheprincipalportionof
theleaseliabilityareclassifiedwithinfinancingactivities.Paymentsforshort-termleases,
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leasesoflow-valueassetsandvariableleasepaymentsnotincludedinthemeasurementof
theleaseliabilityremainpresentedwithinoperatingactivities.
Althoughaccountingremainssubstantiallythesameforlessors,thechangesmadebythe
newstandardarestillrelevant.Inparticular,lessorsshouldbeawareofthenewguidance
onthedefinitionofalease,subleasesandtheaccountingforsaleandleaseback
transactions.Thechangesinlesseeaccountingmightalsohaveanimpactonlessorsas
lesseesneedsandbehaviourschangeandtheyenterintonegotiationswiththeir
customers.
Forboth,lesseesandlessorsIFRS16addssignificantnew,enhanceddisclosure
requirements.
LeaseaccountingwasajointprojectoftheIASBandtheUS-standardsetter(theFASB).
AlthoughinitiallythetwoBoardsintendedtodevelopaconvergedstandard,ultimatelyonly
theguidanceonthedefinitionofaleaseandtheprincipleofrecognisingallleasesonthe
lesseesbalancesheetareexpectedtobealigned.Inotherareas,differencesremainorwill
evenincrease.WeprovideasummaryofthemaindifferencesbetweenIFRS16andthe
expectednewguidanceinUSGAAPintheAppendix.
Scope
IFRS16willapplytoalllease contractsexceptfor:
leasestoexplorefororuseminerals,oil,naturalgasandsimilarnonregenerativeresources;
leasesofbiologicalassetswithinthescopeofIAS41,Agriculture,held
bylessees;
serviceconcessionarrangementswithinthescopeofIFRIC12,
ServiceConcessionArrangements;
licencesofintellectualpropertygrantedbyalessorwithinthescopeof
IFRS15,RevenuefromContractswithCustomers;and
rightsheldbylesseeunderlicensingagreementswithinthescopeof
IAS38,IntangibleAssets,foritemssuchasmotionpicturefilms,video
recordings,plays,manuscripts,patentsandcopyrights.
Asidefromthis,alesseemaychoosetoapplyIFRS16toleasesofintangibleassetsother
thanthosementionedabove.
Identifying a lease
Definition of a lease
IFRS16definesaleaseasacontract,orpartofacontract,thatconveystherighttousean
asset(theunderlyingasset)foraperiodoftimeinexchangeforconsideration.Atfirstsight,
thedefinitionlooksstraightforward.But,inpractice,itcanbechallengingtoassesswhethera
contractconveystherighttouseanassetoris,instead,acontractforaservicethatis
providedusingtheasset.
Forexample,anentitymightwanttotransportaspecifiedquantityofgoods,inaccordance
withastatedtimetable,foraperiodoffiveyearsfromAtoBbyrail.Toachievethis,itcould
eitherrentanumberofrailcarsoritcouldcontracttobuythetransportservicefromafreight
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carrier.Inbothcases,thegoodswillarriveatBbuttheaccountingmightbequitedifferent!
PwC observation:
Infuture,thereislikelytobeagreaterfocusonidentifyingwhetheracontractisorcontains
alease,giventhatallleases(exceptshort-termleasesandleasesoflow-valueassets)will
berecognisedonthebalancesheetofthelessee.Currently,manycompaniesthathave
contractswhichincludebothanoperatingleaseandaservicedonotseparatetheoperating
leasecomponent.Thisisbecausetheaccountingforanoperatingleaseanda
service/supplyarrangementisthesame(thatis,thereisnorecognitiononthebalance
sheetandstraight-lineexpenseisrecognisedinprofitorlossoverthecontractperiod).
Underthenewstandard,thetreatmentofthetwocomponentswilldiffer.Alesseemay
decideasapracticalexpedientbyclassofunderlyingassetnottoseparatenon-lease
components(services)fromleasecomponents.Ifthelesseedecidestoapplythis
exemptioneachleasecomponentandanyassociatednon-leasecomponentisaccounted
forasasingleleasecomponent.Sotheservicecomponentwilleitherbeseparatedorthe
entirecontractwillbetreatedasalease.
Leasesaredifferentfromservicecontracts:aleaseprovidesacustomerwiththerightto
controltheuseofanasset;whereas,inaservicecontract,thesupplierretainscontrol.IFRS
16statesthatacontractcontainsaleaseif:
thereisanidentified asset;and
thecontractconveystheright to control the use of the identified asset
foraperiodoftimeinexchangeforconsideration.
Whatisanidentifiedasset?
Anassetcanbeidentifiedeitherexplicitlyorimplicitly.Ifexplicit,theassetisspecifiedinthe
contract(forexample,byaserialnumberorasimilaridentificationmarking);ifimplicit,the
assetisnotmentionedinthecontract(sotheentitycannotidentifytheparticularasset)but
thesuppliercanfulfilthecontractonlybytheuseofaparticularasset.Inbothcasesthere
maybeanidentifiedasset.
Inanycase,thereisnoidentifiedassetifthesupplierhasasubstantive right to substitutethe
asset.Substitutionrightsaresubstantivewherethesupplierhasthepracticalabilityto
substituteanalternativeassetandwouldbenefiteconomicallyfromsubstitutingtheasset.
Thetermbenefitisinterpretedbroadly.Forexample,thefactthatthesuppliercoulddeploy
apoolofassetsmoreefficiently,bysubstitutingtheleasedassetfromtimetotime,might
createasufficientbenefitaslongastherearenosignificantcosts.Itisimportanttonotethat
significantisassessedwithreferencetotherelatedbenefits(thatis,costsmustbelower
thanbenefits,itisnotsufficientifthecostsarelowornotmaterialtotheentityasawhole).
Significantcostscouldoccur,inparticular,iftheunderlyingassetistailoredforusebythe
customer.Forexample,aleasedaircraftmighthavespecificinteriorandexterior
specificationsdefinedbythecustomer.Insuchascenario,substitutingtheaircraft
throughouttheleasetermcouldcreatesignificantcoststhatwoulddiscouragethesupplier
fromdoingso.
Theassessmentwhetherasubstitutionrightissubstantivedependsonthefactsand
circumstancesatinceptionofthecontractanddoesnottakeintoaccountcircumstancesthat
arenotconsideredlikelytooccur.
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Arighttosubstituteanassetifitisnotoperatingproperly,orifthereisatechnicalupdate
required,doesnotpreventthecontractfrombeingdependentonanidentifiedasset.The
sameistrueforasuppliersrightorobligationtosubstituteanunderlyingassetforany
reasononorafteraparticulardateorontheoccurrenceofaspecifiedeventbecausethe
supplierdoesnothavethepracticalabilitytosubstitutealternativeassetsthroughoutthe
periodofuse.
Ifthecustomercannotreadilydeterminewhetherthesupplierhasasubstantivesubstitution
right,itispresumedthattherightisnotsubstantive(thatis,thatthecontractdependsonan
identifiedasset).
Portion of an asset
Anidentifiedassetcanbeaphysically distinct portionofalargerasset,suchasonefloorofa
multi-levelbuildingorphysicallydistinctdarkfibreswithinacable.
Acapacityportion(thatis,aportionofalargerassetthatisnotphysicallydistinct)isnotan
identifiedassetunlessitrepresentssubstantiallyallofthecapacityoftheentireasset.So,for
example,acapacityportionofafibre-opticcablethatdoesnotrepresentsubstantiallyallof
thecapacityofthecablewouldnotqualifyasanidentifiedasset.
Whendoesthecustomerhavetherighttocontroltheuseofanidentifiedasset?
Acontractconveystherighttocontroltheuseofanidentifiedassetifthecustomerhasboth
therighttoobtainsubstantially all of the economic benefits from useoftheidentifiedasset
andtheright to direct the use of the identified assetthroughouttheperiodofuse.
Substantiallyalloftheeconomicbenefitsfromuseoftheassetthroughouttheperiodofuse
Economicbenefitscanbeobtaineddirectlyorindirectly(forexample,byusing,holdingor
subleasingtheasset).Benefitsincludetheprimaryoutputandanyby-products(including
potentialcashflowsderivedfromtheseitems),aswellaspaymentsfromthirdpartiesthat
relatetotheuseoftheidentifiedasset.Economicbenefitsrelatingtotheownershipofthe
assetareignored.
Theexamplebelowillustratesunderwhichcircumstancespaymentsfromthirdpartiesshould
betakenintoaccount:
Example
Acustomerrentsasolarfarmfromthesupplier.Thesupplierreceivestaxcreditsrelatingto
theownershipofthesolarfarm,whereasthecustomerreceivesrenewableenergycredits
fromtheuseofthefarm.Inthisscenario,onlytherenewableenergycreditsaretakeninto
accountintheanalysis,becausethetaxcreditsrelatenottotheuseofthesolarfarmbut,
instead,toownershipoftheasset.
Righttodirecttheuseofanassetthroughouttheperiodofuse
Whenassessingwhetherthecustomerhasthe right to direct the use of the identified asset,
thekeyquestioniswhichparty(thatis,thecustomerorthesupplier)hastheright to direct
how and for what purpose the identified asset is usedthroughouttheperiodofuse.
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Thestandardgivesseveralexamplesofrelevantdecision-makingrights:
Righttochangewhattypeofoutputisproduced.
Righttochangewhentheoutputisproduced.
Righttochangewheretheoutputisproduced.
Righttochangehow muchoftheoutputisproduced.
Therelevanceofeachofthedecision-makingrightsdependsontheunderlyingassetbeing
considered.Ifbothpartieshavedecision-makingrights,anentityconsiderstherightsthatare
mostrelevanttochanginghowandforwhatpurposetheassetisused.Decision-making
rightsarerelevantwhentheyaffecttheeconomicbenefitstobederivedfromtheuseofthe
asset.
Toillustratetheconcept,thetablebelowprovidessomequestionstoconsiderwhen
evaluatingwhichpartyhastherelevantdecision-makingrights:
Which party decides
Leaseoftrucks/aircraft/railcarsetc.

Whichgoodsaretransported?
Whenthegoodsaretransportedandto
where?
Howoftentheassetisused/howfullitneeds
tobetorun?
Whichrouteistaken?

Fibre-opticcable

Whenandwhethertolightthefibres?
Whatandhowmuchdatathecablewill
transport?
Howtorunthecable?
Throughwhichroutesthedatawillbe
delivered?

Retailunit

Whichgoodswillbesold?
Thepricesatwhichthegoodswillbesold?
Whereandhowthegoodsaredisplayed?

Powerplant

Howmuchpowerwillbedeliveredand
when?
Whentoturnthepowerplanton/off?

However,thereareseveralrightsthatarenot taken into account:

Protective rights:Inmanycases,asuppliermightlimittheuseofan
assetbyacustomerinordertoprotectitspersonnelortoensure
compliancewithrelevantlawsandregulations(forexample,a
customerwhohashiredashipispreventedfromsailingtheshipinto
waterswithahighriskofpiracyortransportinghazardousmaterials).
Theseprotectiverightsdonotaffecttheassessmentofwhichpartyto
thecontracthastherighttodirecttheuseoftheidentifiedasset.
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Maintaining/operating the asset:Decisionsaboutmaintainingand

operatinganassetdonotgranttherighttodirecttheuseoftheasset.
Theyareonlytakenintoaccountifthedecisionsabouthowandfor
whatpurposetheassetisusedarepredetermined(seebelow).
Decisions made before the period of use:Decisionsmadebeforethe
periodofusearenottakenintoaccountunlesstheyaremadeinthe
contextofthedesignoftheassetbyacustomer(seebelow).
Insomescenarios,thedecisionsabouthowandforwhatpurposetheunderlyingassetis
usedarealreadypredeterminedbeforetheinceptionofthelease.Ifthisisthecase,the
customerhastherighttodirecttheuseofanassetifiteither:
hastherighttooperatetheidentifiedassetthroughouttheperiodof
usewithoutthesupplierhavingtherighttochangethoseoperating
instructions,or
hasdesignedtheidentifiedasset(orspecificaspectsoftheasset)ina
waythatpredetermineshowandforwhatpurposetheassetwillbe
usedthroughouttheperiodofuse.

PwC observation:
Thenewconceptofpre-determinedintroducedbyIFRS16canbeverycomplexand
judgmentalwheredecisionsaremadebeforetheinceptionofthelease.Whenanalysing
thesedecisions,thereareseveralquestionstobeconsidered,suchas:
Doanydecisionsthatarenotpredeterminedhaveasignificanteffect
onhowandforwhatpurposetheassetisused?
Towhatextentaredecisionsabouthowandforwhatpurposethe
assetisusedpredetermined?
Dothedecisionspredeterminehowandforwhatpurposethe
identifiedassetisusedordotheyonlyestablishprotectiverights?
Whichpartytothecontracthasmadethedecisions?
Sometimes,anidentifiedassetisincidentaltoaservicebuthasnospecificusetothe
customerbyitself.Inthesecases,thecustomeroftendoesnothavetherighttodirectthe
useoftheasset.
Example
Acustomerentersintoacontractwithatelecommunicationscompanyfornetworkservices.
Tosupplytheservices,itisnecessarytoinstallaserveratthecustomerspremises.The
suppliercanreconfigureorreplacetheserver,whenneeded,tocontinuouslyprovidethe
networkservices;thecustomerdoesnotoperatetheserver,nordoesitmakeany
significantdecisionsaboutitsuse.Thetelecommunicationcompanydeterminesthespeed
andthequalityofdatatransportationinthenetworkusingtheservers.
Thetelecommunicationcompanyhastherighttocontroltheuseoftheserverbecauseit
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makesalltherelevantdecisionsabouttheuseoftheserverthroughouttheperiodofuse.It
decideshowthedataistransported,whethertoreconfiguretheserversandwhethertouse
theserversforanotherpurpose.Thecustomeronlydecidesaboutthelevelofnetwork
services(thatistheoutputoftheservers)beforetheperiodofuse.
Thisarrangementdoesnotcontainalease.
Summaryoverview
Theflowchartbelowsummarisestheanalysistobemadetoevaluatewhetheracontract
containsalease:
Determining whether a contract contains a lease

PwC observation:
Thedefinitionofaleaseisnowmuchmoredrivenbythequestionofwhichpartytothe
contractcontrolstheuseoftheunderlyingassetfortheperiodofuse.Acustomernolonger
needsonlytohavetherighttoobtainsubstantiallyallofthebenefitsfromtheuseofan
asset(benefitselement),butmustalsohavetheabilitytodirecttheuseoftheasset
(powerelement).
Thisconceptualchangebecomesobviouswhenlookingatacontracttopurchase
substantiallyalloftheoutputproducedbyanidentifiedasset(forexample,apowerplant).If
thepriceperunitofoutputisneitherfixednorequaltothecurrentmarketprice,thecontract
wouldbeclassifiedasaleaseunderIAS17andIFRIC4,Determiningwhetheran
ArrangementcontainsaLease.
IFRS16,however,requiresnotonlythatthecustomerobtainssubstantiallyallofthe
economicbenefitsfromtheuseoftheassetbutalsoanadditionalpowerelement,namely
therightofthecustomertodirecttheuseoftheidentifiedasset(forexample,therightto
decidetheamountandtimingofpowerdelivered).
Comprehensive example
Acustomerentersintoacontractthatconveystherighttouseanexplicitlyspecifiedretail
unitforaperiodoffiveyears.Thepropertyownercanrequirethecustomertomoveinto
anotherretailunit;thereareseveralretailunitsofsimilarqualityandspecificationavailable.
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Asthepropertyownerhastopayforanyrelocationcostsitcanbenefiteconomicallyfrom
relocatingthecustomeronlyifthereisanewtenantthatwantstooccupyalargeamountof
retailspaceataratethatissufficienttocovertherelocationcosts.Thosecircumstances
mayarise,buttheyarenotconsideredlikelytooccur.
Thecontractrequiresthecustomertosellhisgoodsduringtheopeninghoursofthelarger
retailspace.Thecustomerdecidesonthemixofgoodssold,thepricingofthegoodssold
andthequantitiesofinventoryheld.Hefurthercontrolsphysicalaccesstotheretailunit
throughoutthefive-yearperiodofuse.
Therentthatthecustomerhastopayincludesafixedamountplusapercentageofthe
salesfromtheretailunit.
Is there an identified asset?
Theretailunitisexplicitlyspecifiedinthecontract.Thepropertyownerhasarightto
substitutetheasset.But,becauseitwouldbenefitfromtheexerciseoftherightonlyunder
certaincircumstancesthatarenotconsideredlikelytooccur,thesubstitutionrightisnot
substantive.
Hence,theretailunitisanidentifiedasset.
Has the customer the right to obtain substantially all of the economic benefits from the use
of the retail unit?
Thecustomerhastheexclusiveuseoftheretailunitthroughouttheperiodofuse.Thefact
thatapartofthecashflowsreceivedfromtheusearepassedtothepropertyowneras
considerationdoesnotpreventthecustomerfromhavingtherighttosubstantiallyallofthe
economicbenefitsfromtheuseoftheretailunit.
Has the customer the right to direct the use of the retail unit?
Duringtheperiodofuse,alldecisionsonhowandforwhatpurposetheretailunitisused
aremadebythecustomer.Therestrictionthatgoodscanonlybesoldduringtheopening
hoursofthelargerretailspacedefinesthescopeofthecontract,butitdoesnotlimitthe
customersrighttodirecttheuseoftheretailunit.
Conclusion
Thecontractcontainsaleaseofretailspace.
Separatingcomponentsofacontract
Contractsoftencombinedifferentkindsofobligationsofthesupplier,whichmightbea
combinationofleasecomponentsoracombinationofleaseandnon-leasecomponents.For
example,theleaseofanindustrialareamightcontaintheleaseofland,buildingsand
equipment,oracontractforacarleasemightbecombinedwithmaintenance.
Wheresuchamulti-elementarrangementexists,IFRS16requireseachseparatelease
componenttobeidentified(basedontheguidanceonthedefinitionofalease)and
accountedforseparately.
Therighttouseanassetisaseparateleasecomponentifbothofthefollowingcriteriaare
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met:
thelesseecanbenefit from use of the asseteitheronitsownor
togetherwithotherresourcesthatarereadilyavailabletothelessee;
and
theunderlyingassetisneither highly dependenton,norhighly
interrelatedwith,theotherunderlyingassetsinthecontract.
PwC observation:
IFRS15containsguidanceonhowtoevaluatewhetheragoodorservicepromisedtoa
customerisdistinctforlessors.ThequestionarisesofhowIFRS16interactswithIFRS15.
Foramulti-elementarrangementthatcontains(ormightcontain)alease,thelessorhasto
performtheassessmentasfollows:
ApplytheguidanceinIFRS16toassesswhetherthecontract
containsoneormoreleasecomponents.
ApplytheguidanceinIFRS16toassesswhetherdifferentlease
componentshavetobeaccountedforseparately.
AfteridentifyingtheleasecomponentsunderIFRS16,thenon-lease
componentsshouldbeassessedunderIFRS15forseparate
performanceobligations.
ThecriteriainIFRS16fortheseparationofleasecomponentsaresimilartothecriteriain
IFRS15foranalysingwhetheragoodorservicepromisedtoacustomerisdistinct.
Iftheanalysisconcludesthatthereareseparateleaseandnon-leasecomponents,the
considerationmustbeallocatedbetweenthecomponentsasfollows:
Lessee:Thelesseeallocatestheconsiderationonthebasisofrelative
stand-aloneprices.Ifobservablestand-alonepricesarenotreadily
available,thelesseeshallestimatetheprices,andshouldmaximise
theuseofobservableinformation.
Lessor:ThelessorallocatestheconsiderationinaccordancewithIFRS
15(thatis,onthebasisofrelativestand-alonesellingprices).
Asapractical expedient,lesseesareallowednottoseparateleaseandnon-lease
componentsand,instead,accountforeachleasecomponentandanyassociatednon-lease
componentsasasingleleasecomponent.Thisaccountingpolicychoicehastobemadeby
classofunderlyingasset.Becausenotseparatinganon-leasecomponentwouldincrease
thelesseesleaseliability,theBoardexpectsthatalesseewillusethisexemptiononlyifthe
servicecomponentisnotsignificant.
Combinationofcontracts
Often,severalcontractswiththesamecounterpartyareenteredintoatornearthesame
timeandincontemplationofanother.IFRS16requiresanentitytocombinecontracts
enteredintoatornearthesametimewiththesamecounterparty(orrelatedpartiesofthe
counterparty)beforeassessingwhethertheycontainaleaseandaccountforthemasa
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singlecontractifoneormoreofthefollowingconditionsaremet:
thecontractsarenegotiatedasapackagewithanoverallcommercial
objective;
theconsiderationinonecontractdependsontheprice/performanceof
theothercontract;or
theassetsinvolvedareasingleleasecomponent.
Leaseterm
SimilartoIAS17,thenewstandarddefinestheleasetermasthenon-cancellable periodof
theleaseplusperiodscoveredbyanoption to extendoranoption to terminateifthelessee
isreasonablycertaintoexercisetheextensionoptionornotexercisetheterminationoption.
Theinterpretationofthetermreasonably certain hasbeenasourceoflongand
controversialdiscussions,underIAS17,thatledtodiversityinpractice.Toaddressthis,the
standardstatestheprinciplethatallfactsandcircumstancescreatinganeconomicincentive
forthelesseetoexercisetheoptionmustbeconsidered,andprovidessomeexamplesof
suchfactors:
Contractualtermsandconditionsforoptionalperiodscomparedwith
marketrates:Itismorelikelythatalesseewillnotexercisean
extensionoptionifleasepaymentsexceedmarketrates.Other
examplesoftermsthatshouldbetakenintoaccountaretermination
penaltiesorresidualvalueguarantees.
Significantleaseholdimprovementsundertaken(orexpectedtobe
undertaken):Itismorelikelythatalesseewillexerciseanextension
optionifalesseehasmadesignificantinvestmentstoimprovethe
leasedassetortotailoritforitsspecialneeds.
Costsrelatingtotheterminationofthelease/signingofareplacement
lease:Itismorelikelythatalesseewillexerciseanextensionoptionif
doingsoavoidscostssuchasnegotiationcosts,relocationcosts,costs
ofidentifyinganothersuitableasset,costsofintegratinganewasset
andcostsofreturningtheoriginalassetinacontractuallyspecified
conditionortoacontractuallyspecifiedlocation.
Theimportanceoftheunderlyingassettothelesseesoperations:Itis
morelikelythatalesseewillexerciseanextensionoptionifthe
underlyingassetisspecialisedorifsuitablealternativesarenot
available.
Ifanoptioniscombinedwithoneormoreotherfeaturessuchasfor
examplearesidualvalueguaranteewiththeeffectthatthecashreturn
forthelessoristhesameregardlessofwhethertheoptionisexercised
anentityshallassumethatthelesseeisreasonablycertaintoexercise
theoptiontoextendthelease,ornottoexercisetheoptionto
terminatethelease.
Whentheoptioncanonlybeexercisedifoneormoreconditionsaremetthelikelihoodthat
thoseconditionswillexistshouldalsobetakenintoaccount.
Asidefromthis,lesseespastpracticeregardingtheperiodoverwhichithastypicallyused
particulartypesofassets,anditseconomicreasonsfordoingso,mayalsoprovidehelpful
information.
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PwC observation:
Oneoftheprimaryreasonsforincludingextensionoptions(andnotlimitingtheaccounting
tothenon-cancellableleaseterm)istoavoidthepotentialforstructuringopportunities.For
example,onecouldtheoreticallystructurea20-yearleaseasadailyleasewith20years
worthofdailyrenewals.
Thereisnoguidanceinthestandardonhowtoweighttheindividualfactorswhen
determiningwhetheritisreasonablycertainthatalesseewillexerciseanoption.For
example,consideraflagshipstorethatinaprimeandmuchsought-afterlocation.
Significantjudgementwouldbeneededtodeterminewhethertheprimegeographical
locationofthestoreorotherfactors(forexampleterminationpenalties,leasehold
improvements,etc.)indicatethatitisreasonablycertainwhetherornotthelesseewill
renewthestorelease.
Theleasetermisreassessed in only limited circumstances:
wherethelesseeexercisesordoesnotexerciseanoptioninadifferent
waythantheentityhadpreviouslydeterminedwasreasonablycertain;
whereaneventoccursthatcontractuallyobligesthelesseetoexercise
anoption(prohibitsthelesseefromexercisinganoption)not
previouslyincludedinthedeterminationoftheleaseterm(previously
includedinthedeterminationoftheleaseterm);or
whereasignificanteventorchangeincircumstancesoccursthatis
withinthecontrolofthelesseeandaffectswhetheritisreasonably
certaintoexerciseanoption.Thistriggerisonlyrelevantforthelessee
(andnotthelessor).
Example
Anentityleasesabuildingforaten-yearperiod,withtheoptiontoextendforfiveyears.At
thecommencementdate,theentityconcludesthatitisnotreasonablycertainthatitwill
exercisetheextensionoption.Itdeterminestheleasetermtobetenyears.Afterusingthe
buildingforfiveyears,theentitydecidestosubleasethebuildingtoanotherparty,andit
entersintoasubleasecontractwithatermoftenyears.
Enteringintoasubleaseisasignificanteventthatiswithinthecontrolofthelessee,andit
affectstheentitysassessmentofwhetheritisreasonablycertaintoexercisetheextension
option.Accordingly,thelesseehastoreassesstheleasetermoftheheadleaseuponthe
occurrenceofthesignificantevent.
Thisrequirementcanbeseenasacompromise:ontheonehand,theIASBbelievesthata
regularreassessmentoftheleasetermwouldprovidemorerelevantinformationtousersof
thefinancialstatements;ontheotherhand,theBoardacknowledgesthatsucharequirement
couldbeverycostly.
Accordingly,theIASBdecidedtodevelopanapproachsimilartotheoneforimpairment
testingareassessmentisonlymadeifthereareindicatorsthatitwouldresultinadifferent
outcome.

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Recognitionandmeasurementexemptions
Thestandardcontainstworecognitionandmeasurementexemptions.Bothexemptionsare
optionalandtheyonlyapplytolessees.Ifoneoftheseexemptionsisapplied,theleasesare
accountedforinawaythatissimilartocurrentoperating lease accounting(thatis,payments
arerecognisedonastraight-linebasisoranothersystematicbasisthatismore
representativeofthepatternofthelesseesbenefit):
Short-term leases:Short-termleasesaredefinedasleaseswitha
leasetermof12monthsorless.Theleasetermalsoincludesperiods
coveredbyanoptiontoextendoranoptiontoterminate ifthelesseeis
reasonablycertaintoexercisetheextensionoptionornotexercisethe
terminationoption.Aleasethatcontainsapurchaseoptionisnota
short-termlease.Ifalesseeelectsthisexemption,ithastobemadeby
classofunderlyingasset.
Ifanentityappliestheshort-termleaseexemptionitshalltreatany
subsequentmodificationorchangeinleasetermasresultinginanew
lease.
Leases for which the underlying asset is of low value:The
standarddoesnotdefinethetermlowvalue,buttheBasisfor
ConclusionsexplainsthattheBoardhadinmindassetsofavalueof
USD5,000orlesswhennew.ExamplesofassetsoflowvalueareIT
equipmentorofficefurniture.Forcertainassets(suchasassetsthat
aredependenton,orhighlyinterrelatedwith,otherunderlyingassets),
theexemptionisnotapplicable.
Theelectioncanbemadeonalease-by-leasebasis.Itisimportanttonotethattheanalysis
doesnottakeintoaccountwhetherlow-valueassetsinaggregatearematerial.Accordingly,
althoughtheaggregatedvalueoftheassetscapturedbytheexemptionmaybematerialthe
exemptionisstillavailable.
IFRS16alsoclarifiesthatbothalesseeandalessorcanapplythestandardtoaportfolioof
leaseswithsimilarcharacteristicsiftheentityreasonablyexpectsthattheresultingeffectis
notmateriallydifferentfromapplyingthestandardonalease-by-leasebasis.
Lessee accounting
Initialrecognitionandmeasurement
ThenewlesseeaccountingmodelwithinIFRS16isthemostimportantchangetocurrent
guidance.
UnderIFRS16,lesseeswillnolongerdistinguishbetweenfinanceleasecontracts(on
balancesheet)andoperatingleasecontracts(offbalancesheet),buttheyarerequiredto
recognisearight-of-use assetandacorrespondinglease liabilityforalmostalllease
contracts.Thisisbasedontheprinciplethat,ineconomicterms,aleasecontractisthe
acquisitionofarighttouseanunderlyingassetwiththepurchasepricepaidininstalments.
Theeffectofthisapproachisasubstantialincreaseintheamountofrecognisedfinancial
liabilitiesandassetsforentitiesthathaveenteredintosignificantleasecontractsthatare
currentlyclassifiedasoperatingleases.
Theleaseliabilityisinitiallyrecognisedatthecommencementdayandmeasuredatan
amountequaltothepresentvalueoftheleasepaymentsduringtheleasetermthatarenot
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yetpaid;theright-of-useassetisinitiallyrecognisedatthecommencementdayand
measuredatcost,consistingoftheamountoftheinitialmeasurementoftheleaseliability,
plusanyleasepaymentsmadetothelessoratorbeforethecommencementdatelessany
leaseincentivesreceived,theinitialestimateofrestorationcostsandanyinitialdirectcosts
incurredbythelessee.Theprovisionfortherestorationcostsisrecognisedasaseparate
liability.
Initial measurement of a right-of-use asset and a lease liability

Leasepayments
Leasepaymentsconsistofthefollowingcomponents:
fixedpayments(includingin-substancefixedpayments),lessanylease
incentivesreceivable;
variableleasepaymentsthatdependonanindexorarate;
amountsexpectedtobepayablebythelesseeunderresidualvalue
guarantees
theexercisepriceofapurchaseoption(ifthelesseeisreasonably
certaintoexercisethatoption);and
paymentsofpenaltiesforterminatingthelease(iftheleaseterm
reflectsthelesseeexercisingtheoptiontoterminatethelease).
IFRS16distinguishesbetweenthreekindsofcontingent payments,dependingonthe
underlyingvariableandtheprobabilitythattheyactuallyresultinpayments:
1. Variableleasepaymentsbasedonanindex or a rate:Variablelease
paymentsbasedonanindexorarate(forexample,linkedtoaconsumer
priceindex,abenchmarkinterestrateoramarketrentalrate)arepartofthe
leaseliability.Fromtheperspectiveofthelessee,thesepaymentsare
unavoidable,becauseanyuncertaintyrelatesonlytothemeasurementof
theliabilitybutnottoitsexistence.Variableleasepaymentsbasedonan
indexorarateareinitiallymeasuredusingtheindexortherateatthe
commencementdate(insteadofforwardrates/indices).Thismeansthatan
entitydoesnotforecastfuturechangesoftheindex/rate;thesechangesare
takenintoaccountatthepointintimeinwhichleasepaymentschange.The
accountingforvariableleasepaymentsthatdependonanindexorarateis
illustratedintheexampleonpage18.
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2. Variableleasepaymentsbasedon any other variable:Variablelease

paymentsnotbasedonanindexoraratearenotpartoftheleaseliability.
Theseincludepaymentslinkedtoalesseesperformancederivedfromthe
underlyingasset,suchaspaymentsofaspecifiedpercentageofsalesmade
fromaretailstoreorbasedontheoutputofasolarorawindfarm.Similarly
paymentslinkedtotheuseoftheunderlyingassetareexcludedfromthe
leaseliability,suchaspaymentsifthelesseeexceedsaspecifiedmileage.
Suchpaymentsarerecognisedinprofitorlossintheperiodinwhichthe
eventorconditionthattriggersthosepaymentsoccurs.
3. In-substance fixedpayments:Leasepaymentsthat,inform,contain
variabilitybut,insubstance,arefixedareincludedintheleaseliability.The
standardstatesthataleasepaymentisin-substancefixedifthereisno
genuinevariability(forexample,wherepaymentsmustbemadeiftheasset
isproventobecapableofoperating,orwherepaymentsmustbemadeonly
ifaneventoccursthathasnogenuinepossibilityofnotoccurring).
Furthermore,theexistenceofachoiceforthelesseewithinalease
agreementcanalsoresultinanin-substancefixedpayment.If,forexample,
thelesseehasthechoiceeithertoextendtheleasetermortopurchasethe
underlyingasset,thelowestcashoutflow(thatis,eitherthediscountedlease
paymentsthroughouttheextensionperiodorthediscountedpurchaseprice)
representsanin-substancefixedpayment.Inotherwords,theentitycannot
arguethatneithertheextensionoptionnorthepurchaseoptionwillbe
exercised.
Ifpaymentsareinitiallystructuredasvariableleasepaymentslinkedtotheuseofthe
underlyingassetbutthevariabilitywillberesolvedatalaterpointintime,thosepayments
becomein-substancefixedpaymentswhenthevariabilityisresolved.
IAS17doesnotcontainanyspecificguidanceonin-substancefixedpayments.However,
theBoardbelievesthatcurrentpracticealreadyfollowsthisapproach.
PwC observation:
Determiningwhetheracontingentpaymentisadisguisedorin-substancefixedlease
paymentwillrequireasignificantjudgement,particularlyasthestandardincludesonly
limitedguidanceonhowtointerprettheterm.
A residual value guarantee capturesanykindofguarantee madetothelessorthatthe
underlyingassetwillhaveaminimumvalueattheendoftheleaseterm.TheBoardindicated
itbelievedthataresidualvalueguaranteecouldbeinterpretedasanobligationtomake
paymentsbasedonvariabilityinthemarketpricefortheunderlyingassetandissimilarto
variableleasepaymentsbasedonanindexorarate.
PwC observation:
TheBasisforConclusionsnotesthatthemeasurementofaresidualvalueguaranteeshould
reflecttheentitysreasonableexpectationoftheamountthatwillbepaid.However,the
standardissilentaboutwhetherexpectationshouldbebasedonaprobability-weighted
approachorinterpretedasthemostlikelyoutcome.
Asidefromthis,itisworthnotingthattherequirementtorecogniseonlyamountsexpected
tobepayableisachangecomparedtotheguidanceinIAS17.UnderIAS17themaximum
amountguaranteedbythelesseehadtobeincludedintheleaseliability(incaseofa
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financelease).
Discountrate
Thelesseeusesasthediscountratethe interest rate implicit in the lease -thisistherateof
interestthatcausesthepresentvalueof(a)leasepaymentsand(b)theunguaranteed
residualvaluetoequalthesumof(i)thefairvalueoftheunderlyingassetand(ii)anyinitial
directcostsofthelessor.Determiningtheinterestrateimplicitintheleaseisakey
judgementthatcanhaveasignificantimpactonanentitysfinancialstatements.
Ifthisratecannotbereadilydetermined,thelesseeshouldinsteaduseitsincremental
borrowing rate.
Theincrementalborrowingrateisdefinedastherateofinterestthatalesseewouldhaveto
paytoborrow,overasimilartermandwithasimilarsecurity,thefundsnecessarytoobtain
anassetofasimilarvaluetothecostoftheright-of-useassetinasimilareconomic
environment.
Restorationcosts
Inmanycases,thelesseeisobligedtoreturntheunderlyingtothelessorinaspecific
conditionortorestorethesiteonwhichtheunderlyingassethasbeenlocated.Toreflectthis
obligation,thelesseerecognisesaprovisioninaccordancewithIAS37,Provisions,
ContingentLiabilitiesandContingentAssets.Theinitialcarryingamountoftheprovision,if
any,(thatis,theinitialestimateofcoststobeincurred)shouldbeincludedintheinitial
measurementoftheright-of-useasset.Thiscorrespondstotheaccountingforrestoration
costsinIAS16Property,PlantandEquipment.
Anysubsequentchangeinthemeasurementoftheprovision,duetoarevisedestimationof
expectedrestorationcosts,isaccountedforasanadjustmentoftheright-of-useassetas
requiredbyIFRIC1,ChangesinExistingDecommissioning,RestorationandSimilar
Liabilities.
Initialdirectcosts
Thestandarddefinesinitialdirectcostsasincrementalcoststhatwouldnothavebeen
incurredifaleasehadnotbeenobtained.Suchcostsincludecommissionsorsome
paymentsmadetoexistingtenantstoobtainthelease.Allinitialdirectcostsareincludedin
theinitialmeasurementoftheright-of-useasset.
Subsequentmeasurement
Theleaseliabilityismeasuredinsubsequentperiodsusingtheeffectiveinterestrate
method.Theright-of-useassetisdepreciatedinaccordancewiththerequirementsinIAS16,
Property,PlantandEquipmentwhichwillresultinadepreciationonastraight-linebasisor
anothersystematicbasisthatismorerepresentativeofthepatterninwhichtheentity
expectstoconsumetheright-of-useasset.Thelesseemustalsoapplytheimpairment
requirementsinIAS36,Impairmentofassets,totheright-of-useasset.
PwCobservation:
Thecombinationofastraight-linedepreciationoftheright-of-useassetandtheeffective
interestratemethodappliedtotheleaseliabilityresultsinadecreasingtotalleaseexpense
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throughouttheleaseterm.Thiseffectissometimesreferredtoasfrontloading.

Manystakeholdersbelievethatthefrontloadingeffectcreatesartificialvolatilityinthe
incomestatementthatdoesnotproperlyreflecttheeconomiccharacteristicsofalease
contract,particularlyiftheriskandrewardsincidentaltoownershipstaywiththelessor
(operatinglease).Othersbelievethatineconomicterms,aleasecontractistheacquisition
ofarighttouseanunderlyingassetwiththepurchasepricepaidininstalmentsandthat
frontloadingreflectsthis.
Itshouldbenoted,however,that,ifthelesseehasaportfolioofsimilarleaseassetsthatare
replacedonaregularbasis,theeffectshouldevenout.
Thecarryingamountoftheright-of-useassetandtheleaseliabilitywillnolongerbeequalin
subsequentperiods.Duetothefrontloadingeffectdescribedabove,thecarryingamountof
theright-of-useassetwill,ingeneral,bebelowthecarryingamountoftheleaseliability.
Subsequent measurement of lease liability and right-of-use asset

Reassessment
Asactualleasepaymentscandiffersignificantlyfromleasepaymentsincorporatedinthe
leaseliabilityoninitialrecognition,thestandardspecifieswhentheleaseliabilityistobe
reassessed.Itisimportanttonotethatareassessmentonlytakesplaceifthechangeincash
flowsisbasedoncontractualclausesthathavebeenpartofthecontractsinceinception.Any
changesthatresultfromrenegotiationsarediscussedunderModificationofaleasebelow.
Therequirementsforreassessmentaresummarisedbelow:
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Reassessment

Leasetermandassociatedextensionand
terminationpayments

When?Ifthereisachangeinthelease
term.

How?Reflecttherevisedpaymentsusinga
revised discount rate
(theinterestrateimplicitintheleaseforthe
remainderofleaseterm(ifthatratecanbe
readilydetermined);otherwise:incremental
borrowingrateatthedateofreassessment).

Exercisepriceofapurchaseoption

When?Ifasignificanteventorchangein
circumstancesoccursthatiswithinthe
controlofthelesseeandaffectswhetherthe
lesseeisreasonablycertaintoexercisean
option.
How?Reflecttherevisedpaymentsusinga
revised discount rate
(theinterestrateimplicitintheleaseforthe
remainderofleaseterm(ifthatratecanbe
readilydetermined);otherwise:incremental
borrowingrateatthedateofreassessment).

Amountsexpectedtobepayableundera
residualvalueguarantee

When?Ifthereisachangeintheamount
expectedtobepaid.
How?Includetherevisedresidualpayment
usingtheunchanged discount rate.

Variableleasepaymentdependentonan
indexorarate

When?Ifachangeintheindex/rateresults
inachangeincashflows.
How?Reflecttherevisedpaymentsbased
ontheindex/rateatthedatewhenthenew
cashflowstakeeffectfortheremainderofthe
termusingtheunchanged discount rate.
(Exception:thediscountratehastobe
updatedifthechangeresultsfromachange
infloatinginterestrates).

Example
Anentityoperatinginaninflationaryenvironmententeredintoaten-yearleasecontractwith
annualleasepaymentsofCU50,000,payableatthebeginningofeachyear.Everytwo
years,leasepaymentswillbeadjustedtoreflectchangesintheConsumerPriceIndexfor
thepreceding24months.Atthecommencementdate,theConsumerPriceIndexwas125.
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AtthebeginningofthethirdyearCPIis135.
When is the lease liability reassessed?
Oninitialrecognition,theleaseliabilityiscalculatedbasedonthecontractuallease
paymentsofCU50,000p.a.EveniftheConsumerPriceIndexmaychangetheentitywill
notremeasureitsleaseliabilitybeforethebeginningofthethirdyearbecauseuntilthenthe
changeinCPIdoesnotresultinachangeincashflows.Atthebeginningofthethirdyear,
however,theleaseliabilityhastobeadjustedbecausethecontractualcashflowshave
changed.
How is the lease liability reassessed?
Therevisedmeasurementoftheleaseliabilityisatthepresentvalueoftherevised
payments,basedontheConsumerPriceIndexatthedateofchangefortheremainderof
thetermusingtheunchangeddiscountrate(thatisCU50,000135/125=CU54,000).
Asidefromthis,theleaseliabilityshallberemeasuredifpaymentsinitiallystructuredas
variablepaymentsbecomein-substancefixedleasepaymentsbecausethevariabilityis
resolvedatsomepointafterthecommencementdate.
Anyremeasurementoftheleaseliabilityresultsinacorrespondingadjustmentoftheright-ofuseasset.Ifthecarryingamountoftheright-of-useassethasalreadybeenreducedtozero,
theremainingremeasurementisrecognisedinprofitorloss.
Reassessment of a lease liability

Theright-of-useassetisalsoremeasuredifthecarryingamountoftheprovisionfor
restorationcostshaschangedduetoarevisedestimateofexpectedcosts.Inthatinstance,
thechangeinthecarryingamountoftheright-of-useassetisequaltothechangeinthe
carryingamountoftheprovision.Ifadjustmentsresultinanadditiontheentityshallconsider
whetherthisisanindicationthatthenewcarryingamountoftheright-of-useassetmaynot
befullyrecoverable.
Modificationofalease
Therearemanydifferentreasonswhythepartiestoacontractmightdecidetorenegotiate
andmodifyanexistingleasecontractduringtheleaseterm.Oneobjectivemightbeto
extendorshortenthetermofanexistingcontract(withorwithoutchangingtheother
contractualterms);anotherreasonmightbetochangetheunderlyingasset(forexample,a
lesseealreadyleasestwofloorsofabuildingandthepartiesagreetoaddathirdone).Ifthe
lesseeisinfinancialdifficulties,thelessormightagreetoreduceleasepaymentsasa
concessiontosupportarestructuring.
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IFRS16definesamodificationasachange in the scopeofalease,ortheconsiderationfor

alease,thatwasnot part of the original terms and conditionsofthelease.Anychangethatis
triggeredbyaclausethatisalreadypartoftheoriginalleasecontract(includingchangesdue
toamarketrentreviewclauseortheexerciseofanextensionoption)isnotregardedasa
modification.
Theaccountingforthemodificationofaleasedependsonhowthecontractismodified.The
standarddistinguishesbetweenthreedifferentscenarios:
Modification of a lease

Anexampleforarenegotiationthatwouldresultinachangeofthescopeoftheleasewould
beaddinganadditionalfloortotheexistingleaseofabuildingfortheremainingleaseterm.
Theeffectivedateofthemodificationisthedateonwhichthepartiesagreetothe
modificationofthelease.
Incaseswherethemodificationisnotaccountedforasaseparateleasethelesseeshall,in
afirststep,allocatetheconsiderationinthemodifiedcontractbetweenseparateleaseand
non-leasecomponentsanddeterminetheleasetermofthemodifiedlease(thatis,reassess
thepreviousestimationoftheleaseterm).
Decreaseinscope
Iftheleaseismodifiedtoterminatetherightofuseofoneormoreunderlyingassets(for
example,alesseealreadyleasesthreefloorsofabuildingandthepartiesagreetoreduce
theleasebyonefloorfortheremainingcontractualterm)ortoshortenthecontractuallease
term,thelesseeremeasurestheleaseliabilityattheeffectivedateofthemodificationusinga
reviseddiscountrate.Thereviseddiscountrateistheinterestrateimplicitintheleaseforthe
remainderoftheleaseterm(or,ifnotreadilydeterminable,thelesseesincremental
borrowingrateatthattime).Furthermore,itdecreasesthecarryingamountoftheright-of-use
assettoreflectthepartialorfullterminationofthelease.Anygainorlossrelatingtothe
partialorfullterminationisrecognisedinprofitorloss.
Example
Alesseeentersintoaleasefor5,000squaremetresofofficespacefortenyears.Thelease
paymentsarefixedatCU50,000p.a.Afterfiveyears,thepartiesamendthecontractto
reducetheofficespaceby2,500squaremetres.Fromyear6onwards,theannuallease
paymentswillbeCU30,000.Atthebeginningofyear6,thelesseesincrementalborrowing
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rateis5%(assumethattherateimplicitintheleaseatthatdateisnotreadilydeterminable).
Thecarryingamountsoftheleaseliabilityandright-of-useassetbeforemodificationareas
follows:
Carryingamountoftheright-of-useassetbeforethemodificationCU184,002
CarryingamountoftheleaseliabilitybeforethemodificationCU210,618
ThevalueoftheleaseliabilityafterthemodificationisCU129,884
(=CU30,000/1.05+CU30,000/1.052+CU30,000/1.053+CU30,000/1.054+
CU30,000/1.055).
Inafirststep,theright-of-useassetandtheleaseliabilityarereducedby50%,becausethe
originalofficespaceisreducedby50%.Thedifferencebetweenthesetwoamountsis
recognisedasagaininprofitorloss:

Inasecondstep,theright-of-useassethastobeadjustedtoreflecttheupdateddiscount
rateandthechangeintheconsideration.Accordingly,thedifferencebetweentheremaining
leaseliability(CU105,309)andthemodifiedleaseliability(CU129,884)isrecognisedasan
adjustmenttotheright-of-useasset:

Increaseinscopewithacorrespondingincreaseintheleaseconsideration
Iftherehasbeenan increase in the scopeoftheleaseandtheconsideration for the lease
increase is commensurate with the stand-alone price for the increase in scope,the
modificationisaccountedforasaseparate lease.Tobecommensurate,theincreaseinthe
considerationdoesnotneedtobeequaltothestand-alonepriceoftheincreaseinscope.
Thestandardmakesclearthatanyappropriateadjustmentstoreflectthecircumstancesof
theparticularcontractarestillinlinewiththeassumptionthatachangeintheconsideration
iscommensurate.Soforexampleadiscountthatreflectsthecoststhelessorwouldhave
incurredwhenlookingforanewlessee(suchasmarketingcosts),maybeanappropriate
adjustment.
Itisimportanttonotethatanincreaseinthescopeoftheleaseonlyarisesifthepartiesadd
therighttouseoneormoreunderlyingassets.Theextensionofanexistingrightofuse(for
example,byachangeintheleaseterm)isnotanincreaseinscopeand,therefore,always
resultsinthecontinuationoftheexistinglease.However,itisstillaccountedforasa
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modificationofalease.
PwC observation:
Inpractice,itmightbedifficulttodecidewhetheranincreaseinconsiderationis
commensuratewithanincreaseinscopeofthelease.AccordingtoIFRS16,achangein
considerationwillstillbecommensuratewiththechangeinthescopeoftheleaseifit
includesappropriateadjustmentstoreflectthecircumstancesoftheparticularcontract.
However,theassessmentofwhetheranadjustmentisappropriatewillbehighlyjudgmental.
Increaseinscopewithoutacorrespondingincreaseintheleaseconsideration
Iftheconsiderationpaidfortheincreaseinthescopeoftheleasedoesnot increase by a
commensurate amount(thatis,thestand-alonepricefortheincreaseinscopeandany
appropriateadjustments),thelesseeremeasurestheleaseliabilityattheeffectivedateofthe
modificationusingareviseddiscountrateandmakesacorrespondingadjustmenttothe
right-of-useasset.Thereviseddiscountrateistheinterestrateimplicitintheleaseforthe
remainderoftheleaseterm(or,ifnotreadilydeterminable,thelesseesincremental
borrowingrateatthattime).
Example
Alesseeentersintoaleasefor5,000squaremetresofofficespacefortenyears.Thelease
paymentsarefixedatCU100,000p.a.Afterfiveyears,thepartiesamendthecontractforan
additional5,000squaremetres.TheannualleasepaymentsincreasetoCU150,000.The
marketrentfortheadditional5,000squaremetresisCU100,000.Atthebeginningofyear6,
thelesseesincrementalborrowingrateis7%(assumethattheinterestrateimplicitinthe
leaseatthatdateisnotreadilydeterminable).
Thepartiesdecidedtoaddanadditionalrightofuse(thatis,for5,000squaremetresof
officespace)andincreasethescopeofthelease.However,theadditionalleasepayments
arenotcommensuratewiththestand-alonepricefortheadditionalofficespaceandany
appropriateadjustments.Accordingly,themodificationisnotaccountedforasaseparate
leasebutasanadjustmenttotheoriginallease.Themodifiedleaseliabilityiscalculatedas
thepresentvalueofthefiveremainingleasepayments(CU150,000each)discountedusing
thelesseesincrementalborrowingrateattheeffectivedateoftheleasemodification(7%).
Thisresultsina(revised)leaseliabilityofCU615,030.Thedifferencebetweenthisamount
andthecarryingamountoftheleaseliabilityimmediatelybeforethemodificationofthe
leaseisrecognisedasanadjustmenttotheright-of-useasset.
If,however,theconsiderationfortheadditionalofficespaceisincreasedbyCU100,000p.a.
toCU200,000p.a.(thatis,byanamountequaltothestand-alonepricefortheadditional
rightofuse),themodificationisinsteadaccountedforasasecond,separateleasefor5,000
squaremetresofofficespaceoverafive-yearperiod.
Changeintheleaseconsideration
Ifthepartiestothecontractchangetheconsiderationoftheleasewithoutincreasingor
decreasingthescopeofthelease,thelesseeremeasurestheleaseliabilityusingtheinterest
rateimplicitintheleasefortheremainderoftheleaseterm(or,ifnotreadilydeterminable,
thelesseesincrementalborrowingrateattheeffectivedateofmodification)andmakesa
correspondingadjustmenttotheright-of-useasset.
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PwC observation:
IAS17didnotcontainguidanceonaccountingformodifications.Accordingly,althoughthe
guidanceinIFRS16requirestheapplicationofjudgement(forexample,inassessing
whethertheincreaseintheconsiderationfortheleaseiscommensuratewiththestandalonepricefortheadditionalrightofuseandanyappropriateadjustments),itisexpected
thatthiswillimproveconsistencyintheaccountingforleasemodifications.
Othermeasurementmodels
Asidefromthecostmodeldescribedabove,IFRS16containstwoalternativemeasurement
modelsthatcanimpactmeasurementforcertainright-of-useassets:
Aright-of-useassetmustbesubsequentlymeasuredinaccordance
withthefairvaluemodelinIAS 40iftheright-of-useassetmeetsthe
definitionofinvestmentpropertyandthelesseehaselectedthefair
valuemodelinIAS40.
Aright-of-useassetcanbesubsequentlymeasuredattherevalued
amountinaccordancewithIAS 16ifitrelatestoaclassofproperty,
plantandequipmentandthelesseeappliestherevaluationmodelto
allassetsinthatclass.
Presentationanddisclosures
Onthebalance sheet,theright-of-useassetcanbepresentedeitherseparatelyorinthe
samelineiteminwhichtheunderlyingassetwouldbepresented.Theleaseliabilitycanbe
presentedeitherasaseparatelineitemortogetherwithotherfinancialliabilities.Iftherightof-useassetandtheleaseliabilityarenotpresentedasseparatelineitems,anentity
disclosesinthenotesthecarryingamountofthoseitemsandthelineiteminwhichtheyare
included.
Inthestatement of profit or loss and other comprehensive income,thedepreciationcharge
oftheright-of-useassetispresentedinthesamelineitem/itemsinwhichsimilarexpenses
(suchasdepreciationofproperty,plantandequipment)areshown.Theinterestexpenseon
theleaseliabilityispresentedaspartoffinancecosts.However,theamountofinterest
expenseonleaseliabilitieshastobedisclosedinthenotes.
Inthestatement of cash flows,leasepaymentsareclassifiedconsistentlywithpaymentson
otherfinancialliabilities:
Thepartoftheleasepaymentthatrepresentscashpaymentsforthe
principalportionoftheleaseliabilityispresentedasacashflow
resultingfromfinancingactivities.
Thepartoftheleasepaymentthatrepresentsinterestportionofthe
leaseliabilityispresentedeitherasanoperatingcashfloworacash
flowresultingfromfinancingactivities(inaccordancewiththeentitys
accountingpolicyregardingthepresentationofinterestpayments).
Paymentsonshort-termleases,forleasesoflow-valueassetsand
variableleasepaymentsnotincludedinthemeasurementofthelease
liabilityarepresentedasanoperatingcashflow.
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Toprovideuserswithinformationthatallowsthemtoassesstheamount,timingand
uncertaintyofleasepayments,IFRS16includesenhanceddisclosurerequirements.The
mostimportantdisclosuresareshownintheAppendixtothispublication.
Lessoraccounting
IFRS16doesnotcontainsubstantialchangestolessoraccountingcomparedtoIAS17.The
lessorstillhastoclassifyleasesaseitherfinanceoroperating,dependingonwhether
substantiallyalloftheriskandrewardsincidentaltoownershipoftheunderlyingassethave
beentransferred.Forafinancelease,thelessorrecognisesareceivableatanamountequal
tothenetinvestmentintheleasewhichisthepresentvalueoftheaggregateoflease
paymentsreceivablebythelessorandanyunguaranteedresidualvalue.Ifthecontractis
classifiedasanoperatinglease,thelessorcontinuestopresenttheunderlyingassets.
Thereare,however,somechangestocurrentrequirementsworthmentioning.
Subleases
Structure of a sublease

UnderIAS17,asubleasewasclassifiedwithreferencetotheunderlyingasset.IFRS16now
requiresthelessortoevaluatethesubleasewithreferencetotheright-of-useasset.
Because,typically,thefairvalueoftheright-of-useassetisbelowthefairvalueofthe
underlyingasset,subleasesarenowmorelikelytobeclassifiedasfinanceleases.Aside
fromthis,sincethelessorofthesubleaseis,atthesametime,thelesseewithrespecttothe
headlease,itwillinanycasehavetorecogniseanassetonitsbalancesheetasaright-ofuseassetwithrespecttotheheadlease(ifthesubleaseisclassifiedasanoperatinglease)
oraleasereceivablewithrespecttothesublease(ifthesubleaseisclassifiedasafinance
lease).
Iftheheadleaseisashort-termlease,thesubleaseshallbeclassifiedasanoperatinglease.
Forasubleasethatresultsinafinancelease,theintermediatelessorisnotpermittedto
offsettheremainingleaseliability(fromtheheadlease)andtheleasereceivable(fromthe
sublease).Thesameistruefortheleaseincomeandleaseexpenserelatingtoheadlease
andsubleaseofthesameunderlyingasset.
Manufacturer/dealerlessor
Theguidanceregardingwhenandtowhatextentamanufacturer/dealerlessorshould
recogniseprofitorlossremainsalmostunchanged.AccordingtoIFRS16:
revenueisthefairvalueoftheunderlyingasset,or,iflower,the
presentvalueoftheleasepaymentsaccruingtothelessor,discounted
usingamarketrateofinterest;
costofsaleisthecost,orcarryingamountifdifferent,oftheunderlying
assetlessthepresentvalueoftheunguaranteedresidualvalue;and
sellingprofitorlossisthedifferencebetweenrevenueandthecostof
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salerecognisedinaccordancewithanentityspolicyforoutrightsales
towhichIFRS15applies.
Amanufacturerordealerlessorshallrecognisesellingprofitorlossonafinanceleaseatthe
commencementdate,regardlessofwhetherthelessortransferstheunderlyingassetas
describedinIFRS15.
Asidefromthis,thenewguidanceonidentifyingalease(asdescribedatthebeginningof
thisIndepth)alsoaffectsthelessor.
ModificationofaleaseIAS17issilentabouthowtoaccountforthemodificationofalease
forlessors.Toavoiddiversityinpractice,IFRS16includesspecificrules:
Modificationofanoperatinglease
Themodificationofanoperatingleaseshouldbeaccountedforasanewleasebythelessor.
Anyprepaidoraccruedleasepaymentsareconsideredtobepaymentsforthenewlease
(thatis,theywillbespreadoverthenewtermofthemodifiedlease).
Modificationofafinancelease
Alessoraccountsforthemodificationofafinanceleaseasaseparateleaseif:
themodificationincreasesthescopeofthelease;and
theconsiderationfortheleaseincreasesbyanamountcommensurate
withthestand-alonepricefortheincreaseinscopeandany
appropriateadjustmentstothatpricetoreflectthecircumstancesofthe
particularcontract.
Thismirrorstheguidanceforlessees.
Ifoneoftheabovecriteriaisnotmet,thelessorhastoassesswhetherthemodification
wouldhaveresultedineitheranoperatingorafinanceleaseifithadbeenineffectat
inceptionofthelease:
Iftheleasewouldhavebeenclassifiedasanoperatinglease,the
lessoraccountsforthemodificationasanewlease(operatinglease).
Thecarryingamountoftheunderlyingassetthathastoberecognised
ismeasuredasthenetinvestmentintheoriginalleaseimmediately
beforetheleasemodification.
Iftheleasewouldhavebeenclassifiedasafinancelease,thelessor
accountsfortheleasemodificationinaccordancewithIFRS9
Sale and leaseback transactions
Determiningwhetherthetransferisasale
Asidefromlesseeaccounting,theaccountingforsaleandleasebacktransactionsisoneof
themainareasinwhichthenewleasestandardchangesthecurrentguidance.The
accountingforsaleandleasebacktransactionsunderIAS 17mainlydependedonwhether
theleasebackwasclassifiedasafinanceoranoperatinglease.UnderIFRS 16the
determiningfactoriswhetherthetransferoftheassetqualifiesasasaleinaccordancewith
IFRS15.Anentityshallapplytherequirementsfordeterminingwhenaperformance
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obligationissatisfiedinIFRS15tomakethisassessment.
Structure of a sale and leaseback

Transferoftheassetisasale
Ifthebuyer-lessorhasobtainedcontroloftheunderlyingassetandthetransferisclassified
asasaleinaccordancewithIFRS15,theseller-lesseemeasuresaright-of-useassetarising
fromtheleasebackastheproportionofthepreviouscarryingamountoftheassetthatrelates
totherightofuseretained.Thegain(orloss)thattheseller-lesseerecognisesislimitedto
theproportionofthetotalgain(orloss)thatrelatestotherightstransferredtothebuyerlessor.
Iftheconsiderationforthesaleisnotequaltothefairvalueoftheasset,anyresulting
differencerepresentseitheraprepaymentofleasepayments(ifthepurchasepriceisbelow
marketterms)oranadditionalfinancing(ifthepurchasepriceisabovemarketterms).The
samelogicappliesiftheleasepaymentsarenotatmarketrates.Thebuyer-lessoraccounts
forthepurchaseinaccordancewithapplicablestandards(suchasIAS16iftheunderlying
assetisproperty,plantorequipment),andfortheleasebackinaccordancewithIFRS16.
Example (from the perspective of the seller-lessee)
Aseller-lesseesellsabuildingtoanunrelatedbuyer-lessorforcashofCU2,000,000.The
fairvalueofthebuildingatthattimeisCU1,800,000;thecarryingamountimmediately
beforethetransactionisCU1,000,000.
Atthesametime,theseller-lesseeentersintoacontractwiththebuyer-lessorfortheright
tousethebuildingfor18years,withannualpaymentsofCU120,000payableattheendof
eachyear.Theinterestrateimplicitintheleaseis4.5%,whichresultsinapresentvalueof
theannualpaymentsofCU1,459,200.
Thetransferoftheassettothebuyer-lessorhasbeenassessedasmeetingthedefinitionof
asaleunderIFRS15.
Financingtransaction
Sincetheconsideration(CU2,000,000)exceedsthefairvalue(CU1,800,000)ofthe
building,theagreementcontainsafinancingtransaction:

SaleandLeaseback
Theseller-lesseeinitiallyrecognisesaright-of-useassetastheproportionoftheprevious
carryingamount(CU1,000,000)thatreflectstherightofuseretained.Theproportionis
calculatedbydividingthepresentvalueoftheleasepayment(CU1,459,200)lessthepart
oftheleasepaymentsthatisjustarepaymentofthefinancinggrantedtotheseller-lessee
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(CU200,000)[=CU1,259,200]bythefairvalueoftheasset(CU1,800,000).

ThegainonsaleiscalculatedasaproportionofthetotalgainofCU800,000(purchase
pricelessfinancingelementlesscarryingamountofthebuilding),representingtheratio
betweentherightseffectivelytransferredtothebuyer(=Fairvalueofthebuildinglessthe
right-of-useassetobtainedbytheseller-lessee)andthefairvalueofthebuilding:

Thefinalaccountingentriesareasfollows:

Transferoftheassetisnotasale
Ifthetransferisnotasale(thatis,thebuyer-lessordoesnotobtaincontroloftheassetin
accordancewithIFRS15),theseller-lesseedoesnotderecognisethetransferredassetand
accountsforthecashreceivedasafinancialliability.Thebuyer-lessordoesnotrecognise
thetransferredassetand,instead,accountsforthecashpaidasafinancialasset
(receivable).
Transition
IFRS16iseffectiveforreportingperiodsbeginningonorafter1 January 2019(forentities
withintheEUthisissubjecttoEUendorsement).Earlierapplicationispermitted,butonlyin
conjunctionwithIFRS15.ThismeansthatanentityisnotallowedtoapplyIFRS16before
applyingIFRS15.Thedate of initial applicationisthebeginningoftheannualreporting
periodinwhichanentityfirstappliesIFRS16.
Definitionofalease
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Entitiesarenotrequiredtoreassessexistingleasecontractsbutcanelecttoapplythe
guidanceregardingthedefinitionofaleaseonlytocontractsenteredinto(orchanged)onor
afterthedateofinitialapplication(grandfathering).Thisappliestobothcontractsthatwere
notpreviouslyidentifiedascontainingaleaseapplyingIAS17/IFRIC4andthosethatwere
previouslyidentifiedasleasesinIAS17/IFRIC4.Ifanentitychoosesthisexpedientitshall
beappliedtoallofitscontracts.
Acknowledgingthepotentiallysignificantimpactofthenewleasestandardonalessees
financialstatements,IFRS16doesnotrequireafullretrospectiveapplicationinaccordance
withIAS8butallowsasimplified approach.Fullretrospectiveapplicationisoptional.
Simplifiedapproachlesseeaccounting
Ifalesseeelectsthesimplifiedapproach,itdoesnotrestatecomparativeinformation.
Instead,thecumulativeeffectofapplyingthestandardisrecognisedasanadjustmenttothe
openingbalanceofretainedearnings(orothercomponentofequity,asappropriate)atthe
dateofinitialapplication.
Balance sheet item

Measurement

Leases previously classified as operating leases

Leaseliability

Remainingleasepayments,discountedusinglessees
incrementalborrowingrateatthedateofinitial
application.

Right-of-useasset

Retrospectivecalculation,usingadiscountratebased
onlesseesincrementalborrowingrateatthedateof
initialapplication.
or
Amountofleaseliability(adjustedbytheamountofany
previouslyrecognisedprepaidoraccruedlease
paymentsrelatingtothatlease).
(Lessee can choose one of the alternatives on a leaseby-lease basis.)
Leases previously classified as finance leases

Leaseliability

Carryingamountoftheleaseliabilityimmediately
beforethedateofinitialapplication.

Right-of-useasset

Carryingamountoftheleaseassetimmediatelybefore
thedateofinitialapplication.

Alesseeisnotrequiredtoapplythenewlesseeaccountingmodeltoleasesforwhichthe
leasetermendswithin12monthsafterthedateofinitialapplication.
Alesseeisnotrequiredtoapplythenewlesseeaccountingmodeltoleasesforwhichthe
leasetermendswithin12monthsafterthedateofinitialapplication.
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Simplifiedapproachlessoraccounting
LessoraccountingstayslargelythesameasunderIAS17.Theonlysignificantchangeis
that,underIFRS16,subleasesmustbeclassifiedeitherasfinanceorasoperatingleases,
withreferencetotheright-of-useassetresultingfromtheheadlease.
Hence,thelessorisnotrequiredtomakeanyadjustmentsontransitionexceptforthe
reassessmentofoperatingsubleasesongoingatthedateofinitialapplication.Theanalysis
ismadeonthebasisoftheremainingcontractualtermsandconditionsoftheheadleaseand
thesublease.Ifoperatingsubleasesarenowclassifiedasfinanceleases,thelessor
accountsforthesubleaseasanewfinanceleaseenteredintoonthedateofinitial
application.
Simplifiedapproachsaleandleaseback
Saleandleasebacktransactionsenteredintobeforethedateofinitialapplicationarenot
reassessed.Inthecaseofafinanceleaseback,theseller-lesseecontinuestoamortiseany
gainonsaleoverthetermofthelease.Inthecaseofanoperatingleaseback,anydeferred
gainorlossduetooff-markettermsisaccountedforasanadjustmenttotheleasebackrightof-useasset.
Retrospectiveapplication
Ifanentitychoosesnottousethesimplifiedapproach,ithastoapplyIFRS16
retrospectivelytoeachpriorreportingperiodinaccordancewithIAS8,AccountingPolicies,
ChangesinAccountingEstimatesandErrors.
AppendixDisclosurerequirementsforlessees*
Right-of-use asset

Depreciationcharge(byclassofunderlyingasset)
Carryingamount(byclassofunderlyingasset)
Additions
Lease liabilities
Interestexpense
Maturityanalysisinaccordancewithparagraph39andB11ofIFRS7
Recognition and measurement exemptions

Expenserelatingtoshort-termleases
Expenserelatingtoleasesoflow-valueassets
Other disclosures relating to income statement
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Expenserelatingtovariableleasepaymentsnotincludedinleaseliabilities
Incomefromsubleasingright-of-useassets
Gainsorlossesarisingfromsaleandleasebacktransactions
Total cash outflow for leases
Future cash outflows from
Variableleasepayments
(includeskeyvariablesonwhichpaymentsdependandhowtheyaffectthem)
Extensionoptionsandterminationoptions
Residualvalueguarantees
Leasesnotyetcommencedtowhichtheentityiscommitted
Short-termleasecommitments
Qualitative disclosures
Natureofthelesseesleasingactivities
Restrictionsorcovenantsimposedbyleases
Saleandleasebacktransactions
*Thistablecoversthemajordisclosurerequirements;dependingontheparticularfactsand
circumstances,additionaldisclosuresmightbenecessary.
Disclosurerequirementsforlessors*
Finance lease

Sellingprofitorloss
Financeincomeonthenetinvestmentinthelease
Leaseincomerelatingtovariableleasepaymentsnotincludedinthemeasurementofthe
leasereceivable
Qualitativeandquantitativeexplanationofthesignificantchangesinthecarryingamountof
thenetinvestmentinthelease

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Maturityanalysisofleasereceivableforaminimumofeachofthefirstfiveyearsplusatotal
amountfortheremainingyears;reconciliationtothenetinvestmentinthelease
Operating lease
Leaseincome,separatelydisclosingincomerelatingtovariableleasepaymentsthatdonot
dependonanindexorrate
Maturityanalysisofleasepaymentsforaminimumofeachofthefirstfiveyearsplusatotal
amountfortheremainingyears
DisclosurerequirementsinIAS36,IAS38,IAS40andIAS41forassetssubjectto
operatingleases
DisclosurerequirementsinIAS16foritemsofproperty,plantandequipmentsubjecttoan
operatinglease
Qualitative disclosures for all leases
Natureofthelessorsleasingactivities
Managementoftheriskassociatedwithanyrightsthatthelessorretainsinunderlying
assets
Relevant requirements of IFRS 7
*Thistablecoversthemajordisclosurerequirements;dependingontheparticularfactsand
circumstances,additionaldisclosuresmightbenecessary.
ComparisonofIFRS16andIAS17/IFRIC4overviewofthemaindifferences

Issue
Definition of a lease

IFRS 16
Righttouseanasset,thatis:
identified
asset,and
rightto
controlthe
use

Separating lease
components

Separatecomponent,if:
separate
benefitfor

IAS 17/IFRIC 4
IngeneralsimilartoIFRS
16,butdifferentdetailed
guidance

Nospecificguidance
(exceptforleaseofland
andbuilding)

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lessee,and
nothighly
dependent
on,orhighly
interrelated
with,other
component
Combination of contracts Combinecontractsifcertain
criteriaaremet

Nocomprehensive
guidance
(seeSIC27)

Exemptions

Short-termlease(lessee)

Leaseterm12months
(providedthereisnopurchase
option)

No

Low-valueassets(lessee)

ValueUSD5,000

No

Lessee accounting

Balancesheet

Right-of-useassetandlease
liabilityforalmosteverylease

Operatinglease:
Noassetorliability
recognised(onlyaccruals
orprepayments)
Financelease:Leased
assetandleaseliability

Variableleasepayments

Partoftheleaseliabilityifthey
dependonindex/rate

Notpartoftheleaseliability

Incomestatement

Singleapproach

Operatinglease:Lease
paymentsonastraight-line
basis
Financelease:
Leasedasset:depreciation
Leaseliability:effective
interestratemethod
Variableleasepayments
notincludedinleaseliability

Right-of-use
asset:
depreciation
Lease
liability:
effective
interestrate
method
Variable
lease
payments
notincluded
inlease
liability(that
is,not
depending
on

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index/rate)
Cashflowstatement

Partofleasepaymentthat
representsprincipalportion:
Cashflowresultingfromfinancing
activities
Partofleasepaymentthat
representsinterestportion:
operatingcashfloworcashflow
resultingfromfinancingactivities
(dependingonentityspolicy)

Operatinglease:operating
cashflow
Financelease:Similarto
IFRS16

Paymentsforshort-termleases,
forleaseoflow-valueassetsand
variableleasepaymentsnot
includedinleaseliability:
operatingcashflow
Lessor accounting
Balancesheet

Classificationasfinanceoroperating
lease
Financelease:derecognitionofthe
underlyingasset,recognitionofalease
receivableatamountequaltothenet
investmentinthelease
Operatinglease:continuetorecognise
theunderlyingasset

Incomestatement

Financelease:interestmeasuredusingtheeffectiveinterest
ratemethod
Operatinglease:leasepaymentsonstraight-linebasis

Subleases

Classificationofsubleaserefers
toright-of-useasset

Modifications

Adjustment
ofexisting
lease,or
accounted
forasa
separate
lease,

Classificationofsublease
referstoleasedasset
Nospecificguidance

dependingonkindofmodification
Sale and leaseback

Distinctionbasedonwhether
transferissale

Distinctionbasedon
classificationofleaseback

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ComparisonofIFRS16andrevised*USGAAP-overviewofthemaindifferences
(*ThepublicationtakesintoaccountdecisionsoftheFASBasat31December2015).
IFRS16
Issue
Definition of a lease Righttouseanasset,thatis:

US-GAAP
SameasIFRS16

identified
asset,and
rightto
controlthe
use
Exemptions

Short-termlease
(lessee)

Yes
(Leaseterm12months;no
purchaseoption)

Yes

Low-valueassets
(lessee)

Yes
(ValueUSD5,000)

No

Lessee accounting

Balancesheet

Right-of-useassetandleaseliabilityforalmosteverylease

Incomestatement

Single approach
Right-of-use
asset:
depreciation
Lease
liability:
effective
interestrate
method
Variable
lease
payments
notincluded
inlease
liability(that
is,not
depending
on
index/rate)

Dual approach
Dependingonthecharacteristics
ofthelease:
Similarto
IFRS16or
Recognising
asingle
lease
expense
typicallyon
astraightlinebasis
overthe
leaseterm

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Lessor accounting

Previousguidanceissubstantiallycarriedforward

Subleases

Classificationofsubleaserefers
toright-of-useasset

Classificationofsubleaserefersto
underlyingasset

Sale and leaseback Gainorlossonsaleislimitedto

theamountthatrelatestothe
rightstransferred

Gainorlossonsaleisaccounted
forconsistentlywithguidancethat
wouldapplytoanyothersaleof
assets

Reassessment of
variable lease
payments

Ingeneralnoreassessment
(however,remeasurementis
requirediftheleaseisreassessed
foranotherreason)

Requiredforvariablelease
paymentsthatdependon
index/rate(whenthereisa
changeincashflows)

Impactonlesseeskeyperformanceindicators
KPI

Calculation

EffectofIFRS16

Gearing(debttoequityratio)

Liabilities/equity

Increase
(becausemostleases
previouslyaccountedforas
operatingleaseswillnowbe
onbalancesheet)

EBIT

Earningsbeforeinterestand
tax

Increase
(becausethedepreciation
addedislowerthanthelease
expenseeliminatedfrom
operatingincome)

EBITDA

Earningsbeforeinterest,tax
andamortisation

Increase
(becauseleaseexpenseis
eliminatedfromEBITDA)

Operatingcashflow

Increase
(becausesomeorallofthe
operatingleasepaymentsare
movedtofinancing)

Assetturnover

Sales/totalassets

Decreasebecauselease
assetsarepartoftotalassets

ROCE

EBIT/Equityplusfinancial
liabilities

Dependsonthe
characteristicsofthelease
portfolio(EBITaswellas
financialliabilitieswill

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increase)
Leverage

Netdebt/EBITDA

Dependsonthe
characteristicsofthelease
portfolio(EBITDAaswellas
netdebtwillincrease)

Authoredby:

JessicaTaurae
Phone:+442072125700
Email:jessica.taurae@uk.pwc.com

DerekCarmichael
Phone:+442078046475
Email:derek.j.carmichael@uk.pwc.com

HolgerMeurer
Phone:+442072123073
Email:holger.m.meurer@uk.pwc.com

PricewaterhouseCoopers LLP

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