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CareerDeal – IFRS
training
IAS 17- Leases
Agenda/Contents

• Objective, scope and definition


• Classification
• Leases in the financial statements of lessees
• Leases in the financial statements of lessors
• Disclosure
• Worked example of a finance lease

IAS 17 - Leases July 2017


PwC Slide 2
Objective, scope and definition

IAS 17 - Leases July 2017


PwC Slide 3
Objective and scope

• To prescribe, for lessees and lessors, the appropriate accounting


policies and disclosure to apply in relation to leases
This Standard shall be applied in accounting for all leases other than:
• Leases to explore for or use minerals, oil, natural gas and similar
non-regenerative resources
• Licensing agreements for such items as motion picture films, video
recordings, plays, manuscripts, patents and copyrights

IAS 17 - Leases July 2017


PwC Slide 4
Objective and scope - continued

However, this Standard shall not be applied as the basis of


measurement for:
• Investment property and biological assets held by lessees (IAS 40 &
IAS 41)
• Investment property and biological assets provided by lessors under
operating leases (IAS 40 & IAS 41)

IAS 17 - Leases July 2017


PwC Slide 5
Definitions

• Lease - an agreement whereby the lessor conveys to the lessee in


return for a payment or series of payments the right to use an asset
for an agreed period of time
• Lease term - the non-cancellable period for which the lessee has
contracted to lease the asset (together with any further terms for
which the lessee has the option to continue to lease the asset, with or
without further payment, when at the inception of the lease it is
reasonably certain that the lessee will exercise the option)
• Commencement of the lease term - the date from which the lessee is
entitled to exercise its right to use the leased asset. It is the date of
initial recognition of the lease (i.e. the recognition of the assets,
liabilities, income or expenses resulting from the lease, as
appropriate)

IAS 17 - Leases July 2017


PwC Slide 6
Definitions - continued

• Non-cancellable lease - a lease that is cancellable only:


- upon the occurrence of some remote contingency
- with the permission of the lessor
- if the lessee enters into a new lease for the same or an equivalent
asset with the same lessor, or
- upon payment by the lessee of such an additional amount that, at
inception of the lease, continuation of the lease is reasonably
certain.

IAS 17 - Leases July 2017


PwC Slide 7
Definitions - continued

• Inception of the lease - the earlier of the date of the lease agreement
and the date of commitment by the parties to the principal provisions
of the lease. As at this date:
- a lease is classified as either an operating or a finance lease
- in the case of a finance lease, the amounts to be recognised at the
commencement of the lease term are determined
• Finance lease - a lease that transfers substantially all the risks and
rewards incidental to ownership of an asset. Title may or may not
eventually be transferred
• Operating lease - a lease other than a finance lease

IAS 17 - Leases July 2017


PwC Slide 8
Definitions - continued

• Fair value - the amount for which an asset could be exchanged, or a


liability settled, between knowledgeable, willing parties in an arm’s
length transaction
• Economic life - either:
- the period over which an asset is expected to be economically
usable by one or more users; or
- the number of production or similar units expected to be obtained
from the asset by one or more users
• Useful life - the estimated remaining period, from the
commencement of the lease term, without limitation by the lease
term, over which the economic benefits embodied in the asset are
expected to be consumed by the entity

IAS 17 - Leases July 2017


PwC Slide 9
Definitions - continued

• Minimum lease payments - the payments over the lease term that the
lessee is or can be required to make, excluding contingent rent, costs
for services and taxes to be paid by and reimbursed to the lessor,
together with:
- for a lessee, any amounts guaranteed by the lessee or by a party
related to the lessee
- for a lessor, any residual value guaranteed to the lessor by:
◦ the lessee;
◦ a party related to the lessee; or
◦ a third party unrelated to the lessor that is financially capable of
discharging the obligations under the guarantee

IAS 17 - Leases July 2017


PwC Slide 10
Definitions - continued

• Guaranteed residual value -


- for a lessee, that part of the residual value that is guaranteed by the
lessee or by a party related to the lessee (the amount of the
guarantee being the maximum amount that could, in any event,
become payable); and
- for a lessor, that part of the residual value that is guaranteed by the
lessee or by a third party unrelated to the lessor that is financially
capable of discharging the obligations under the guarantee
• Unguaranteed residual value - that portion of the residual value of
the leased asset, the realisation of which by the lessor is not assured
or is guaranteed solely by a party related to the lessor

IAS 17 - Leases July 2017


PwC Slide 11
Definitions - continued

• Initial direct costs - incremental costs that are directly attributable to


negotiating and arranging a lease except costs incurred by
manufacturer or dealer lessors
• Gross investment in the lease - the aggregate of:
- the minimum lease payments receivable by the lessor under a
finance lease, and
- any unguaranteed residual value accruing to the lessor
• Net investment in the lease - the gross investment in the lease
discounted at the interest rate implicit in the lease

IAS 17 - Leases July 2017


PwC Slide 12
Definitions - continued

• Interest rate implicit in the lease - the discount rate that, at the
inception of the lease, causes the aggregate present value of:
- the minimum lease payments, and
- the unguaranteed residual value to be equal to the sum of:
◦ the fair value of the leased asset
◦ any initial direct costs of the lessor
• Unearned finance income - the difference between:
- the gross investment in the lease, and
- the net investment in the lease.

IAS 17 - Leases July 2017


PwC Slide 13
Definitions - continued

• Lessee’s incremental borrowing rate of interest - the rate of interest


the lessee would have to pay on a similar lease or, if that is not
determinable, the rate at the inception of the lease which the lessee
would incur to borrow over a similar term the funds necessary to
purchase the asset (at a similar security)
• Contingent rent - that portion of the lease payments that is not fixed
in amount based on the future amount of a factor that changes other
than with the passage of time (eg. percentage of future sales, amount
of future use, future price indices, future market rates of interest).

IAS 17 - Leases July 2017


PwC Slide 14
Classification

IAS 17 - Leases July 2017


PwC Slide 15
Classification

• A lease is classified as:


- a finance lease if it transfers substantially all the risks and rewards
incidental to ownership, or
- an operating lease if it does not transfer substantially all the risks
and rewards incidental to ownership
• Whether a lease is a finance lease or an operating lease depends on
the substance of the transaction rather than the form of the contract

IAS 17 - Leases July 2017


PwC Slide 16
Classification - continued

• Examples of situations that individually or in combination would


normally lead to a lease being classified as a finance lease are:
- the lease transfers ownership of the asset to the lessee by the end
of the lease term;
- the lessee has the option to purchase the asset at a price that is
expected to be sufficiently lower than the FV when it becomes
exercisable and at inception will be reasonably certain it will be
taken
- the lease term is for the major part of the economic life of the asset
even if title is not transferred

IAS 17 - Leases July 2017


PwC Slide 17
Classification - continued

• Examples of situations that individually or in combination would


normally lead to a lease being classified as a finance lease are -
continued:
- at inception of the lease the present value of the minimum lease
payments amounts to at least substantially all of the FV of the asset
- the leased assets are of such a specialised nature that only the
lessee can use them without major modifications

IAS 17 - Leases July 2017


PwC Slide 18
Classification - continued

• Indicators of situations that individually or in combination could also


lead to a lease being classified as a finance lease are:
- if the lessee can cancel the lease, the lessor’s losses associated with
the cancellation are borne by the lessee
- gains or losses from the fluctuation in the FV of the residual accrue
to the lessee (for example, in the form of a rent rebate equalling
most of the sales proceeds at the end of the lease)
- the lessee has the ability to continue the lease for a secondary
period at a rent that is substantially lower than market rent.

IAS 17 - Leases July 2017


PwC Slide 19
Finance lease vs. Operating lease

Finance Lease Operating Lease


The lease transfers ownership of The lease does NOT transfer
the asset to the lessee by the end of ownership of the asset to the
the lease term lessee by the end of the lease term

Option to purchase the asset at a No option to purchase the asset, or


price expected to be exercised option to purchase not expected to
be exercised
Leased asset’s nature only suitable There can be several users of the
for lessee asset

IAS 17 - Leases July 2017


PwC Slide 20
Finance lease vs. Operating lease - continued

Finance Lease Operating Lease


The lease term is for the major The lease term is NOT for the
part of the economic life of the major part of the economic life of
asset even if title is not transferred the asset even if title is not
transferred
Present value of MLPs equals to Present value of MLPs differs
substantially all of the FV of the substantially from the FV of the
asset asset

If the lessee can cancel the lease, If the lessee can cancel the lease,
the lessor’s losses associated with the lessor’s losses associated with
the cancellation are borne by the the cancellation are borne by the
lessee lessor

IAS 17 - Leases July 2017


PwC Slide 21
Finance lease vs. Operating lease - continued

Finance Lease Operating Lease


The lessee has the ability to The lessee does NOT have the
continue the lease for a secondary ability to continue the lease for a
period at a rent that is secondary period at a rent that is
substantially lower than market substantially lower than market
rent rent

Gains or losses from the Gains or losses from the


fluctuation in the FV of the fluctuation in the FV of the
residual accrue to the lessee residual accrue to the lessor

IAS 17 - Leases July 2017


PwC Slide 22
Leases in the financial statements of
lessees

IAS 17 - Leases July 2017


PwC Slide 23
Finance leases
Initial recognition

At the commencement of the lease term:


• lessees shall recognise finance leases as assets and liabilities in their
statements of financial position at:
- amounts equal to the fair value of the leased property or,
- if lower, the present value of the minimum lease payments, each
determined at the inception of the lease.
• The discount rate to be used in calculating the present value of the
minimum lease payments is:
- the interest rate implicit in the lease, if this is practicable to
determine;
- if not, the lessee’s incremental borrowing rate shall be used. Any
initial direct costs of the lessee are added to the amount recognised
as an asset.
IAS 17 - Leases July 2017
PwC Slide 24
Finance leases
Subsequent measurement

• Minimum lease payments shall be apportioned between the finance


charge and the reduction of the outstanding liability
• The finance charge shall be allocated to each period during the lease
term so as to produce a constant periodic rate of interest on the
remaining balance of the liability
• Contingent rents shall be charged as expenses in the periods in which
they are incurred

IAS 17 - Leases July 2017


PwC Slide 25
Finance leases
Subsequent measurement - continued

• A finance lease gives rise to depreciation expense for depreciable


assets as well as finance expense for each accounting period
• The depreciation policy for depreciable leased assets shall be
consistent with that for depreciable assets that are owned, and the
depreciation recognised shall be calculated in accordance with IAS 16
and IAS 38
• If there is no reasonable certainty that the lessee will obtain
ownership by the end of the lease term, the asset shall be fully
depreciated over the shorter of the lease term and its useful life.

IAS 17 - Leases July 2017


PwC Slide 26
Operating leases

• Lease payments under an operating lease shall be recognised as an


expense on a straight-line basis over the lease term unless another
systematic basis is more representative of the time pattern of the
user’s benefit

IAS 17 - Leases July 2017


PwC Slide 27
Leases in the financial statements of
lessors

IAS 17 - Leases July 2017


PwC Slide 28
Finance leases
Initial recognition

• Lessors shall recognise assets held under a finance lease in their


statements of financial position and present them as a receivable at
an amount equal to the net investment in the lease

IAS 17 - Leases July 2017


PwC Slide 29
Finance leases
Subsequent measurement

• The recognition of finance income shall be based on a pattern


reflecting a constant periodic rate of return on the lessor’s net
investment in the finance lease

IAS 17 - Leases July 2017


PwC Slide 30
Operating leases

• Lessors shall present assets subject to operating leases in their


statements of financial position according to the nature of the asset
• Lease income from operating leases shall be recognised in income on
a straight-line basis over the lease term unless another systematic
basis is more representative of the time pattern in which use benefit
derived from the leased asset is diminished
• Initial direct costs incurred by lessors in negotiating and arranging
an operating lease shall be added to the carrying amount of the
leased asset and recognised as an expense over the lease term on the
same basis as the lease income
• The depreciation policy for depreciable leased assets shall be
consistent with the lessor’s normal depreciation policy for similar
assets, and depreciation shall be calculated in accordance with IAS 16
and IAS 38
IAS 17 - Leases July 2017
PwC Slide 31
Sale and leaseback transactions

• If a sale and leaseback transaction results in a finance lease, any


excess of sales proceeds over the carrying amount shall not be
immediately recognised as income by a seller-lessee. Instead, it shall
be deferred and amortised over the lease term.

IAS 17 - Leases July 2017


PwC Slide 32
Sale and leaseback transactions

• If a sale and leaseback transaction results in an operating lease, and


it is clear that the transaction is established at fair value, any profit or
loss shall be recognised immediately:
- If the sale price is below fair value, any profit or loss shall be
recognised immediately except that, if the loss is compensated for
by future lease payments at below market price, it shall be deferred
and amortised in proportion to the lease payments over the period
for which the asset is expected to be used
- If the sale price is above fair value, the excess over fair value shall
be deferred and amortised over the period for which the asset is
expected to be used

IAS 17 - Leases July 2017


PwC Slide 33
Sale and leaseback transactions - continued

• For operating leases, if the fair value at the time of a sale and
leaseback transaction is less than the carrying amount of the asset, a
loss equal to the amount of the difference between the carrying
amount and fair value shall be recognised immediately.

IAS 17 - Leases July 2017


PwC Slide 34
Lease accounting
- impact on financial statements

Lease type St. of financial position St. of Comp. Income


Finance - Asset & Lease obligation Finance charge
Lessee Accumulated depreciation Depreciation expenses
Reduction in lease obligation
Finance - Receivable Finance income
Lessor Reduction in receivable Profit/loss on sale
Operating - Off balance sheet Rental expense
Lessee

Operating - Asset Rental income


Lessor Accumulated depreciation Depreciation expense

IAS 17 - Leases July 2017


PwC Slide 35
Disclosure

IAS 17 - Leases July 2017


PwC Slide 36
Disclosures for lessees
Finance vs. Operating leases

Finance Operating
For each class of asset, the net carrying P O
amount at the end of the reporting period
A reconciliation between the total of future P O
minimum lease payments at the end of the
reporting period, and their present value
The total of future minimum lease payments P P
for each of the following periods:
for non-
• not later than one year cancellable
• later than one year but not later than five leases
years
• later than five years
IAS 17 - Leases July 2017
PwC Slide 37
Disclosures for lessees
Finance vs. Operating leases - continued

Finance Operating
Contingent rents recognised as an expense in P O
the period

The total of future minimum sublease P P


payments expected to be received under non-
cancellable subleases at the end of the
reporting period
Lease and sublease payments recognised as an O P
expense in the period, with separate amounts
for minimum lease payments, contingent
rents, and sublease payments

IAS 17 - Leases July 2017


PwC Slide 38
Disclosures for lessees
Finance vs. Operating leases - continued

Finance Operating
A general description of the lessee’s significant P P
leasing arrangements including, but not
limited to, the following:
• the basis on which contingent rent payable
is determined;
• the existence and terms of renewal or
purchase options and escalation clauses;
and
• restrictions imposed by lease arrangements,
such as those concerning dividends,
additional debt and further leasing

IAS 17 - Leases July 2017


PwC Slide 39
Disclosures for lessors
Finance vs. Operating leases

Finance Operating
A reconciliation between the gross investment P O
in the lease at the end of the reporting period,
and the present value of minimum lease
payments receivable at the end of the
reporting period
The gross investment in the lease and the P P
present value of minimum lease payments
receivable at the end of the reporting period, for non-
for each of the following periods: cancellable
leases
- not later than one year;
- later than one year and not later than five
years;
- later than five years
IAS 17 - Leases July 2017
PwC Slide 40
Disclosures for lessors
Finance vs. Operating leases - continued

Finance Operating
Unearned finance income P O
The unguaranteed residual values accruing to P O
the benefit of the lessor

The accumulated allowance for uncollectible P O


minimum lease payments receivable

Contingent rents recognised as income in the P P


period
A general description of the lessor’s material P P
leasing arrangements

IAS 17 - Leases July 2017


PwC Slide 41
Disclosures
Accounting policies (lessee under operating and fin. lease)

IAS 17 - Leases July 2017


PwC Slide 42
Disclosures
Accounting policies (lessor under operating and fin. lease)

IAS 17 - Leases July 2017


PwC Slide 43
Disclosures
PPE(lessee under fin. lease, and lessor under op. lease)

IAS 17 - Leases July 2017


PwC Slide 44
Disclosures
Borrowings (lessee under finance lease)

IAS 17 - Leases July 2017


PwC Slide 45
Disclosures
Receivables (lessor under finance lease)

IAS 17 - Leases July 2017


PwC Slide 46
Disclosures
Lease commitments (lessee under operating lease)

IAS 17 - Leases July 2017


PwC Slide 47
Disclosures
Lease commitments (lessor under operating lease)

IAS 17 - Leases July 2017


PwC Slide 48
Disclosures
Lease commitments (lessee under finance lease)

IAS 17 - Leases July 2017


PwC Slide 49
Worked example of a finance lease

IAS 17 - Leases July 2017


PwC Slide 50
Example

Cost of leased asset €100,000


Lease term 5 years

Rental six monthly in advance €12,000

Expected residual value at the end of the lease term €10,000

Lessee’s interest in residual proceeds 97%

Economic life 8 years

Inception and commencement date 1 January 2004

Lessee’s financial year end 31 December

IAS 17 - Leases July 2017


PwC Slide 51
Example - continued

• Initial direct costs are ignored for the purpose of this example
• In this example, the lease is a finance lease because the lessor has
only an insignificant interest in the residual value (3%)

IAS 17 - Leases July 2017


PwC Slide 52
Example - continued

Rental
Present
value
Present
value at • The amounts the lessor expects
payment

factor 4.3535%
€ to receive and retain comprise
Lessee's minimum lease payments:
January 2004 12,000 1 12,000
the rentals, plus 3% of the
June 2004
January 2005
12,000
12,000
0.958281
0.918303
11,499
11,020
residual at the end of the lease
June 2005
January 2006
12,000
12,000
0.879992
0.84328
10,560
10,119
term. These amounts can be
June 2006 12,000 0.8081 9,697 used to determine the interest
January 2007 12,000 0.774387 9,293
June 2007 12,000 0.74208 8,905 rate implicit in the lease and the
January 2008 12,000 0.711122 8,533
June 2008 12,000 0.681454 8,177 present value of the lessee’s
minimum lease payments:
99,804
Lessor's residual
December 2008 (€10,000 − €9,700) 300 0.653025 196
Fair value 100,000

IAS 17 - Leases July 2017


PwC Slide 53
Example - continued

• The interest rate that amortises these amounts is 4.3535%,


compounded on a six-monthly basis.
• The amount that is capitalised as both an asset and an obligation at
the commencement of the lease is, therefore, €99,804.

IAS 17 - Leases July 2017


PwC Slide 54
Example - continued

• The finance charge can now be allocated to each accounting period.


In this example the actuarial method has been used:
Finance
Obligation at Obligation charge at Obligation at
Period commencing start of period Rental paid during period 4.3535% end of period
€ € € € €
January 2004 99,804 (12,000) 87,804 3,823 91,627
June 2004 91,627 (12,000) 79,627 3,467 83,094
January 2005 83,094 (12,000) 71,094 3,095 74,189
June 2005 74,189 (12,000) 62,189 2,707 64,896
January 2006 64,896 (12,000) 52,896 2,303 55,199
June 2006 55,199 (12,000) 43,199 1,881 45,080
January 2007 45,080 (12,000) 33,080 1,440 34,520
June 2007 34,520 (12,000) 22,520 980 23,500
January 2008 23,500 (12,000) 11,500 500 12,000
June 2008 12,000 (12,000) (0) - (0)
(120,000) 20,196

IAS 17 - Leases July 2017


PwC Slide 55
Example - continued

• The finance charges for each year and, by deduction, the capital
repayment element of the rental can now be summarised:
Finance
Rental charges
€ €
2004 24,000 7,290
2005 24,000 5,802
2006 24,000 4,184
2007 24,000 2,420
2008 24,000 500
120,000 20,196

IAS 17 - Leases July 2017


PwC Slide 56
Example - continued

• In this example, the lessee’s financial year end coincides with the end
of a rental period and so no interest accrual is necessary.
• Depreciation can now be calculated as follows:
Lease term = 5 years
Economic life = 8 years
• Lessee’s interest in the proceeds of the residual = €9,700
• Therefore, the depreciation charge on a straight line basis is:
(€99,804 - €9,700) / 5 years = €18,021 per annum

IAS 17 - Leases July 2017


PwC Slide 57
Example - continued

• The effects on the lessee’s statement of financial position and


statement of comprehensive income for each year can now be
summarised as:
• Start of lease - 1 Jan 2004

Dr PPE Asset €99,804


Cr Lease obligation €99,804
Being initial recognition of the asset held under finance lease, and
the related lease obligation

IAS 17 - Leases July 2017


PwC Slide 58
Example - continued

• 31 Dec 2004

Dr Depreciation charge €18,021


Cr PPE Asset €18,021
Being depreciation charge for the year

Dr Lease obligation €16,710


Dr Finance charge €7,290
Cr Cash €24,000
Being allocation of rental payment between the reduction of lease
obligation and finance charges
IAS 17 - Leases July 2017
PwC Slide 59
Example - continued

• 31 Dec 2005

Dr Depreciation charge €18,021


Cr PPE Asset €18,021
Being depreciation charge for the year

Dr Lease obligation €18,198


Dr Finance charge €5,802
Cr Cash €24,000
Being allocation of rental payment between the reduction of lease
obligation and finance charges
IAS 17 - Leases July 2017
PwC Slide 60
Example - continued

• 31 Dec 2006

Dr Depreciation charge € 18,021


Cr PPE Asset € 18,021
Being depreciation charge for the year

Dr Lease obligation € 19,816


Dr Finance charge € 4,184
Cr Cash €24,000
Being allocation of rental payment between the reduction of lease
obligation and finance charges
IAS 17 - Leases July 2017
PwC Slide 61
Example - continued

• 31 Dec 2007

Dr Depreciation charge € 18,021


Cr PPE Asset € 18,021
Being depreciation charge for the year

Dr Lease obligation € 21,580


Dr Finance charge € 2,420
Cr Cash € 24,000
Being allocation of rental payment between the reduction of lease
obligation and finance charges
IAS 17 - Leases July 2017
PwC Slide 62
Example - continued

• 31 Dec 2008

Dr Depreciation charge € 18,020


Cr PPE Asset € 18,020
Being depreciation charge for the year

Dr Lease obligation € 23,500


Dr Finance charge € 500
Cr Cash € 24,000
Being allocation of rental payment between the reduction of lease
obligation and finance charges
IAS 17 - Leases July 2017
PwC Slide 63
Example - continued

• 31 Dec 2008 - continued

Dr Cash € 9,700
Cr PPE Asset € 9,700
Being net proceeds received upon disposal of the PPE asset (97% X
€10,000)

IAS 17 - Leases July 2017


PwC Slide 64
Example - continued

• The above example illustrates that, in addition to its impact on the


lessee’s statement of financial position, lease capitalisation may also
have a significant impact on the lessee’s statement of comprehensive
income
• For example, the lease rentals are €24,000 per annum, but the
combined charge for depreciation and interest varies from €25,311 to
€18,520 p.a.:
Obligations
under finance Net book value Finance
leases of leased assets Depreciation charges Total charges
€ € € € €
Start 99,804 99,804
2004 83,094 81,783 18,021 7,290 25,311
2005 64,896 63,762 18,021 5,802 23,823
2006 45,080 45,741 18,021 4,184 22,205
2007 23,500 27,720 18,021 2,420 20,441
2008 9,700 18,020 500 18,520
90,104 20,196 110,300

IAS 17 - Leases July 2017


PwC Slide 65
A changing landscape for lease accounting
IFRS 16
The need for a new standard
for leasearrangements
• Leasing accounting satisfy a variety of business needs, from short-
IFRS
term16
asset use to long-term asset financing
• The accounting model for an operating lease under IAS 17 is
inconsistent with the IASB’s conceptual framework as it allows
lessees to:
- structure lease transactions to comply with operating lease
classification; and thus
- benefit from off-balance sheet financing
• The model was subject to criticism for failing to meet users’ needs
because it did not always provide a faithful representation of leasing
transactions
• Accordingly, a new approach to lease accounting was required

IAS 17 - Leases July 2017


PwC Slide 66
Background to the new leasing standard
A long and winding road

January 2016:
May 2013: Final standard
Revised
August 2010: exposure draft
March 2009: Exposure draft
July 1996: Discussion paper
G4+1 - Leases:
Implementation of a
new approach

• Effective date: 1 January 2019 (early


adoption permitted in conjunction with
IFRS 15)

• EU-Endorsement: To be determined

A changing landscape for lease accounting June 2017


PwC Slide 67
Background to the new leasing standard
A new era of lease accounting

• IFRS 16, ‘Leases’ starts a new era of lease accounting for lessees
• Under the previous guidance in IAS 17, a lessee had to make a
distinction between a finance lease (on balance sheet) and an
operating lease (off balance sheet)
• IFRS 16 requires the lessee to recognise almost all lease contracts on
the balance sheet
- optional exemptions exist for certain short-term leases and leases
of low-value assets

For lessees that have entered into contracts classified as


operating leases under IAS 17, this could have a huge impact on
the financial statements.

A changing landscape for lease accounting June 2017


PwC Slide 68
Overview

Lessor accounting stays


Lessee recognises right-of-use substantially the same
asset and lease liability for as under current
almost all lease contracts guidance

Exemptions for short-term


leases and leases of low-
value assets
Enhanced disclosure
requirements
Effective date
Comprehensive 1 January 2019
guidance on the
definition of a lease Potentially huge
impact on KPI
Earlier application (debt/equity ratio;
permitted (together EBIT/EBITDA/
with IFRS 15) operating cash flow)

A changing landscape for lease accounting June 2017


PwC Slide 69
www.pwcacademy.com.mt

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