Drafting new IFRS 16 disclosures may be a time-consuming process for lessees

Previous Accounting News articles have highlighted some of the complexities associated with measuring right-of-use (ROU) assets and lease liabilities of lessees. However, preparers should also bear in mind that there are many new disclosures required by lessees, and that first time around, these may take a significant amount of time to prepare. While this article does not cover all disclosures required by lessees, we endeavour to highlight some important aspects you may not yet have considered.

Presentation of ROU assets and lease liabilities by lessees

Please refer to our eLearning materials on the presentation requirements for lessees in the statement of financial position, statement of comprehensive income and statement of cash flows. In particular, preparers should note the treatment of lease payments in the cash flow statement because this may be different from your previous practice.

One note where possible

The lessee disclosures required by IFRS 16 Leases, paragraphs 51 to 60A cover all aspects of leasing, including: ROU assets; lease liabilities; income statement impacts (such as interest on lease liabilities and amortisation of ROU assets, variable lease payments etc.); and general information about the lessee’s leasing activities.

It should be noted that IFRS 16 requires information regarding a lessee’s leases to be included in a single note, or a separate section, in its financial statements. However, there is no need to duplicate information already presented elsewhere in the financial statements, provided such information is incorporated by cross-reference. This means that the separate ‘leases’ note/section should include a subheading or statement cross-referencing to the note in the financial statements where the relevant leases information can be found.

Tabular format

The following information is required to be disclosed in a tabular format, unless another format is more appropriate. A reconciliation format would not be suitable as much of this information is unrelated, but a table/columnar format is more appropriate than burying this amongst detailed narrative information.

A lessee shall disclose the following amounts for the reporting period:

depreciation charge for right-of-use assets by class of underlying asset;
interest expense on lease liabilities;
the expense relating to short-term leases accounted for applying paragraph 6. This expense need not include the expense relating to leases with a lease term of one month or less;
the expense relating to leases of low-value assets accounted for applying paragraph 6. This expense shall not include the expense relating to short-term leases of low-value assets included in paragraph 53(c);
the expense relating to variable lease payments not included in the measurement of lease liabilities;
income from subleasing right-of-use assets;
total cash outflow for leases;
additions to right-of-use assets;
gains or losses arising from sale and leaseback transactions; and
the carrying amount of right-of-use assets at the end of the reporting period by class of underlying asset.

IFRS 16, paragraph 53

Also note:

All the above amounts must include costs that have been capitalised into the carrying amount of another asset during the period. For example, amortisation of the ROU asset may have been included in exploration costs capitalised under IFRS 6 Exploration for and Evaluation of Mineral Resources. This will need to be added to the amortisation expense for the purposes of paragraph 53(a) disclosure.

Paragraph 53(a), (f), (h) and (j) are not required for ROU assets that meet the definition of investment property under IAS 40 Investment Property because the IAS 40 disclosure requirements will be applied instead.

If ROU assets are revalued under IAS 16 Property, Plant and Equipment, disclosures required by IAS 16, paragraph 77 must also be provided.

Total cash outflows for leases

IFRS 16, paragraph 53(g) requires disclosure of the ‘total cash outflow for leases’. This is not simply the amount shown for lease payments as part of ‘financing activities’ in the cash flow statement, which includes only principal repayments. When preparing this disclosure, you will need to sum up all of the following:

Cash flows	Type of payments
Financing activities	Principal repayments on leases Interest repayments on leases (and/or include interest repayments on leases classified as investing or operating activities as permitted under IFRS 16, paragraph 50(b))
Operating activities	Payments for short-term leases not capitalised on the balance sheet Payments for low-value leases not capitalised on the balance sheet Variable lease payments such as contingent payments (e.g. turnover rentals)

Lease liability maturity analysis

A maturity analysis is required to be disclosed for lease liabilities, and must be presented separately from the maturity analysis required for liquidity risk disclosures under IFRS 7 Financial Instruments: Disclosures. However, the same principles apply as for IFRS 7, including that commitments include gross cash flows (i.e. not discounted).

Disclose future potential cash outflows not included in measurement of lease liabilities

An area that is likely to involve some work because numbers will not flow out of any pre-existing lease models is the requirement in IFRS 16, paragraph 59(b) to disclose qualitative and quantitative information about the lessee’s leasing activities, which includes, but is not limited to, information that helps users of financial statements assess future cash outflows to which the lessee is potentially exposed that are not reflected in the measurement of lease liabilities.

In addition to the disclosures required in paragraphs 53-58, a lessee shall disclose additional qualitative and quantitative information about its leasing activities necessary to meet the disclosure objective in paragraph 51 (as described in paragraph B48). This additional information may include, but is not limited to, information that helps users of financial statements to assess:

...
future cash outflows to which the lessee is potentially exposed that are not reflected in the measurement of lease liabilities. This includes exposure arising from:
1. variable lease payments (as described in paragraph B49);
2. extension options and termination options (as described in paragraph B50);
3. residual value guarantees (as described in paragraph B51); and
4. leases not yet commenced to which the lessee is committed.
...
...

Extract of IFRS 16, paragraph 59

IFRS 16, paragraphs B49, B50 and B51 provide guidance on what is expected to meet the requirements of paragraph 59(b).

Lessees will need to quantify some of this information by reworking their models for lease accounting, for example, when determining future changes to variable lease payments, and the impacts of exercising all extension and termination options.

BDO Global’s IFRS Illustrative Financial Statements show one potential way that these disclosures may be presented. These are extracted below.

Variable lease payments (note 15 - page 129)

Refer detailed disclosures in IFRS 16, paragraph B49

Nature of leasing activities (in the capacity as lessee)

The group leases a number of properties in the jurisdictions from which it operates. In some jurisdictions it is customary for lease contracts to provide for payments to increase each year by inflation or and in others to be reset periodically to market rental rates. In some jurisdictions property leases the periodic rent is fixed over the lease term.

The group also leases certain items of plant and equipment. In some contracts for services with distributors, those contracts contain a lease of vehicles. Leases of plant, equipment and vehicles comprise only fixed payments over the lease terms.

The percentages in the table below reflect the current proportions of lease payments that are either fixed or variable. The sensitivity reflects the impact on the carrying amount of lease liabilities and right-of-use assets if there was an uplift of 5% on the balance sheet date to lease payments that are variable.

31 December 2019	Lease Contracts	Fixed payments	Variable payments	Sensitivity
	Number	%	%	CU'000
Property leases with payments linked to inflation	3	-	25%	±495
Property leases with periodic uplifts to market rentals	6	-	40%	±791
Property leases with fixed payments	2	15%	-	-
Leases of plant and equipment	46	17%	-	-
Vehicle leases	3	3%	-	-
	_______	_______	_______	_______
	60	35%	65%	±1,286
	_______	_______	_______	_______

Extension and termination options (note 15 - page 131)

Refer detailed disclosures in IFRS 16, paragraph B50

The group sometimes negotiates break clauses in its property leases. On a case-by-case basis, the group will consider whether the absence of a break clause would exposes the group to excessive risk. Typically factors considered in deciding to negotiate a break clause include:

the length of the lease term;
the economic stability of the environment in which the property is located; and
whether the location represents a new area of operations for the group.

At 31 December 2019 the carrying amounts of lease liabilities are not reduced by the amount of payments that would be avoided from exercising break clauses because on both dates it was considered reasonably certain that the group would not exercise its right to exercise any right to break the lease. Total lease payments of CU 1,250,000 (2018 – CU 1,125,000) are potentially avoidable were the group to exercise break clauses at the earliest opportunity.

Residual value guarantees (note 15 - page 131)

Refer detailed disclosures in IFRS 16, paragraph B51

One of the contracts that the group has with a distributor conveys to the Group the right to use certain vehicles for the contractual term. The Group agreed to the inclusion of a residual value guarantee in favour of the supplier. This is because the pricing of the contract does not result in the group having to pay full fair value of the vehicles, but as those vehicles are under the Group’s control, the Group is able to use the vehicles to such an extent that they would have little value to the supplier at the end of the lease term. The alternative would have been to restrict the mileage use of the vehicles over the lease term, but the Group did not wish to be operationally restricted on its ability to use the vehicles. The amount of the residual value guarantee, which has been included in the carrying value of lease liabilities, is CU 475,000 (2018 – CU 475,000). The lease was previously classified as finance type under IAS 17, therefore the estimate of the residual value guarantee was included in loans and other borrowings prior to the adoption of IFRS 16.

Transition disclosures - modified retrospective methods

Many entities are expected to adopt one of the modified retrospective methods on first-time adoption of IFRS 16 lease accounting, which means that comparatives are not restated. Despite IFRS 16, paragraph C12 providing relief to lessees from disclosing of the impacts of the new accounting policies on each financial statement line item affected (IAS 8, paragraph 29(f)), many entities may wish to nevertheless include a reconciliation on 1 July 2019 (transition date) to explain adjustments made on transition to IFRS 16.

Lessees will also need to disclose their weighted average incremental borrowing rate applied to lease liabilities recognised in the balance sheet at transition date.

Lastly, lessees will need to include a reconciliation of movements between the operating lease commitment note disclosed at 30 June 2019 under IAS 17 Leases, and lease liabilities recognised on the balance sheet under IFRS 16 at date of initial application, 1 July 2019. For the purposes of the comparison, the lease commitments must be discounted using the same incremental borrowing rate used to determine the lease liabilities on 1 July 2019.

The following illustrates the types of items we would expect to see disclosed on the reconciliation:

	$
Minimum operating lease commitments - 30 June 2019	xxx
Less:
Short-term leases not recognised under IFRS 16	(xx)
Low-value leases not recognised under IFRS 16	(xx)
Reduction in lease terms as a result of changes in assessments of termination/extension options	(xx)
Contracts reassessed as service contracts under IFRS 16	(xx)
Add:
Increase in lease terms as a result of changes in assessments of termination/extension options	xx
Adjustments to an index or rate affecting variable lease payments	xx
Service contracts reassessed as leases under IFRS 16	xx
Effect of discounting using lessee’s incremental borrowing rate at 1 July 2019	(xx)
Leases previously classified as finance leases	xxx
Lease liability at 1 July 2019	xxxx

Need help applying IFRS 16?

Please contact BDO’s IFRS Advisory team if you require assistance preparing your lease accounting entries and disclosures. BDO has two possible solutions: BDO Lead which is a cloud-based lease management solution (SaaS) to help you manage the complexities in IFRS 16; and we also provide a lease manage outsourcing service (BDO Lease Management Services).