IFRS 16 Leases PDF

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Topics

IND AS 116

Pg Pg.. Topics

Pg.

I. Objective

1

Presentation

11

II. Scope

1

Disclosure

11

III. Lease

1

Exemption of Recognition

12

Right to Control

1

Books of Lessor:

13

Right to obtain all economic benefits

2

Finance lease:

14

Right to direct the use

2

Indicators

14

How & For what purpose asset is used

3

Definition

14

4

Accounting

15

Identified Asset

4

Manufacturer or Dealer Lessor

16

Lease Term

5

Separation of Contracts

6

Accounting

17

Combination of Contracts

7

Modification

18

Inception of Lease

7

Disclosure

18

Commencement of Lease

7

V. Lease Incentive

19

IV. Recognition & Measurement

8

VI. Sale & Lease Back

20

Books of Lessee:

8

VII. Lease of Land

21

Initial Recognition

8

VIII. Sub Lease

22

Subsequent Recognition

9

IX. Continuous Involvement

22

Relevant Decision

Operating Lease:

17

with asset before commencement Reassessment of Lease Liability

9

X. Transition Provision

23

Modification of lease

10 XI. Practical Questions

28

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IND AS 116

I. This Standard sets out the principles for the recognition, measurement, presentation and disclosure of leases. The objective is to ensure that lessees and lessors provide relevant information in a manner that faithfully represents lease transactions.

II. An entity shall apply this Standard to all leases, including leases of right-of-use (ROU) assets in a sublease, except for: (a)

Leases to explore for or use minerals, oil, natural gas & similar non-regenerative resources IND AS 106

(b)

Leases of biological assets within the scope of Ind AS 41, Agriculture, held by lessee;

(c)

Service concession arrangements within the scope Ind AS 115.

(d)

Licences of intellectual property granted by a lessor within the scope of Ind AS 115.

(e)

Rights held by a lessee under licensing agreements within the scope of Ind AS 38, Intangible Assets, for such items as motion picture films, video recordings, plays, manuscripts, patents and copyrights. A lessee may, but is no nott required to to, apply this Standard to leases of intangible assets other than those described above.

III. 1.

A contract is, or contains, a lease if contract conveys the right to control the use of an identified asset for a pe period riod of time in exchange for consideration consideration.

2.

Period of time may be described in terms of the amount of use of an identified asset for e.g. number of production units that an item of equipment will be used to produce.

3.

Right to control use of an identified asset is conveyed in contract if, throughout the period of use use, customer has both of the following:

a.

Right to obtain substantially all of economic benefits from use of identified asset; and

b.

Right to direct the use of the identified asset.

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IND AS 116

If customer has the right to control the use of an identified asset for only a portion of the term of the contract, the contract contains a lease for that portion of the term. Right to control use of an asset may not necessarily be documented, in form, as a lease agreement. Often, right to use an identified asset is embedded in an arrangement that may appear to be a supply arrangement/service contract. .’. an entity should consider all the terms of an arrangement to determine whether it contains a lease.

Explanation to 3.a: Right to obtain substantially all economic benefits from use To control use of asset, a customer is required to have the right to obtain substantially all of the economic benefits from use of asset throughout the period of use use, either directly / indirectly, such as by using, holding or sub-leasing the asset. Any contractual payment to suppliers out of cash derived from use of asset as consideration shall be considered to be part of economic benefits obtains from use of asset. For e.g., if customer is required to pay supplier a percentage of sales from use of retail space as consideration, that requirement does not prevent customer from having right to obtain substantially all of economic benefits from use of retail space.

Explanation to 3.b: Right to direct the use A customer has right to direct the use of an identified asset throughout the period of use only if either either: Customer has right to direct how & for w what hat purpose the asset is used throughout

A.

the period of use, or Relevant decisions about how & for what purpose asset is used are

B.

predetermined and i.

Customer has the right to operate the asset or to direct others to operate the asset in a manner that customer determines, throughout the period of use, without supplier having the right to change those operating instructions; or

ii.

Customer designs asset or specific aspects of asset in a way that predetermines how & for what purpose the asset will be used throughout the period of use.

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A.

IND AS 116

How and for what purpose the asset is used 1.

A customer has right to direct how & for what purpose the asset is used if, within the scope of contract, it can change how & for what purpose the asset is used throughout the period of use. In this assessment, an entity considers the decision-making rights that are most relevant, i.e. decisions that affect the economic benefit to be derived from asset, to changing how and for what purpose the asset is used throughout the period of use. How & for what purpose an asset is used is a Single Concept i.e., ‘how’ an asset is used is not assessed separately from ‘for what purpose’ an asset is used. For e.g. of decision-making rights that, depending on circumstances, grant right to change how & for what purpose asset is used, within defined sscope cope of contract contract, include: Rights

Example

1. To change the type of output that is

To decide whether to use a shipping container to

produced by the asset

transport goods or for storage or to decide upon the mix of products sold from retail space

2. To change when output is produced

To decide when an item of machinery or a power plant will be used.

3. To change where output is produced

To decide upon destination of a truck or a ship, or to decide, where an item of equipment is used.

4. To change whether the output is

To decide whether to produce energy from a power plant

produced, & the quantity of that output

and how much energy to produce from that power plant.

Example of decision-making rights that do not grant the right to change how & for what purpose the asset is used include rights that are limited to operating or maintaining the asset or protective rights

Protective rights:: Terms & conditions designed to protect the supplier’s interest in asset / to protect its personnel / to ensure supplier’s compliance with laws or regulations, define the scope of the customer’s right and does not prevent customer’s right to direct the use of an asset. E.g. a contract may i. specify the maximum amount of use of an asset or limit where or when customer can use the asset, iiii.. require a customer to follow particular operating practices iii. require a customer to inform supplier of changes in how an asset will be used.

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B.

IND AS 116

Relevant Decision Relevant decisions about how & for what purpose asset is used can be predetermined in many ways. e.g. relevant decisions can be predetermined by design of asset or by contractual restrictions on use of the asset. In assessing customers has the right to direct the use of an

asset, an entity shall consider only rights to make decisions about use of asset du durring the peri period od of use use, unless customer designed the asset as in a way that predetermines how & for what purpose the asset will be used throughout the period of use. Consequently, unless the asset is customer designed, an entity shall not consider decisions that are predetermined before the period of use use. For e.g. if a customer is able only to specify output of an asset before the period of use, customer does not have right to direct use of that asset. As it is gives customer rights same as any customer that purchases goods / services.

4.

Identified Asset: Asset is typically identified by being explicitly specified in a contract or implicitly specified at the time that asset is made available for use by customer. A capacity portion of an asset is an identified asset if it is physically distinct e.g., a floor of a building. A capacity or other portion of an asset that is not physically distinct e.g., a capacity portion of a fiber optic cable, is not an identified asset, unless it represents

substantially all of the capacity of the asset and thereby provides the customer with the right to obtain substantially all of the economic benefits from use of the asset. a.

Substantive substitution rights: Even if an asset is specified, a customer does not have right to use an identified asset if if, supplier has substantive right to substitute asset throughout period of use. Right is substantive only if both these conditions exist:

i.

Supplier has practical ability to substitute alternative assets throughout, period of use e.g. customer cannot prevent the supplier from substituting asset & alternative assets are readily available or could be sourced by supplier within a reasonable time.

ii.

Supplier would be benefit nefit economically from the exercise of its right to substitute asset i.e. economic benefits from substitution are expected to exceed costs of substitution.

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b.

IND AS 116

Right /Obligation to substitute asset only on/after either a particular date/occurrence of specified event doesn’t give practical ability of substitution throughout period of use.

c.

Evaluation of substantiveness is based on facts and circumstances at inception of contract and excludes future events that are not considered likely to occur.

d.

Supplier’s right / obligation to substitute asset for repairs & maintenance in case asset doesn’t work properly or for upgrade doesn’t amount to substitution right as above.

e. 5.

If substantiveness is not determinable then presume no substitution right is substantive. Lease term

a.

Lease term includes non-cancellable period of a lease and periods covered by both both:

i.

Option to extend lease if lessee is reasonably certain to exercise that option; and

ii.

Option to terminate lease if lessee is reasonablycertain not to exercise that option.

b.

To assess whether lessee is reasonably certain, consider all facts and circumstances on commencement date & expected change in them that create an economic incentive for lessee to exercise either the option to extend / not to terminate the lease. i.e. whether is it profitable to lessee to excises/not to exercise option.

c.

The shorter the non-cancellable period of a lease, the more likely a lessee is to exercise an option to extend the lease or not to exercise an option to terminate the lease.

d.

A lessee’s past practice regarding the period over which it has typically used particular types of assets (whether leased or owned), and its economic reasons for doing so, may provide information lessees reasonable certainty but is not a sole determinant.

e.

A lessee shall reassess reasonable certainty upon the occurrence of either a significant event or a significant change in circumstances that:

i.

is within the control of the lessee; and

ii.

affects whether the lessee is reasonably certain to exercise or not to exercise an option not previously included in its determination of the lease term for e.g. significant leasehold improvements, modification or customisation not anticipated at the commencement date that are expected to have significant economic benefit for the lessee, inception of a sublease for a period beyond the end of the previously determined lease term

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e.

IND AS 116

Lease term may be revised if there is a change in non-cancellable period of a lease. For e.g. non-cancellable period of a lease will change if, lessee exercises / does not exercise an option previously not included / previously included in determination of lease term or an event occurs that contractually obliges lessee to exercise an option not previously included in lease term or an event occurs that contractually prohibits lessee from exercising an option previously included lease term.

f.

Lease term and length of the non-cancellable period of a lease should include period for which the contract is enforceable enforceable. E.g. when lessee & lessor each has right to terminate the lease without permission from other party, with not more than an insignificant penalty, then the contract is not enforceable.

If only lessee has right to terminate lease

If only lessor has right to terminate lease

that right is considered to be an option to non-cancellable period of lease includes terminate the lease & may be considered the period covered by option to terminate in determining the lease term.

the lease.

Ind AS 116 applies to contracts that are referred to as ‘cancellable’, ‘month-to-month’, ‘at will’, ‘evergreen’, ‘perpetual’ or ‘rolling’ if they create enforceable rights & obligations. These types of lease generally allow for contract to continue beyond a non-cancellable period until one party gives notice to terminate contract for e.g., contract will roll monthly until lessee or lessor elect to terminate contract.

6.

Separating components of a contract

a.

Entity shall account for each lease component & non-lease components in contract separately. Only items that contribute to securing the output of the asset are lease components. For e.g. a supplier may lease a truck & also operate leased asset on behalf of a customer (provide a driver), this service is not related to securing use of truck.

b.

In contract that contains multiple assets, right to use each such asset is a separate lease component if both the following conditions are met, else they are considered to be a single lease component: i.

Lessee can benefit from use of the underlying asset either on its own or together with other resources that are readily available to the lessee and

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ii.

IND AS 116

Underlying asset is neit neither her highly dependent on, nor highly interrelated with, the other underlying assets in the contract.

c.

Any reimbursement of admin task or other cost incurred without transfer of good / service, is not a separate component of lease, but are part of total c consideration onsideration that is allocated to the separately identified components of the contract.

d.

A lessee shall allocate the consideration in the contract to each lease component on the basis of the relative stand-alone price of the lease component and the aggregate stand-alone price of the non-lease components by applying allocation of transaction price to performance obligation as per Ind AS 115.

e.

A lessee shall account for non-lease components applying other applicable Standards.

Note:

As a practical expedient, a lessee may elect not to separate non-lease components from lease components, & instead account for both as a single lease component. This practical expedient is not applicable to multiple lease components of a single contract and embedded derivatives.

Combination of contracts: Two / more contracts entered into at or near same time

7.

with same counterparty or its related parties, are accounted as a single contract if one or more of following criteria are met: i.

Contracts are negotiated as a package with an overall commercial objective that cannot be understood without considering the contracts together;

ii.

Consideration payable in one contract depends on price/performance of other contract;

iii. Rights to use underlying assets conveyed in the contracts (or some rights to use underlying assets conveyed in each of the contracts) form a single lease component. 8.

Inception date is defined as the earlier of date of a lease agreement & date of commitment by the parties to the principal terms and conditions of the lease.

9.

Commencement date is defined as the date on which a lessor makes an underlying asset available for use by a lessee. If a lessee takes possession of, or is given control over, the use of asset before it begins operations / making lease payments under terms of lease, the lease term has commenced even if the lessee is not required to pay rent or the lease arrangement states the lease commencement date is a later date.

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IND AS 116

IV. A. 1.

Initial Recognition: At commencement of lease: Right to Use Asset………..Dr. To Lease Liability Note 1: Calculation of Lease Liability Present value of Remaining payments at commencement date discounted at interest rate implicit in lease (IRR of Lessor for the transaction) if not readily available the incremental borrowing rate of lessee (IBR of Lessee). Remaining payments includes Particulars

`

Fixed Payments (including in substance fixed payments)

x

Add: Variable payments depending of Index or Rate*

x

(Initial measured at Commencement date index / rate) Add: Guaranteed Residual Value

x

Add: Exercise price of purchase option**

x

Add: Payment of penalty on Termination of contract**

x

Less: Lease Incentive receivable

x Total

x

Note2: Calculation of value Right to Use asset Particulars

`

Value of Lease liability (as above)

x

Add: Any payment already paid (Down Payment)

x

Add: Initial Direct Cost

x

Add: Provision for Dismantling, Restoration of ...