Presented by : Sanel Tomlinson Venue: InterContinental ...s3-ap-southeast-1.amazonaws.com/nova-webcast/... · 11/5/2016 · 5% CU43,000 7% CU41,000 10% CU38,000 “Why is the discount

Getting ready for the new leases standard

Presented by : Sanel Tomlinson

Venue: InterContinental, Hong Kong

Date: 5 November 2016

2

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The materials of this seminar / workshop / conference are intended to provide general

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3© 2016 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in Hong Kong.

The big picture…How ready are

you?

The new leases standard could

have a significant impact when it

comes into effect in 2019.


Lessees face major changes

Balance sheet P&L

Asset

Liability

Depreciation

Interest

= ‘Right-of-use’ of underlying asset

= Obligation to make lease payments

All major leases on balance sheet

EBITDA


Impact on profit/loss

Total lease expense will be front-loaded even when cash rentals are constant

Depreciation Interest

Cash rental payments


Impact on balance sheet

Companies with operating leases will appear to be more asset-rich, but also more heavily indebted

Asset Liability


Lessor accounting

but lacks consistency with new lessee accounting model

Lessor accounting remains similar to current practice…

Lease classification test

Finance leases and operating leases

Consistent accounting model for lessors and

lessees


Assessing the challenge

How ready are

you?

The new leases standard will have a

significant impact when it comes

into effect in 2019


1. How many leases do you have?A useful rule of thumb is

that it is more than you

think!


OFF

Lease definition

Old standard

New standard

Operating

lease

Service

Finance

lease

Lease

The new on/off-balance sheet test

for lessees – a key judgement area

ONLease

classification

test


Lease definition – Control

The new definition

increases focus on who

controls the asset and

may change which

contracts are leases ?Lease Not a lease


OverviewIdentified asset?

Contract does

not contain

a lease

No

Yes


Substantive substitution rightsPractical ability of lessor to substitute

asset throughout the period of use?

Lessor benefits economically from

substitution?

Yes

Yes

No identified asset

Could be

identified asset

No

No


Capacity portions

Physically distinctNot physically distinct:

Substantially all of total capacity?

Can be identified asset No identified asset

Yes No



Lessee obtains substantially all

of the economic benefits? Contract does

not contain

a lease

No

No

Yes

Yes



Lessee obtains substantially all

of the economic benefits?

Lessee directs the use?

Contract is or contains a lease

Contract does

not contain

a lease

No

No

No

Yes

Yes

Yes


Directing the right to use

Customer

Predetermined

Customer

operates asset

or directs others

to do so

Customer

designed

asset

Contract is or contains a lease*Contract does not contain a

lease

Who takes the ‘how and what purpose’ decisions throughout the period of use?

Supplier

Other

Protective rights of the supplier

* If other criteria are met.


2. Will you apply the optional exemptions?They could save you time

and money!

≤ 12 months? and no purchase

option?

≤ USD 5,000? and not subleased?


3. Do you have all the information you need and do you know where it is kept?Do you have a database?

Is it kept centrally or in

the business units?

?


Measuring the lease liability

Key inputs

Present value of

expected

payments at end

of lease

Present value of

lease rentals +=Lease liability

Lease termLease

paymentsDiscount rate


Lease term

Lease

term =

Non-cancellable period

+

+

Optional renewal periods if lessee reasonably certain to exercise

Periods after optional termination date if lessee reasonably certain not to

exercise


Lease payments

Lease

payments

Fixed payments

(include in-substance

fixed payments)

Termination penalty

(if termination is

reasonably certain)

Purchase options

(exercise price if

reasonably certain)

Residual value

guarantees (expected

amount payable)

Variable lease payment

based on index or rate


Discount rate

The lessee’s incremental

borrowing rate

The rate implicit in the

lease, if readily availableOR

Discount rate Lease liability

(5 year lease @

CU10,000 per annum)

3% CU46,000

5% CU43,000

7% CU41,000

10% CU38,000

“Why is the

discount rate

important?”


Discount rate – rate implicit in the lease

Present value of lease

payments

Present value of

unguaranteed residual value

Fair value underlying asset

Initial direct costs


Measuring the right-of-use (ROU) asset

ROU asset

Initial direct

costs

Lease

liability

Costs to

dismantle or

restore

(IAS 37)

Prepaid

lease

payments

Lease

incentives

=


Subsequent measurement

Lease liability Amortised cost using the effective interest method.

ROU asset

(cost model)

Depreciated in accordance with IAS 16 Property, Plant &

Equipment.

Depreciation period is the shorter of lease term/useful

life.

Impairment testing under IAS 36 Impairment.

ROU asset

(alternative models)

Revaluation model under IAS 16.

Fair value model under IAS 40 Investment Property.


Re-measurement of lease liabilityRe-measure to reflect reassessment

of any changes in:

Unchanged discount rate

Expected amount payable on the

residual value guarantee

Index or rates

Lease term

Floating interest rates

Assessment of purchase options

Revised discount rate


Re-measurement of ROU assetChanges in carrying amount of lease liability due to:

Reassessment of

lease term, purchase

option and residual

value guarantee

Variable lease

payments not

depending on an index

or rate

Reassessment of variable lease

payments depending on an index or rate

Relates to

future periods

Relates to

current period

Adjust ROU assets

(recognise in profit or loss if zero balance)Recognise in profit or loss


4. Which transition method will you apply?

Select transition

optionModified

retrospective

Full retrospectiveApply

recognition

exemptions?

Apply lease

definition

Identify the population Applying the standard


Applying the new lease definition

Apply the new definition to all

contracts

ComparabilityCost

Grandfather existing contracts

and apply the new definition

only to new contracts

OR


Applying the new standard

Retrospectively to all

accounting periods

ComparabilityCost

As a ‘big bang’ at the date of

initial application

OR


5. How will IFRS 16 affect your KPIs and/or covenants?Do any change in

ways you wouldn’t

expect?

Have you started to

communicate the

impact?


6. What new leases will you sign by 2019?


7. Have you considered the impacts on other parts of the business?


8. Are your operating lease disclosures complete and accurate?


9. What will you say about IFRS 16 in your 2016 annual report?Your regulators and

stakeholders will expect

a steer


10. Who owns your IFRS 16 implementation project?

If you don’t know, the

answer could you ‘you’!


How did you do?

How many of our ten questions

could you answer?

9–10 Great!

5–8 You’re with the pack

0–4 You really need to engage

Thank you

© 2016 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with

KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in Hong Kong.

The KPMG name, logo are registered trademarks or trademarks of KPMG International.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular

individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such

information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on

such information without appropriate professional advice after a thorough examination of the particular situation.

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Presented by : Sanel Tomlinson Venue: InterContinental ...s3-ap-southeast-1.amazonaws.com/nova-webcast/... · 11/5/2016 · 5% CU43,000 7% CU41,000 10% CU38,000 “Why is the discount