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IND AS 116, LEASES –A PRACTICAL APPROACH
9 MAY 2019 - WEBCAST
Ind AS Implementation Group
Accounting Standards Board
The Institute of Chartered Accountants of India,
New Delhi, India
ICAI
DISCLAIMER
The views expressed by the presenter are his personal views and based on
professional judgements
The views of the presenter may not be construed as the conclusions or
opinions of the Ind AS Implementation Group or the Accounting Standards
Board or that of the Institute of Chartered Accountants of India
Due care and professional judgements may be exercised by the audience in
applying the requirements of the Standard
2
ICAI
STRUCTURE OF THE DISCUSSION
3
A snap shot of the
Standard
Key
Impact AreasCase
Study
Practical
expedients
Transitional
ProvisionsThe
Next Steps
ICAI
A SNAPSHOT OF THE STANDARD
4
Erstwhile Ind AS 17 Ind AS 116
A lease is 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
A contract, or part of a contract, that
conveys the right to use an asset (the
underlying asset) for a period of time in
exchange for consideration.
Future lease payments in respect of
operating leases are off balance sheet
items
Right of use Asset is recognised with
corresponding Lease liability in the
balance sheet for all operating leases
Operating lease payments are charged to
the profit and loss as expense on a
straight line basis
Depreciation (on Right of use Assets) and
finance costs (on Lease Liability) to be
recognised in the financial statements of
the Lessee
ICAI
HOW IT LOOKS LIKE?
5
Assets Under Ind AS 17 Under Ind AS 116
Total existing assets 38,750 38,750
Right of use assets NA 14,500
Total Assets 38,750 53,250
Balance Sheet
Equity and Liabilities Under Ind AS
17
Under Ind AS 116
Total existing equity
and liabilities
38,750 38,750
Lease Liability NA 14,500
Total Liabilities 38,750 53,250
Rs.in Lakhs
Impact on
• Debt to Equity
• ROI
• Asset Coverage
• Current Ratio
• Business
valuations
• Impact on loan
covenants
ICAI
HOW IT LOOKS LIKE?
6
Particulars Under I
nd AS 17
Under
Ind AS 116
Profit before lease
accounting
7421 7421
Operating lease expenses (451) NA
Low value/ short term
leases
NA (98)
EBITDA 6,970 7,323
Depreciation on ROU asset NA (1,450)
Finance cost on Lease
Liability
NA (145)
Profit for the period 6,970 5,728
Statement of profit and loss Rs.in Lakhs
Impact on
• EBITDA
• Interest Cover
• Free cash accruals
• Front loading of
expenses
• PBT in initial years
• Operating cash flow
• Financing cash flow
ICAI
IDENTIFYING A LEASE
Is it a lease?
Assessment to be at inception
Re-assess only if terms and
conditions of contract changed
Identified AssetRight to control the use
of an identified asset&
Right to obtain
substantially all
economic benefits from useRight to direct the use
ICAI
POINTS TO PONDER
• Accounting for bundled contract containing both lease and provision of
services by Lessees
• When the supplier has a substantive substitution right
• If exists, there is no identified asset
• Substitution of the asset during repairs or maintenance periods does not,
represent a substantive right of substitution
• The ability to substitute if new technology becomes available does not
represent a substantive right of substitution
ICAI
IDENTIFIED ASSET
Portion of Identified
asset?
Physically distinct
portionCapacity portion
Substantially all the
capacity?A minimal portion of the
capacity
ICAI
LEASE TERM
Initial lease period
Reassess and revise estimate of Lease Term at every reporting period
based on facts and circumstances
Reasonably certain
that the option to
extend will be
elected
Reasonably certain
that the option to
terminate will be
elected
Extension and Termination options to be
considered in determining the lease term
ICAI
POINTS TO PONDER
The entity will need to consider all relevant facts and circumstances that create an
‘economic incentive’ for the lessee to exercise the option to extend a lease or
terminate it
• Contractual terms for optional periods and market rates
• Significant leasehold improvements
• Costs of termination and return
• Importance to operations (specialised, location, alternatives)
• Conditionality associated with option
ICAI
INITIAL MEASUREMENT
Right of use asset
(At cost)
Discount the lease payments to arrive at the present value of right of
use asset/ lease liability
At the commence of lease, recognise right of use
asset and lease liability
Lease Liability
(PV of lease payments)
ICAI
DISCOUNT RATE
Interest rate implicit in the
lease
Use rate implicit in the lease or Incremental borrowing rate
Incremental borrowing rate of
the lessee
Lease payments shall be discounted using
ICAI
POINTS TO PONDER
• Can an entity directly use incremental borrowing rate as the discount rate?
• Implicit interest rate requires fair value of underlying asset and initial direct cost
incurred by the Lessor
• Significant judgements involved in determining incremental borrowing rate
• Similar term
• Similar security
• Similar fund required to be borrowed in a similar economic environment
• Adjustment factors may include (a) Lease Term (b) Repayment profile (c)
Credit Risk (d) Loan Security
ICAI
SUBSEQUENT MEASUREMENT
Right of Use Asset
• Apply depreciation requirements in
Ind AS 16
• Depreciate over the useful life
(taking extension options into
consideration)
• Test for Impairment under Ind AS
36, if indicators are existing
• Increase the lease liability to reflect
the interest
• Decrease the lease liability to reflect
payments made
Lease Liability
ICAI
CASE STUDY IN THE LESSEE’S
ACCOUNTS UNDER IND AS 116
ABC, the manufacturing company, needs to adopt the new standard Ind AS 116 Leases in
the reporting period ending 31 March 2020.
During the preparatory works, ABC discovered that the operating lease contract related to a
machine might require some adjustments.
ABC entered into the contract on 1 April 2017 for 5 years, annual rental payments are
Rs.1.25 Lakhs in arrears (that is, 31 March each year) and at the end of the lease term, the
machine will be returned back to the lessor. The economic life of a machine is 10 years.
How can ABC restate the contract under Ind AS 116 using both full retrospective and
modified retrospective approach?
Use the discount rate of 10%.
1
6
ICAI
CALCULATION OF PRESENT VALUE
OF LEASE PAYMENTS
1
7
Year ending Lease
payments
Discount factor Present value of
lease payments
31-03-2018 1,25,000 0.9091 1,13,636
31-03-2019 1,25,000 0.8264 1,03,306
31-03-2020 1,25,000 0.7513 93,914
31-03-2021 1,25,000 0.6830 85,377
31-03-2022 1,25,000 0.6209 77,615
Total 6,25,000 4,73,848
Note: Discount factor in the first year is calculated as 1/((1+10%) to the power of year 1), etc.
The right of use asset equals to the lease liability at the commencement date, plus lessee’s
initial direct costs, plus some other things – but in this case, we have nothing like that, so let’s
just say it’s the same as the lease liability.
ICAI
JOURNAL ENTRY
1
8
Under Ind AS 116, the initial journal entry would be
Date Particulars Debit Credit
1 April 2018 Right to use asset a/c Dr 4,73,848
To Lease liability a/c 4,73,848
Subsequently, ABC needs to take care about 2 things:
1. Depreciation of the ROU asset: Let’s say it’s straight line over the lease term of 5
years, thus it’s Rs. 94,770 per year (Rs. 4,73,848/5).
2. Lease payments: Each lease payment of Rs.1,25,000 is split between the repayment of
the lease liability and interest.
ICAI
CALCULATION FOR SPLITTING OF LEASE
LIABILITY AND INTEREST ON REPAYMENT
1
9
Year ending Lease
liability
b/f (A)
Lease
payment
Interest
(B = A*10%)
Decrease in
lease liability
(C = 1,25,000 - B)
Lease
Liability c/f
(D = A - C)
31-03-2018 4,73,848 1,25,000 47,385 77,615 3,96,223
31-03-2019 3,96,223 1,25,000 39,623 85,377 3,10,857
31-03-2020 3,10,857 1,25,000 31,086 93,914 2,16,942
31-03-2021 2,16,942 1,25,000 21,694 1,03,306 1,13,636
31-03-2022 1,13,636 1,25,000 11,364 1,13,636 0
Total 6,25,000 1,51,152 4,73,848
ICAI
PORTFOLIO APPLICATION
All leases in the portfolio
have similar
characteristics
No material changes is
expected from applying
this Standard to the
individual leases within
that portfolio
Entity shall use estimates and assumptions that reflect the size and
composition of the portfolio.
Standard may be applied for a portfolio of leases
ICAI
LOW VALUE ASSETS
For leases for which the underlying asset is of
low value, entity may apply Para 6 of Ind AS 116
Lease payments associated with
those leases are accounted as
an expense
Either on a straight-line basis
over the lease term or another
systematic basis
Option can be applied on a lease by lease basis
If a lessee subleases an asset, or expects to sublease an asset, the
head lease does not qualify as a lease of a low-value asset
ICAI
SHORT TERM LEASES
Lease payments associated
with those leases are
accounted as an expense
Either on a straight-line basis
over the lease term or another
systematic basis
A lease that contains a purchase option is not a short-term lease
A lease that, at the commencement date, has a
lease term of 12 months or less
Option can be applied only based on class of underlying asset
ICAI
TRANSITIONAL PROVISIONS
Full retrospective
approach
Modified retrospective
approach
A first time adopter of this Standard shall apply
either
ICAI
FULL RETROSPECTIVE APPROACH
24
ABC adopts Ind AS 116 in its financial statements for the year ending 31 March
2020, and that means that the transition date is 1 April 2018.
We need to restate all numbers for the comparative period, too.
1.Restatement of opening balances of the earliest period presented (that is: Before
1 April 2018):
a) Recognizing ROU asset and lease liability:
Date Particulars Debit Credit
01-04-2018 Right to use asset a/c Dr 4,73,848
To Lease liability a/c 4,73,848
ICAI
FULL RETROSPECTIVE APPROACH
(CONTINUATION)
25
b) Reversal of the lease payments before 1 April 2018 under Ind AS 17 (there was just one):
Date Particulars Debit Credit
01-04-2018 Cash a/c Dr 1,25,000
To Retained earnings a/c 1,25,000
c) Accounting for the lease payments before 1 April 2018 under Ind AS 116 (there was just one):
Date Particulars Debit Credit
01-04-2018 Lease liability a/c Dr 77,615
Retained earnings a/c Dr 47,385
To Cash a/c 1,25,000
ICAI
FULL RETROSPECTIVE APPROACH
(CONTINUATION)
26
d) Accounting for the depreciation of the ROU asset before 1 April 2018 under Ind AS 116 (there was just one year):
Date Particulars Debit Credit
01-04-2018 Retained earnings (equity) a/c Dr 94,770
To Right of use asset a/c 94,770
ICAI
FULL RETROSPECTIVE APPROACH
(CONTINUATION)
27
All 4 entries can be combined in one adjustment and it would look something like:
Date Particulars Debit Credit
01-04-2018 Right of use asset a/c Dr
(4,73,848 less depreciation of 94,770)
3,79,079
Retained earnings a/c Dr
(-1,25,000+47,385+94,770, or see table 3 for the year 2018)
17,154
To Lease liability a/c
(4,73,848 less the lease liability repayment of
77,615, or see table 2 for the year 2018)
3,96,233
ICAI
FULL RETROSPECTIVE APPROACH
(CONTINUATION)
28
2. Restatement of the comparative period (year ended March 31, 2019):
Date Particulars Debit Credit
31-03-2019 Lease Liability a/c Dr 85,377
Interest (profit or loss for the year ended 31, March 2019) 39,623
Depreciation (profit or loss for the year ended 31, March
2019)
94,770
To Right to use asset a/c 94,770
To Operating lease expenses (profit or loss for the
year ended 31, March 2019)
1,25,000
ICAI
FULL RETROSPECTIVE APPROACH
(CONTINUATION)
29
3. Restatement of the current period (year ending March 31, 2020):
Date Particulars Debit Credit
31-03-2020 Lease Liability a/c Dr 93,914
Interest (profit or loss for the year ending 31, March
2020)
31,086
Depreciation (profit or loss for the year ending 31, March
2020)
94,770
To Right to use asset a/c 94,770
To Operating lease expenses (profit or loss for the
year ending 31, March 2020)
1,25,000
ICAI
FULL RETROSPECTIVE APPROACH –
STATEMENT OF FINANCIAL POSITION
(EXTRACT)
30
Statement of financial position (extract)
Particulars March 31,
2020
March 31, 2019
(restated)
01-04-2018
(restated)
ROU asset 1,89,539 2,84,309 3,79,079
Equity – accumulated profit
(effect of restatement)
27,403 26,548 17,155
Lease liability
Long term 1,13,636 2,16,942 3,10,857
Short term 1,03,306 93,914 85,377
2,16,942 3,10,857 3,96,233
ICAI
FULL RETROSPECTIVE APPROACH –
STATEMENT OF COMPREHENSIVE
INCOME (EXTRACT)
31
Statement of comprehensive income (extract)
Particulars March 31, 2020 March 31, 2019
(restated)
Depreciation of ROU asset 94,770 94,770
Interest (lease liability) 31,086 39,623
ICAI
MODIFIED RETROSPECTIVE
APPROACH
32
Under the modified approach, ABC needs to make an equity adjustment on 1 April 2019 –
that is at the beginning of the current reporting period.
Comparative numbers remain the same as presented before – so no restatement.
This is a way easier method to apply than the full retrospective approach, because you do
not restate the previous years’ numbers.
However, the price for this relief is lower comparability.
It is quite difficult to compare current year under Ind AS 116 with the previous year under Ind
AS 17 and it does not say much about how your leases developed.
ICAI
MODIFIED RETROSPECTIVE
APPROACH – JOURNAL ENTRIES
33
1. Restatement of opening balances at 1 April 2019:
a) Recognizing ROU asset and lease liability:
Date Particulars Debit Credit
1-04-2019 Right to use asset a/c Dr 4,73,848
To Lease liability a/c 4,73,848
ICAI
MODIFIED RETROSPECTIVE APPROACH –
JOURNAL ENTRIES (CONTINUATION)
34
b) Reversal of the lease payments before 1 April 2019 under Ind AS 17 (there was two):
Date Particulars Debit Credit
1-04-2019 Cash a/c Dr 2,50,000
To Retained earnings a/c 2,50,000
c) Accounting for the lease payments before 1 April 2019 under Ind AS 116 (there was two):
Date Particulars Debit Credit
1-04-2019 Lease liability a/c Dr 1,62,992
Retained earnings a/c Dr 87,008
To Cash a/c 2,50,000
ICAI
MODIFIED RETROSPECTIVE APPROACH –
JOURNAL ENTRIES (CONTINUATION)
35
d) Accounting for the depreciation of the ROU asset before 1 April 2019 under Ind AS 116 (there were two years):
Date Particulars Debit Credit
1-04-2019 Retained earnings (equity) a/c Dr 1,89,539
To Right of use asset a/c 1,89,539
ICAI
MODIFIED RETROSPECTIVE APPROACH –
JOURNAL ENTRIES (CONTINUATION)
36
Similarly as with the full approach, we can make one aggregate entry instead of these four:
Date Particulars Debit Credit
01-04-2019 Right of use asset a/c Dr
(4,73,848 less depreciation of 94,770*2)
2,84,309
Retained earnings a/c Dr
(-2,50,000+87,008+1,89,539, or see table 3 for the years
2018 and 2019)
26,548
To Lease liability a/c
(4,73,848 less the lease liability repayments of
77,615 and 85,377, or see table 2 for the years 2018
and 2019)
3,10,857
ICAI
MODIFIED RETROSPECTIVE APPROACH –
JOURNAL ENTRIES (CONTINUATION)
37
2. Restatement of the current period (year ending March 31, 2020):
Date Particulars Debit Credit
Lease Liability a/c Dr 93,914
Interest (profit or loss for the year ending 31, March 2020) 31,086
Depreciation (profit or loss for the year ending 31, March
2020)
94,770
To Right to use asset a/c 94,770
To Operating lease expenses ((profit or loss for the
year ending 31, March 2020)
1,25,000
ICAI
MODIFIED RETROSPECTIVE APPROACH –
STATEMENT OF FINANCIAL POSITION
(EXTRACT)
38
Statement of financial position (extract)
Particulars March 31,
2020
March 31,
2019
ROU asset 1,89,539 0
Equity - accumulated profit
(effect of restatement)
27,403 0
Lease liability
Long term 1,13,636 -
Short term 1,03,306 -
2,16,942 -
ICAI
MODIFIED RETROSPECTIVE APPROACH –
STATEMENT OF COMPREHENSIVE
INCOME (EXTRACT)
39
Statement of comprehensive income (extract)
Particulars March 31, 2020 March 31, 2019
Operating lease expenses - 1,25,000
Depreciation of ROU asset 94,770 -
Interest (lease liability) 31,086 -
ICAI
KEY IMPACTS – A RECAP
4
0
Profit in the initial
years of leaseEBITA
Return on capital
employed
Net debt and
gearing ratioCurrent RatioNet assets
Asset retirement
obligation
Volatility of profit
or loss
Need for
renegotiating
lease contracts
ICAI
NEXT STEPS
• Impact assessment of the new
Standard as a lessee
• Decide on Transitional Options
• Create stakeholders’ awareness,
especially in respect of listed
companies
• Applying the Standard for June 2019
quarter
• Whether any contracts has to be
renegotiated
ICAI
4
2
Contact for more details : [email protected]
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