AASB 16 Leases · 2020. 9. 4. · Lessee accounting Two lease recognition exemptions. Short term leases ≤ 12 months and no . purchase option. Accounting policy choice – class

AASB 16 Leases –More practical implementation considerations

—5 June 2019

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AASB 16 Leases

Transition projects Lessors and lessees Flow on impacts

Agenda• Lease term – how far can it extend?• Embedded leases – identification/ completeness• Variable lease payments based on index or rate• Other considerations• Tools to assist• Wrap up



Lease term

How far can it extend?



Lease term – reminder

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

The period for which the contract is enforceable.



Lease term – a reminder

Lease term

Non-cancellable period

The period for which the contract is enforceable.

A lease is no longer enforceable when the lessee and the lessor each has the right to terminate the lease

without permission from the other party with no more than an insignificant penalty.

AASB 16:B34



Lease term – beyond the legal contract?What mechanism is considered part of the contract when determining lease term?

Contractual terms only. Contained within legislation to which

contract refers.

Contained within legislation which applies to the contract but the

contract does not refer to it.

Consistently upheld by the courts but not included in legislation or the written

agreement.



Lease term – Example

Tenant leases a property from Landlord.• Written contract is for a term of 5 years.• No extension options in the contract.• Within first few months, Tenant will install significant leasehold improvements

(useful life 8 years).

Y0 Y2 Y6Y4 Y8 Y10

Commencement of lease

End of written contract

Y1 Y3 Y5 Y7 Y9

Useful life of leasehold improvements

What is the period during which the contract is enforceable?





(useful life 8 years).

Y0 Y2 Y6Y4 Y8 Y10



Y1 Y3 Y5 Y7 Y9



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(useful life 8 years).• At the end of year 5 – month-to-month.

Y0 Y2 Y6Y4 Y8 Y10



Y1 Y3 Y5 Y7 Y9


Tacit agreement: month-to-month




Lease term – Global reference and development

Broad definition of penalty Should a broader economic assessment be considered in determination of lease

term?

IASB webcast ESMA letter to IFRIC



Lease term – what we are seeing in practice

Key customer contract impact to the lessee’s operations

Hold-over period during negotiation

Extension option assessmentsEnforceable contract assessment



Embedded leases

Identification – Completeness



Lease definition – reminder

Yes

No

Yes

No

Contract does not contain

a lease

Yes

NoIdentified asset?

Lessee obtains substantially all of the economic benefits?

Lessee directs the use?

Contract is or contains a lease

Rig

ht to

con

trol

the

use



Lessee accountingTwo lease recognition exemptions

Short term leases

≤ 12 months and no purchase option

Accounting policy choice – class

by class

Exemptions not available for lessors

Leases of low value items – when new

≤ USD 5,000for example and not subject to sublease

Asset by asset



Paper cup supply contract – backgroundSupplier manufactures paper cups for CustomerKey features of the supply contract: Supplier has one manufacturing line to produce cups

for Customer The manufacturing line is highly specialised and

located at Supplier Customer uses weekly purchase orders and these

effectively determine whether, when and how much output is produced

Key operating decisions are standardised and any changes in operating procedures are subject to approval by Customer

The supply contract is for a 5 year term Customer pays both a fixed amount of $500,000 and

a variable amount based on actual quantity of cups delivered in excess of 5 million units

How does Supplier account for the supply contact?



Paper cup supply contract – thought process

Lease definition and exemptions ?

Identified asset?

Substantially all economic benefits?

Direction of use?

Short term lease?

Low value item?

Variable payment subject to usage? ?



Lessor profit/loss impactOperating lease

Profit/loss extract

$’000

Revenue from contracts with customers 560,000Manufacturing line rental income 425,000…..

Depreciation 330,000

…..

EBITDA 450,000

Net profit 10,000

Finance lease

Profit/loss extract

$’000

Revenue from contracts with customers 560,000Finance lease interest income 25,000…..

Depreciation -

…..

EBITDA 50,000

Net profit 9,000



Paper cup supply contract – variationsPotential variations in form of supply contract: Supplier has multiple production lines to fulfil orders for

multiple customers The manufacturing line is not highly specialised

OR

Customer provides a half-yearly non-binding production forecast

Paper cups can be easily stored – i.e. Supplier can decide when the output is produced

Impact on Supplier’s accounting?



Road tunnel – background

Subcontracts to bore tunnel

Contracts for a 15km underground four lane road

Tunnel Operator (TO)

HeadContractor (HC)

SubContractor (SC)



Road tunnel – backgroundHC enters into contract with SubContractor (SC) to bore the tunnelKey features of the boring contract: SC will order a specific specialised boring machine At end of tunnel construction SC will retrieve the boring

machine HC determines tunnel design and determines the overall

site plan which involves all aspects to deliver a completed road under the head contract

Key operating decisions are standardised and any changes in operating procedures are subject to approval by HC

Expected length of time is two years HC pays a fixed amount of $50 million

How does HC account for the contract with SC?

HeadContractor(HC)

SubContractor(SC)



Road tunnel – thought process

Lease definition and exemptions ?

Identified asset?

Substantially all economic benefits?

Direction of use?

Short term lease?

Low value item?

Variable payment subject to usage?



Road tunnel – head contract

Impact on HC’s accounting for its contract with TO?

HeadContractor(HC)

Tunnel Operator (TO)



Road tunnel – head contract

Control of underlying assetvs

Control of a right to use the underlying asset

What revenue gets recognised when?

HeadContractor(HC)

SubContractor(SC)



Where could we find embedded leases?

IT servicesDedicated

manufacturing capacity

‘As a service’ contracts

Sales contracts

Supply contracts

Advertising

Transportation

Construction

Related party transactions



Variable lease payments based on index or rate

Change in practice

$10,000 x 5%



Variable lease payments based on index or rate

Payments based on an index or rate - e.g. CPI or interest rate

Payments based on revenues or usage

Which variable lease payments are included in the lease liability?

Remeasure lease liability to reflect reassessment of any changes in an index or rate

(includes market rent review)



Variable lease payments with multiple indices – Example

End of year 6

End of year 10

Market rent review

Commencementdate

CPI = 100

End of first year

CPI = 105

At the end of first year, should the lessee update the Y6-Y10 cash flows for change in CPI when remeasuring the lease liability?



Variable lease payments with multiple indices – ExampleYear View 1

(all remaining payments increased by changes in CPI)

View 2(only future payments until the market

rent review increased by changes in CPI)

Year 2Year 3Year 4Year 5Year 6

10,50010,50010,50010,50010,500

10,50010,50010,50010,50010,500

Year 7Year 8Year 9Year 10

10,50010,50010,50010,500

10,00010,00010,00010,000



Variable lease payments with multiple indices – ExampleYear View 1

(all remaining payments increased by changes in CPI)

View 2(only future payments until the market

rent review increased by changes in CPI)

Year 2Year 3Year 4Year 5Year 6

10,50010,50010,50010,50010,500

10,50010,50010,50010,50010,500

Year 7Year 8Year 9Year 10

10,50010,50010,50010,500

10,00010,00010,00010,000

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Other considerations



Other considerations

Impairment considerations

Tax effect accounting

Lease incentives



KPMG Tools How does it work?

Conforms to the new AASB 16 Leasesaccounting standard

Generates supporting lease level results which can be grouped for presentation and decision making purposes

Provides Balance Sheet, Profit and Loss, and Cash Flow projections

Supports large lease portfolios

What are the benefits?

Suitable for companies with lean operations

Easy to use automated

solution

Fast and cost effective

deployment

Versatile

Oversight

Efficiency

KPMG IFRS 16 Accounting Tool

(KIAT)

KPMG Lease Reporting Model

(LRM)



IFRIC considerations

Customer’s Right to Access

Supplier’s Software

Hosted on the Cloud

Contracts that give rights to

space below the ground for a

period of time

Deferred tax related to

assets and liabilities

arising from a single

transaction

Liabilities in relation to a Joint

Operator’s interest in a Joint

Operation

Agenda decision:Change in accounting policy?Time to adopt?Disclosures required?

Wrap up



Take-aways

1 Be aware of challenges and judgements involved in determining the lease term.

2 Importance of identifying all embedded leases for completeness of the population of lease contracts.

3 Consider impact of variable lease payments linked to index/ rate on the measurement of lease liability.

4 Broader financial reporting impacts.



ResourcesAASB 16: Leases AASB 16 Check – Have you considered these questions?

https://home.kpmg/au/en/home/insights/2017/04/aasb-16-leases-standard.html

https://home.kpmg/au/en/home/insights/2019/02/aasb-16-check.html


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© 2019 KPMG, an Australian 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.

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

Liability limited by a scheme approved under Professional Standards Legislation.

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Documents

AASB 16 Leases · 2020. 9. 4. · Lessee accounting Two lease recognition exemptions. Short term leases ≤ 12 months and no . purchase option. Accounting policy choice – class