Accounting Frontline - Issue 3 - KPMG · PDF fileAccounting Frontline ... ABC LLC uses a provision matrix based on historical ... accounting model that is aligned more closely with

© 2017 KPMG Lower Gulf Limited and KPMG LLP, operating in the UAE, member firms of the KPMG network of independent member firms affiliated with KPMG

International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Accounting Advisory Services

KPMG in the Lower Gulf

Accounting Frontline Issue: 03



ContentsIFRS 9 for non-financial entities

or corporate entities

4

Accounting for nonrefundable

up-front fees under IFRS 15

7

Accounting potpourri –

a mixture of accounting issues

9

Hedging for dummies 11

IFRS 16 – Leases 14



The landscape of international accounting is evolving increasingly quickly. The IASB

has issued new standards on revenue, leases and financial instruments with

implementation due over the next few years. The IASB has also been issuing

amendments and exposure drafts to update existing standards.

Many of the changes that were planned as a response to the economic crisis have

now been issued and entities are busy gearing themselves up to implement the

changes. Change is, perhaps, the only constant in a swiftly changing accounting

universe. It is indeed an exciting time for both accountants and auditors alike.

In this newsletter, we evaluate the significant aspects of these changes and explain

how they are expected to impact the financial statements of entities in the United

Arab Emirates and beyond:

– Most banks have by now taken tangible steps to implement IFRS 9 - Financial

instruments. However, IFRS 9 has an impact beyond just banks. Our article on

IFRS 9 for non-banking clients explores some of these changes.

– IFRS 15 - Revenue from contracts with customers is expected to have a wide

impact across different sectors. Our article on IFRS 15 evaluates the

accounting for nonrefundable fees under the new standard and compares it

with the current requirements.

– Hedging has traditionally been seen as complex and difficult. In our article, we

focus on the non- financial services sector and explain some of the more

challenging concepts.

– Accounting Potpourri, our new section, clarifies some upcoming IFRS changes.

– IFRS 16 - Leases is expected to grow the balance sheets of lessees with

significant operating leases. We highlight some of the key requirements of the

new standard.

As always, we would be delighted to receive feedback from you on topics that we

should cover in forthcoming issues of Accounting Frontline.

Yusuf Hassan

Partner


KPMG Lower Gulf

Foreword



IFRS 9 for non-financial entities

© 2017 KPMG Lower Gulf Limited and KPMG LLP, operating in the UAE, member firms 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.

I Accounting Frontline – Issue: 03

IFRS 9 - effective from 1 January 2018 - revamps

accounting for financial instruments (such as

loans, investments, receivables and deposits)

through its impact on classification, hedging,

measurement and disclosures. Obviously, banks

and financial institutions are the most impacted.

However, IFRS 9 has a significant impact on

non-financial entities as well.

Classification

Classification is how financial assets are

classified on an entity’s balance sheet. It is

important because it determines the basis of

measurement, as well as how changes are

accounted for. The basis of measurement is

important since it affects volatility. For instance,

fair value changes in an equity share classified

as fair value through profit or loss (FVTPL) is

recognized in an entity’s P&L. However, fair

value changes in a non-trading equity share

classified as fair value through other

comprehensive income (FVOCI) can’t be

recognized in a profit or loss account. Any such

movements, including that arising on sales, are

recognized in OCI.

The first step in the classification process is to

establish that the cash flows from assets are

solely payments of principal and interest (SPPI).

This ensures only plain vanilla lending

arrangements are classified and measured at

amortized cost.

or corporate entitiesThe next step is to assess the business model in

which the financial assets are managed. Non-

financial entities need to classify their financial

assets into amortized cost, fair value through

profit or loss account or fair value through OCI

business models, based on, for example, how

the portfolios are managed as shown through

the portfolio’s KPIs, the way portfolio managers

are compensated, or the basis of measurement

for internal reporting. Appropriate documentation

is required to support any conclusions reached.

Debt instruments that meet the SPPI criteria

may also be held in a business model for

liquidity purposes – that is, some of the portfolio

may be sold to meet cash flow needs (perhaps

for acquisitions). Sales should be more than

infrequent and of significant value. For these

portfolios, interest income, foreign exchange

revaluations and impairment losses or reversals

are recognized in the profit or loss and

computed in the same manner as financial

assets measured at amortized cost. The

remaining fair value changes are recognized in

OCI. Upon derecognition, the cumulative fair

value change recognized in OCI is recycled to

the profit or loss account.

Impairment losses must be recognized for all

investments in debt securities not classified as

FVTPL. These reflect probability-weighted

estimates of expected credit losses (ECLs)

based on historical experience and forward

looking information: 12 month ECLs for assets

where credit risk has not significantly increased

and lifetime ECLs where it has.



Special exemption: Trade and lease receivables and contract assets

Accounting Frontline – Issue: 03 I

The accounting treatment of trade receivables is of

immense importance to non-financial entities as these

are one of the most significant financial assets. In

most cases, trade receivables should meet the criteria

to be classified as amortized costs.

From an impairment perspective, IFRS 9 allows non-

financial entities with trade receivables that do not

have a significant financing component to record

lifetime ECLs without applying the general impairment

model. For receivables and contract assets that do

have a significant financing component, IFRS 9 gives a

choice: either recognize lifetime ECLs or apply the

general impairment model.

Currently, most non-financial entities use a matrix

approach to estimate incurred losses based on the

number of days past due. This can still be used for

trade receivables under IFRS 9 – although with certain

changes to reflect ECLs against incurred losses. As a

result, bad debt provisions are expected to both

increase and become more volatile.

ABC LLC develops a provision matrix:

Practical example - adapted from example 12 of the

implementation guidance to IFRS 9

ABC LLC, a manufacturer, has a portfolio of trade

receivables of AED30m in 2017. It operates in one

geographical region. Its customer base is a large

number of small clients. Trade receivables are

categorized by common risk characteristics that reflect

customers’ abilities to pay amounts due. The trade

receivables do not have a significant financing

component in accordance with IFRS 15 - Revenue

from contracts with customers. Paragraph 5.5.15 of

IFRS 9 states that the loss allowance for such trade

receivables is always equal to lifetime expected credit

losses.

To determine the portfolio’s expected credit losses,

ABC LLC uses a provision matrix based on historical

observed default rates over the expected life of the

trade receivables, adjusted for forward-looking

estimates. At every reporting date, the default rates

are updated and changes in forward-looking estimates

are analyzed. In this example, economic conditions are

forecast to deteriorate.

Current 1-30 days past

due

31-60 days

past due

61-90 days

past due

More than 90

days past due

Default rate 0.3% 1.6% 3.6% 6.6% 10.6%

Trade receivables are measured using the provision matrix, with lifetime expected credit loss allowances calculated

by multiplying gross carrying amounts by the lifetime expected credit loss rate:

Gross carrying amount Lifetime expected credit loss allowance

Current AED15,000,000 AED45,000

1-30 days past due AED7,500,000 AED120,000



More than 90 days past due AED1,000,000 AED106,000

AED 30,000,000 AED 580,000






Disclosures

IFRS 9 moves away from a rule-based approach

towards a judgmental approach and increases

flexibility. However, it requires extensive disclosures

to explain how judgment has been exercised, as well

as quantitative disclosures about financial assets.

Extensive disclosures are also needed where a non-

financial entity applies hedge accounting.

Mindset change is welcome – but will require extra

judgment

IFRS 9 simplifies the complex accounting

requirements of IAS 39 and aligns accounting with the

way in which risk is managed. The responsibility for

some accounting decisions, judgments and

disclosures has moved from the finance department

to a joint decision between risk management and

finance. While the mindset change is welcome, it is

likely to result in significant effort and investments.

Hedging

IFRS 9 allows entities to switch to a new hedge

accounting model that is aligned more closely with risk

management. Under the new model, more risk

management strategies (such as those related to

commodity price risks) are likely to qualify for hedge

accounting.

The new model is principle based and permits hedge

accounting to be applied even if there is

ineffectiveness in excess of 80 to120 percent of the

hedged item. The ‘bright line’ no longer exists and has

been replaced by a requirement to demonstrate that

an economic relationship exists and the hedge ratio

between the hedging instrument and the hedged item

is still appropriate.

The approach is judgmental and is expected to result

in more hedges qualifying for hedge accounting.

However, ensure an appropriate governance process

is in place for significant decisions and judgments.






Accounting for nonrefundable

Non-refundable fees under IFRS 15

Under IAS 18, many entities argued for upfront

recognition of refundable fees. The new IFRS 15

- Revenue from contracts with customers

modifies how revenue is recognized in an

entity’s profit or loss statement and is expected

to significantly impact entities across sectors.

IFRS 15 is mandatory for accounting periods

commencing on or after 1 January 2018.

Some contracts include nonrefundable up-front

fees that are paid at or near inception – such as

joining fees for health clubs, activation fees for

telecommunication contracts, and setup fees for

outsourcing contracts. IFRS 15 helps determine

the timing of recognition for such fees. In a

local example, the guidance could impact the

way local free zone authorities recognize their

annual subscription fees.

up-front fees under IFRS 15 Relevant requirements

An entity must assess whether the

nonrefundable up-front fee relates to the

transfer of a promised good or service to the

customer. In many cases, that activity does not

result in the transfer of a promised good or

service to the customer – that is, it’s not a

separate performance obligation but is an

administrative task. If the up-front fee is in

effect an advance payment for performance

obligations to be satisfied in the future, revenue

must be recognized when those goods or

services are provided. The revenue recognition

period extends beyond the initial contractual

period if the entity grants the customer the

option to renew the contract and that option

provides the customer with a material right.

Flowchart summarizing the accounting treatment:

Does the fee relate

to specific goods or

services transferred

to customers?

Promised good or

service

Advanced payment for

future goods or services

Recognize as revenue upon

transfer of promised good or

service

Recognize as revenue when control

of good or service is transferred






Practical example

Cable company X enters into a one-year contract to

provide cable television to Mrs Z. In addition to a

monthly service fee of AED100, Company X charges a

one-time up-front installation fee of AED10. Company

X has determined that its installation services do not

transfer a promised good or service to the customer,

but are instead a set-up activity and an administrative

task. Mrs Z can renew the contract annually for an

additional one-year period at the monthly service fee

rate. Does the contract renewal grant Mrs Z a material

right? After comparing the installation fee with the

total one-year service fees of AED1,200, Company X

concludes that the nonrefundable up-front fee does

not grant Customer Z a material right as it is not

deemed significant enough to influence Customer Z’s

decision to renew or extend the services beyond the

initial one year term. The installation fee is therefore

treated as an advance payment on the contracted one

year cable service and is recognized as revenue over

the one year contract term.

What has changed?

Under IAS 18 - Revenue, any initial or entrance fee

is recognized as revenue when there is no

significant uncertainty over its collection and the

entity has no further obligation to perform any

continuing services. It is recognized on a basis that

reflects the timing, nature, and value of the

benefits provided. Such fees may be recognized

totally or partially up-front or over the contractual

or customer relationship period, depending on

facts and circumstances. Under IFRS 15, the entity

needs to assess whether a nonrefundable, up-front

fee relates to a specific good or service transferred

to the customer – and, if not, whether it gives rise

to a material right to determine the timing of

revenue recognition.

What should you do?

IFRS 15 is an important change to how revenue is

recognized and will affect systems and processes

as well as accounting. Entities are encouraged to

evaluate the changes and to gear themselves to

comply with the requirements of the standard.






Accounting potpourri –

What’s new?

a mixture of accounting issues

We consulted our Accounting Advisory

Services professionals to identify some

emerging accounting issues. We hope these

generate discussion and clarity in your day-

to-day work.

Narrow scope

amendment to IAS 12

Deferred tax assets on unrealized losses were

being recognized in different ways so the IASB has

issued a narrow scope amendment to increase

clarity by clarifying the general underlying

principles. These amendments are effective for

annual periods beginning on or after 1 January

2017.

The clarifications:

A temporary difference must now be calculated by

comparing the carrying amount of an asset against its

tax base at the reporting date. When an entity is

determining whether or not a temporary difference

exists, it should not consider:

— The expected manner of recovery of the related

assets (for instance, by sale or by use)

— Whether any deferred tax asset is likely to be

recoverable.

— Estimation of future taxable profit

The IASB clarified that determining the existence and

amount of the temporary differences and estimating

the future taxable profit against which deferred tax

assets can be utilized are two different steps.

Estimating any future taxable profit inherently includes

the expectation that an entity will recover more than

the carrying amount of the asset. Therefore, if an

entity believes that is likely to realize more than the

carrying amount of an asset at the end of a reporting

period, it should incorporate this assumption into its

estimate of future taxable profits.

How do deferred tax assets affect

future taxable profits?

The tax deduction resulting from the reversal of

deferred tax assets is excluded from the estimated

future taxable profit used to evaluate the

recoverability of those assets.






— Other assets and liabilities if they meet the

disclosure objective (for example, cash and cash

equivalents and interest payments that are

classified as operating activities).

— The amendment does not prescribe a specific

format but encourages management to consider

the disclosure that best meets the objective based

on the individual circumstances of the entity.

The amendment suggests a reconciliation between

opening and closing balances should meet the

disclosure requirement. One possible way of providing

the disclosures required by the amendment could be:

IAS 7 - Net debt amendment

For some time, investors have been calling for more

disclosures on net debt, a term not defined in IFRS.

The IASB has responded by requiring disclosures that

enable users of financial statements to evaluate

changes in liabilities arising from financing activities,

including both changes arising from cash flow and

non-cash changes. This amendment is mandatory for

accounting periods commencing on or after 1 January

2017. This should help users evaluate changes in

borrowings. The disclosure requirements also apply to:

— Financial assets arising from financing activities

(such as derivative assets that hedge long-term

borrowings)

20X1Cash

flowsNon- cash changes 20X2

Acquisition Foreign

exchange

movements

Fair value

changes

Long-term

borrowings

22,000 (1,000) - - - 21,000

Short-term

borrowings

10,000 (500) - 200 - 9,700

Lease liabilities 4,000 (800) 300 - - 3,500

Assets held to hedge

long term

borrowings

(675) 150 - - (25) (550)

----------- -------------- --------------- ---------------- --------------- --------------

Total liabilities from

financing activities

35,325 (2,150) 300 200 (25) 33,650

===== ======= ======= ======== ======== =======

Note that this example only shows current period amounts. Corresponding amounts for the preceding

periods must be presented in accordance with IAS 1 - Presentation of financial statements

Help us to help you!

Accounting potpourri is an interactive feature where we interact with you and

comment where we can. Send in your queries, comments and questions and we

will try to answer them in future editions.





Hedging for dummiesHow does IFRS 9 help?

Under IAS 39, hedging is a complex area of

judgment. Many companies avoid hedge

accounting, even if they hedge. IFRS 9 attempts

to simplify the accounting for financial

instruments and to align hedging with risk

management. Hedging, previously largely the

prerogative of banks and financial institutions, is

now more accessible and simplified for

corporates.

This indicates some of the issues associated with

forecasting - because the past never tells us which

way the future is heading. Treasurers might – with

hindsight - have analyzed the number of oil

platforms in the Gulf of Mexico, tracked China’s

automotive market, or Ali al-Naimi’s body

language. If an entity wants to remain focused on

its core business, it should consider hedging –

despite the fact that in a years’ time it is quite

likely that somebody will ask: “Why did we buy an

umbrella when it didn’t rain?” To understand why

this is the wrong question, we must understand

the basic concepts of risk management.Explaining the concept

An airline CFO and a treasurer are reviewing

their P&L in 2012. As ticket surcharges tested

demand elasticity and fuel became an ever

larger portion of cost, locking the price of fuel at

US$100/bbl might have looked like a good

strategy. Only one quarter later, everybody had

become an oil and gas analyst, smarting about

an overdue correction. Two human biases are

often part of hedging strategies - the risk

avoidance bias and the hindsight bias:




Sea hedges

In Miyako, Japan, seawall defenses were 10m

above sea level - the watermark of a tsunami 50

years earlier. When the 2011 earthquake struck,

causing the Fukushima disaster, the wave that hit

Miyako was 17 meters high.

If we decide a 20m wall is too expensive, we have

two options:

— If our processes are strong enough to recover,

we might decide to let the once-in-a-lifetime

“black swan” loss hit us, and then continue

with operations.

— If the wave repeats a bit too often, then maybe

we can take our village somewhere else – in

other words, consider tweaking or pivoting the

business model.

In either case, the sea walls (our hedges), built

even at 10m and viewed by some as ineffective,

saved lives.

In risk analytics, hedging is often linked to cash

flow at risk (CFaR) methodology. CFaR models try

to build worst case scenarios by coinciding

revenue reductions (and delays) with increases in

expenses. Nevertheless, these worst case

scenarios allow correlations to cancel out some

effects - if your revenues are falling, the chances

are that your cost base will also diminish a bit. The

focus is on cash flow because, from an operational

perspective, cash is often the scarcest and most

valuable element. While hedging strategies try to

address cash setbacks, accounting for it is usually

only an afterthought.

Risk avoidance bias – where certainty is preferred

over a gamble – is based on the logic of locking in

US$100/bbl before things get even worse.

Hindsight bias – where things appear to be more

predictable after the fact – makes it seem more

obvious that oil prices were going to fall.

Trend to continue

Price plateaus

Price reverts to mean

Actual price

Source: KPMG analysis of OPEC data



Risk is a probability of an occurrence (frequency) of

an unwanted event multiplied by the consequence

(severity) of the event. For example, for an

individual taking a decision whether or not to buy

an umbrella, one may feel that one soaked suit

won’t hurt. However, dividing it over one’s

capacity to withstand helps decide whether or not

hedging would be appropriate. Maybe the

individual is prone to pneumonia?

If done properly, hedging increases an entity’s

capacity to withstand risk. Yet, from an operational

perspective, hedging should be viewed only as a

temporary solution because hedging really just

buys time. Ideally, treasury, risk and operations

departments should work together to minimize the

underlying reasons that give rise to the exposures.

From 2018, with IFRS 9, accounting rules are

finally better aligned with risk and treasury ways of

reasoning:

For a fair value hedge you can use…

IFRS 9 non-derivatives

IAS 39 derivatives only

Invest in a fund with overweight exposure to the

silica mining industry, whose performance

fashions a 0.8 correlation to an input glass price.

Under IAS 39, we could only do this through a

derivative - although this at least offered a cheap

exposure through leverage. Required derivatives

often didn’t exist and structuring them was

prohibitively priced. Assuming creativity and cash

are available, IFRS 9 might allow it.

Non-financial items can be hedged…

IFRS 9 through risk components

IAS 39 only in its entirely

Because the final price of the glass also includes

transport, production and administrative expenses

and profit margins, we are actually addressing only

one source of risk, or decomposing the risk into

pieces, when investing in the silica mining

industry. Under IAS 39, this was impossible. Under

IFRS 9, it can be done.

Basis risk change might involve…

IFRS 9 hedge ratio rebalancing

IAS 39 hedge discontinuation

We realize that glass producers are repeating

elevator producers’ trick and keeping a larger share

of the value for themselves. The correlation

between a basket of silica mining companies and

the price of glass falls to 0.6, making our hedge

less effective. In an IAS 39 world, we would have

to discontinue the hedge and create a new one

(assuming we still want to continue the

relationship at 0.6 correlation).

In our bright and shiny IFRS 9 world, according to

paragraph basis risk (another name for a situation

where a change in the underlying instrument does

not fully offset the instrument we are hedging), the

change might involve simply rebalancing the hedge

ratio to restore its effectiveness. Of course, an

economic relationship should exist between the

variables in the first instance.

IFRS 9 makes hedging easier – but

it still isn’t for everyone

CFaR models help you think about risk

management, Start by identifying and eliminating

operational risk - and only then think about hedging

to reduce finance and treasury risk. CFaR models

enable you to identify and leverage correlations

between asset classes and their differing

volatilities to formulate actionable hedging

strategies that can be translate into significant

savings. Hedging is not for everyone – but with the

changes to IFRS 9, hedge accounting is now more

straightforward.






IFRS 16 – LeasesTechnical overview

In January 2016, IASB issued IFRS 16 - Leases,

redefining how leases are accounted for by the

lessee. Under IAS 17 - Leases, a lessee had to

make a distinction between a finance lease (on

balance sheet) and an operating lease (off

balance sheet). IFRS 16 requires the lessee to

recognize almost all lease contracts on the

balance sheet, with an optional exemption for

certain short-term leases and leases of low-value

assets. IFRS 16 will significant impact on

lessees that have entered into contracts

classified as operating leases under IAS 17.

Scope

IFRS 16 applies to all lease contracts except for:

— Leases to explore for or use minerals, oil,

natural gas and similar non-regenerative

resources

— Leases of biological assets within the scope

of IAS 41 - Agriculture

— Service concession arrangements within the

scope of IFRIC 12 - Service concession

arrangements

— Licenses of intellectual property granted by a

lessor within the scope of IFRS 15 - Revenue

from contracts with customers

— Rights held by lessees under licensing

agreements within the scope of IAS 38 -

Intangible assets for items such as films,

video recordings, plays, manuscripts, patents

and copyrights.

— A lessee may choose to apply IFRS 16 to

leases of intangible assets other than those

mentioned above.

What is a lease?

IFRS 16 defines a lease as a contract, or part of

a contract, that conveys the right to use an asset

for a period of time in exchange for a

consideration. In practice, it can be challenging

to distinguish between a contract that conveys

the right to use an asset and a contract for a

service that is provided using the asset.

Under IFRS 16, a contract contains a lease if

there is an identified asset and the contract

gives the right to control the use of that asset

for a period of time in exchange for a

consideration. An asset can be explicitly or

implicitly identified, but is not identified if the

supplier has a substantive right to substitute it.

Substitution rights are substantive if the supplier

can substitute an alternative asset and benefits

economically from doing so.

If a customer cannot readily determine whether

the supplier has a substantive substitution right,

it is presumed that the right is not substantive.

Separating contract components

Contracts often combine different kinds of

obligations, such as lease components or a

combination of lease and non-lease components.

For example, leasing an office could include the

lease of equipment and maintenance. In this

situation, IFRS 16 requires each lease

component to be identified and accounted for

separately. Bundled contracts need to be

carefully separated.






This grosses up balance sheets by substantially

increasing recognized financial liabilities and assets

for entities with significant lease contracts – and

that are currently classified as operating leases.

The lease liability is initially recognized on the

commencement day and measured at an amount

equal to the present value of the lease payments

during the lease term that are not yet paid. Right-

of-use assets are initially recognized on the

commencement day and measured at cost, as the

amount of the initial measurement of the lease

liability, plus any lease payments made to the

lessor at or before the commencement date less

any lease incentives received, the initial estimate

of restoration costs and any initial direct costs

incurred by the lessee. The provision for the

restoration costs is recognized as a separate

liability.

Discount rate

The lessee uses the interest rate implicit in the

lease as the discount rate. This is the rate that

causes the present value of lease payments and

the unguaranteed residual value to equal the sum

of the fair value of the underlying asset and any

initial direct costs of the lessor. If this rate cannot

be readily determined, the lessee should instead

use its incremental borrowing rate.

Lease terms

As with IAS 17, IFRS 16 defines the lease term as

the non-cancellable period of the lease plus

periods covered by an option to extend or

terminate - if the lessee is reasonably certain to

exercise the extension option or not exercise the

termination option.

Recognition and measurement

exemptions

IFRS 16 contains two recognition and

measurement exemptions:

1. Short-term leases (12 months or less)

2. Leases for low value underlying assets

If either of the exemptions is applied, the leases

are accounted for in the same way as current

operating leases - on a straight-line or another

systematic basis that better represents the pattern

of the lessee’s benefit). Election can be made on a

lease-by-lease basis.

Initial recognition and

measurement

The new lessee accounting model within IFRS 16

is the most important change. Under IFRS 16,

lessees no longer distinguish between finance

lease contracts (on balance sheet) and operating

lease contracts (off balance sheet), but they are

required to recognize a right-of-use asset and a

corresponding lease liability for almost all lease

contracts. This is based on the principle that, in

economic terms, a lease contract is the acquisition

of a right to use an underlying asset with the

purchase price paid in instalments.

Initial direct costs

IFRS 16 defines initial direct costs as incremental

costs that would not have been incurred if a lease

had not been obtained. This includes commissions

or other payments made to existing tenants to

obtain a lease. All initial direct costs are included in

the initial measurement of the right-of-use asset.






Lessor accounting

IFRS 16 does not substantially change IAS 17

lessor accounting. The lessor still has to classify

leases as either finance or operating, depending on

whether the risk and rewards of the underlying

asset have been transferred. For a finance lease,

the lessor recognizes a receivable at an amount

equal to the net investment in the lease (the

present value of the aggregate of lease payments

receivable by the lessor and any unguaranteed

residual value). If an operating lease, the lessor

continues to present the underlying assets.

Subsequent measurement

The lease liability is measured in subsequent

periods using the effective interest rate method.

The right-of-use asset must be depreciated in

accordance with IAS 16 - Property, plant and

equipment. The lessee must also apply the

impairment requirements in IAS 36 - Impairment.

Other measurement models

IFRS 16 also permits lessees to use the fair value

model under IAS 40 - Investment property or the

revaluation model in IAS 16 if it relates to a class

of property, plant and equipment and the lessee

applies the revaluation model to all assets in that

class.

Transition

IFRS 16 is effective for reporting periods beginning

on or after 1 January 2019. Earlier application is

permitted, but only alongside IFRS 15.

What does it all mean?

Balance sheets of lessees with major operating leases are likely to be significantly

impacted. Both the asset and liability sides are expected to increase – and the impact

on balance sheet ratios could be considerable. Impacted entities should already be

assessing the new standard and considering its impact.






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 endeavour 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.

© 2017 KPMG Lower Gulf Limited and KPMG LLP, operating in the United Arab Emirates, member firms of the KPMG network of

independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights

reserved. Printed in the UAE.

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

Yusuf Hassan

Partner – Head of Accounting

Advisory Services

[email protected]

+971 4 424 8912

Raajeev B Batra

Partner – Head of Risk

Consulting

[email protected]

+971 2 401 4839

Bhaskar Sahay

Director


[email protected]

+971 4 424 8914

Contact us:

kpmg.com/aekpmg.com/om

mailto:[email protected]



Documents

Accounting Frontline - Issue 3 - KPMG · PDF fileAccounting Frontline ... ABC LLC uses a provision matrix based on historical ... accounting model that is aligned more closely with