need to know / leases - project update - BDO International

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8 LEASES - A PROJECT UPDATE SCOPE The proposed scope means that the new requirements would apply to all leases (including subleases) except for: –– Leases for the right to explore for or use minerals, oil, natural gas and similar non-regenerative resources –– Leases of biological assets –– Leases of service concession arrangements within the scope of IFRIC 12 Service Concession Arrangements –– Short term leases (these are leases with a maximum possible term, including any options to renew, of 12 months or less). This means that leases of noncore assets (that is, assets not related to an entity’s main business activities), and long term leases of land, would be within the scope of the proposals. In addition, there is no scope exclusion for assets that are often treated as inventory, such as non-depreciating spare parts, operating materials, and supplies, if these are associated with the leasing of another underlying asset. This may represent a significant further change for some entities. Although not specifically within the scope of the proposals, intangible assets are noted as not being required to be accounted for in accordance with the leases standard. This means that it would appear that an entity will have an option to apply the new requirements to leases of intangibles. It is not yet clear whether the approach adopted would need to be applied to all leased intangibles, or whether an entity would have a choice on an individual leased asset basis. CONTRACTS THAT CONTAIN LEASE AND NON-LEASE COMPONENTS For contracts that contain lease and non-lease components, the proposals would require each component to be identified and accounted for separately. A lessee would allocate payments due under the overall contract as follows: –– If the purchase price of each component is observable, the lessee would allocate the payments on the basis of the relative purchase prices of individual components. –– If the purchase price of one or more, but not all, of the components is observable, the lessee would allocate the payments on the basis of a residual method. –– If there are no observable purchase prices, the lessee would account for all the payments required by the contract as a lease. Application guidance is to be included in the proposals, to assist lessees in determining what is meant by an ‘observable price’. This will take account of guidance that is planned to be included in other projects, in particular for revenue recognition. A lessor would allocate payments to be received in accordance with the guidance on revenue recognition.
LEASES - A PROJECT UPDATE 9 LESSEE ACCOUNTING Initial recognition and measurement At the date of commencement of a lease, a lessee would recognise and measure a right-of-use asset and a liability to make lease payments. The date of commencement of a lease is the date on which the lessor makes the underlying asset available for use by the lessee. The date of commencement of a lease may be different from the date of inception of the lease, which is the earlier of the date of the lease agreement and the date of commitment by the lessor and lessee to the principal terms of the lease; this can be earlier than the commencement date. In the 2010 ED, the IASB made a distinction between the recognition date (commencement of lease) and the date on which the lease assets and liabilities would be measured, which was the date of inception of the lease. This was similar to existing guidance in IAS 17. This approach was eliminated during redeliberations by the boards. Application guidance is to be included to cover costs incurred, and lease payments made, by lessees after the date of inception of a lease but before its commencement date. In addition, a lease might meet the definition of an onerous contract between its date of inception and date of commencement, meaning that the costs of the lease are greater than the economic benefits to be received from the use of the leased asset. In those cases, it would be accounted for in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets until the date of commencement. A lessee would measure its obligation to make lease payments at the present value of the lease payments, discounted using the lessee’s incremental borrowing rate or, if it can be readily determined, the rate the lessor charges the lessee. The lessee’s incremental borrowing rate is the rate of interest that, at the date of inception of the lease, the lessee would have to pay to borrow over a similar term, and with a similar security, the funds necessary to purchase a similar underlying asset. The right-of-use asset is measured at the amount of the obligation to make lease payments, plus any initial direct costs incurred by the lessee. Initial direct costs are those costs that are directly attributable to negotiating and arranging a lease, that would not have been incurred had the lease transaction not been entered into. Any lease incentives provided by the lessor to the lessee would be deducted from the initial measurement of the right-ofuse asset. Where a right-of-use asset is amortised on a straight line basis to a nil residual value, the accounting result for the incentive will be the same as under current guidance in SIC-15 Operating Leases – Incentives, but it will be different where amortisation is not on a straight line basis.
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