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IFRS 16 – 2021 Issued IFRS Standards (Part A)

contain leases that should be accounted for in accordance with IAS 17 In January 2016 the Board issued IFRS 16 Leases IFRS 16 replaces IAS 17 IFRIC 4 SIC-15 and SIC-27 IFRS 16 sets out the principles for the recognition measurement presentation and disclosure of leases

PDF	IFRS 16 – An overview A lessee initially measures the lease liability at the present value of the future lease payments The key inputs to this calculation are as follows

PDF	IAS 16 Property Plant and Equipment IAS 16 Technical Summary This extract has been prepared by IASC Foundation staff and has not been approved by the IASB For the requirements reference must be made to International Financial Reporting Standards IAS 16 Property Plant and Equipment

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Property Plant and Equipment IAS 16

IAS 16 2021 Issued IFRS Standards (Part A) IAS 16 Property Plant and Equipment In April 2001 the International Accounting Standards Board (Board) adopted IAS 16 Property Plant and Equipment which had originally been issued by the International Accounting Standards Committee in December 1993

What is IFRS 16?
The key objective of IFRS 16 is to ensure that lessees recognise assets and liabilities for their major leases. A lessee applies a single lease accounting model under which it recognises all leases on-balance sheet, unless it elects to apply the recognition exemptions (see Section 2.6).
Who approved IFRS 16 Leases?
IFRS 16 Leases was approved for issue by thirteen of the fourteen members of the International Accounting Standards Board. Mr Zhang dissented. His dissenting opinion is set out after the Basis for Conclusions.
How should IFRS Standards be read?
The Standard should be read in the context of its objective and the Basis for Conclusions, the Preface to IFRS Standards and the Conceptual Framework for Financial Reporting. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance.

Overview

A lessee initially measures the lease liability at the present value of the future lease payments. The key inputs to this calculation are as follows. assets.kpmg.com

When does a lessee first measure the lease liability?

IFRS 16.A A lessee initially measures the lease liability at the commencement date of the lease. This is the date on which a lessor makes an underlying asset available for use by a lessee. The commencement date should be distinguished from the inception date of a lease, which is the earlier of the date of the lease agreement and the date of commitm

Lease payments

lessee includes the following payments relating to the use of the underlying asset in the measurement of the lease liability: fixed payments (including in-substance fixed payments), less any lease incentives receivable; variable lease payments that depend on an index or a rate; amounts expected to be payable by the lessee under residual value guara

Which variable lease payments are included in the initial measurement of the lease liability?

The initial measurement of the lease liability includes variable lease payments that depend on an index or rate – e.g. the CPI or a market interest rate – and payments that appear to be variable but are in-substance fixed payments. Variable lease payments that depend on sales or usage of the underlying asset are excluded from the lease liability. I

Discount rate

At the commencement date, a lessee measures the lease liability at the present value of the lease payments using the interest rate implicit in the lease if this can be readily determined. This is the rate that causes the present value of the lease payments and the unguaranteed residual value to equal the sum of the fair value of the underlying asse

Depreciation of the right-of-use asset

A lessee depreciates right-of-use assets in accordance with the requirements of IAS 16 Property, Plant and Equipment – i.e. the depreciation method reflects the pattern in which the future economic benefits of the right-of-use asset are consumed. This will usually result in a straight-line depreciation charge. Depreciation starts at the commenceme

Are the lessee and lessor accounting models consistent?

No. A key consequence of the decision to retain the IAS 17 dual accounting model for lessors is a lack of consistency with the new lessee accounting model. This can be seen in Example 11 below: the lessee applies the right-of-use model and recognises a right-of-use asset and a liability for its obligation to make lease payments; whereas the lessor

Finance lease model

At commencement, the lessor derecognises the underlying asset and recognises a finance lease receivable at an amount equal to its net investment in the lease, which comprises the present value of the lease payments and any unguaranteed residual value accruing to the lessor. The present value is calculated by discounting the lease payments and any u

Lessor presentation

A lessor presents leases in its statement of financial position as follows. assets.kpmg.com

Specified asset

An asset can be either explicitly specified in a contract (e.g. by a serial number or a specified floor of a building) or implicitly specified at the time it is made available for use by the customer. assets.kpmg.com

Capacity portions

capacity portion of an asset can be an identified asset if: it is physically distinct (e.g. a floor of a building, a specified strand of a fibre-optic cable or a distinct segment of a pipeline); or it is not physically distinct, but the customer has the right to receive substantially all of the capacity of the asset (e.g. a capacity portion of a fi

Example 13 – Identified asset: Capacity portion is an identified asset

Customer C enters into an arrangement with Supplier S for the right to store its products in a specified storage warehouse. Within this storage warehouse, rooms V, W and X are contractually allocated to C for its exclusive use. S has no substitution rights. Rooms V, W and X represent 60% of the warehouse’s total storage capacity. In this example, t

Example 14 – Identified asset: Substantive substitution right

Customer L enters into a five-year contract with Freight Carrier M for the use of rail cars from M to transport a specified quantity of goods. M uses rail cars of a particular specification, and has a large pool of similar rail cars that can be used to fulfil the requirements of the contract. The rail cars and engines are stored at M’s premises whe

Example 15 – Identified asset: No substantive substitution right

Customer L enters into an eight-year contract with Supplier K that requires K to install and maintain specific lighting equipment at L’s stores. The equipment is designed and selected by K, subject to L’s approval. K has an option to upgrade the equipment for future technological advancements and an obligation to replace any damaged or defective eq

Scenario 1

Customer S enters into a contract with Supplier T for the right to use a motor vehicle for five years. T has the right to substitute the asset at any time after three years from the commencement of the contract (i.e. no substitution right for the first three years). Because the supplier’s substitution right does not apply throughout the period of u

Scenario 2

The contract is the same as above except that it gives T the right to substitute the identified asset on a single date, three years into the lease, but not at any other time. The substitution right is not substantive because it does not apply throughout the period of use. assets.kpmg.com

Economic benefits from using the asset

To determine whether a contract conveys the right to control the use of an identified asset, a company assesses whether the customer has the rights to: obtain substantially all of the economic benefits from use of the identified asset throughout the period of use; and direct the use of the identified asset throughout the period of use (see assets.kpmg.com

Section 4.4).

The economic benefits from using an asset include its primary output, by-products and other economic benefits from using the asset that could be realised from a commercial transaction with a third party (e.g. sub-leasing the asset). The benefits derived from ownership of the asset (e.g. income tax credits) are excluded from the analysis. A company

How does a company evaluate whether a customer has the right to substantially all of the economic benefits from use of an asset?

Evaluating whether a customer has the right to obtain substantially all of the economic benefits from use of an asset throughout the period of use is straightforward in many situations, generally because the customer in a lease frequently has exclusive use of the asset. However, in some situations a contract may provide a party other than the custo

How and for what purpose decisions

In assessing who has the right to direct how and for what purpose the asset is used, a company considers the decision-making rights that are most relevant to changing how and for what purpose the asset is used. Decision-making rights are ‘relevant’ when they affect the economic benefits derived from use. Examples of relevant decisions that, dependi

How is an arrangement analysed when the customer and the supplier each make some of the how and for what purpose decisions?

IFRS 16.IE2.Ex4 A company does not have to take all of the how and for what purpose decisions in order to have the right to direct the use of the asset – the decisions can be allocated between the parties. Judgement is required to assess the individual significance of the different how and for what purpose decisions – i.e. their impact on the econo

How and for what purpose decisions are predetermined

The decisions about how and for what purpose the asset is used can be predetermined in a number of different ways. They could, for example, be agreed between the customer and the supplier in negotiating the contract, with neither party being able to change them after the commencement date, or they could, in effect, be predetermined by the design of

Example 22 – Right to direct the use: Predetermined decisions

IFRS 16.IE2, Ex6A Customer R enters into a contract with Supplier S, a ship owner, for the transport of cargo from A Coruña to Hartlepool on an identified ship. The contract details the cargo to be transported on the ship and the dates of pick-up and delivery. The cargo will occupy substantially all of the capacity of the ship. S operates and maint

Example 24 – Protective rights: Scope of right of use

IFRS 16.IE2.Ex7 Customer L enters into a two-year contract with Supplier M, an aircraft owner, for the use of an identified aircraft. The contract details the interior and exterior specifications for the aircraft. It also contains contractual and legal restrictions on where the aircraft can fly. Subject to these restrictions, L determines where and

Identify separate non-lease components

It is common for a lease contract to include non-lease components. For example, a real estate lease may include common area maintenance services provided by the lessor – e.g. cleaning services, maintenance of a central heating plant, common area repairs etc. IFRS 16 generally requires a company to separate the lease and non-lease components of a c

What are the consequences for the lessee of applying the practical expedient?

Applying the practical expedient for lessees not to separate non-lease components from lease components has the potential to reduce cost and complexity in some cases. However, some lessees may find the accounting consequences unattractive. In effect, using this practical expedient may result in recognising a liability for the service component of t

Lessee perspective

We would like to acknowledge the efforts of the following current and former members of the KPMG International Standards Group, who were the principal authors of this publication: Anushree Agrawal, Sashank Gopalswani, Ed Haygarth, Sylvie Leger, Mostafa Mouit, Brian O’Donovan and Sinead Slattery. We would also like to thank the members of the KPMG g

IAS 16 Property Plant and Equipment IFRS International Financial Reporting Standards

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PDF	IFRS in Focus IASB amends IAS 16 and IAS 41 to include bearer This edition of IFRS in Focus outlines the recent amendments to IAS 16 Property. Plant and Equipment and IAS 41 Agriculture to include bearer plants within

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PDF	Exposure Draft: Property Plant and Equipment—Proceeds before 2017?6?4? to IAS 16) is published by the International Accounting Standards Board ... below by email to commentletters@ifrs.org or electronically ...

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