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Article:

IFRS 16 – A closer look at Lessee Presentation and Disclosures

12 December 2019

As companies start to prepare their first set of accounts adopting IFRS 16, we remind preparers of the presentation and disclosure requirements for lessees.

Lessees - presentation

The requirements for the presentation of lease balances and transactions can be summarised as follows:

Statement of financial position Statement of profit and loss Statement of Cash Flows
  • Right-of-use assets:
  • Interest expense with other finance costs.
  • Cash payments of lease liabilities as financing activities.
present in its own line item or combine with property plant and equipment, with separate disclosure. 1
  • Amortisation of right-of-use assets. 2
  • Cash payments for interest in accordance with IAS 7’s requirements for interest paid.
  • Lease liabilities:
 
  • Short-term, low-value and variable lease payments within operating activities.
present separately or include with other liabilities and disclose which line item they have been included in.    

1 Right-of-use assets that meet the definition of investment property must be presented within investment property.

2 IFRS 16 does not require separate presentation of amortisation expense of right-of-use assets on the face of the income statement, nor does it mandate which line item the amortisation expense should be included in (which will in part be driven by whether the entity presents its expenses ‘by function’ or ‘by nature’). However, the expense does need to be disclosed by class of underlying assets in the notes.

The presentation requirements of IFRS 16 may have a significant impact on key metrics including, for example, EBITDA which is often used as a short-term profitability measure in many industries.

Lessees - disclosure

In line with the IASB’s focus in other standards requiring disclosure of the most relevant information (rather than simply a prescriptive list), IFRS 16 contains an overarching requirement for an entity to provide information to enable users to understand the impact that leasing transactions have on its financial position and performance. The disclosure requirements prescribed by the standard may not meet this objective by themselves. Determining the appropriate level of disclosure is a matter of judgment, and may be complex for entities with significant or unusual leases.

In addition, the disclosure requirements should be viewed in light of the IASB’s Disclosure Initiative. The initiative aims to reduce unnecessary disclosure and improve the overall quality of financial statements by highlighting the most relevant information to users and not disclosing information that is immaterial or irrelevant. An entity with very few, straightforward and relatively low value leases may consider certain of the disclosures required by IFRS 16 to be immaterial.

The prescribed requirements in the standard come in both qualitative and quantitative form.

QUANTITATIVE DISCLOSURE REQUIREMENTS
Statement of Financial Position Statement of Profit and Loss Statement of Cash Flows
Additions to right-of-use assets. Depreciation for assets by class. Total cash outflow for leases.
Carrying value of right-of-use assets at the end of the reporting period by class. Interest expense on lease 
 Maturity analysis of lease liabilities separately from other liabilities based on IFRS 7 requirements. Liabilities.
 Short-term leases expensed.
Low-value leases expensed.
Variable lease payments expensed.
Income from subleasing.
Gains or losses arising from sale and leaseback transactions.

 

Qualitative disclosure requirements
 A summary of the nature of the entity’s leasing activities
Potential cash outflows the entity is exposed to that are not included in the lease liability, including:
- Variable lease payments
- Extension options and termination options 
- Leases not yet commenced to which the lessee is committed.
Restrictions or covenants imposed by leases, and
Information about sale and leaseback transactions.

Entities should also consider whether any additional disclosures need to be made in order to comply with IAS 1’s requirement to disclose key judgements management has made in applying the entity’s accounting policies and additionally major sources of estimation.

Transition - disclosure

In addition to the ongoing disclosure requirements, specific transition disclosures must be made depending on the transition approach being adopted. The FRC has recently completed a thematic review looking at the quality of transition disclosures in interim accounts. Please see ‘How companies can improve their IFRS16 related disclosures’ for examples of good practice and areas for improvement.

Further guidance from BDO

BDO has a range of publications to aid companies with IFRS 16. For an example of what the disclosures might look like in practice please see either our 2019 example accounts or Appendix A in our “IFRS 16 in Practice” guide available on the BDO website. There is also a range of E-learning and online videos available covering IFRS 16 on the BDO Global website

For help and advice on accounting for leases please get in touch with your usual BDO contact or Mark Edwards.

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