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Article:

Presentation and disclosures for lessees under IFRS16

09 March 2018

Presentation

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

Statement of financial position

Statement of profit and loss

Statement of Cash Flows

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

 

1 Right-of-use assets that meet the definition of investment property are required to 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 should include the amortisation expense (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.

These requirements 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.

 

Disclosure

There is a common thread in IFRSs to require disclosure of the most relevant information rather than simply setting out a prescriptive list of disclosures. IFRS 16 also 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 in the standard may not meet this objective by themselves. Therefore, determining the appropriate level of disclosure is a matter of judgement 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 project. It 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
  • Carrying value of right-of-use assets at the end of the reporting period by class
  • Maturity analysis of lease liabilities separately from other liabilities based on IFRS 7 requirements.
  • Depreciation for assets by class
  • Interest expense on lease
  • 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.
  • Total cash outflow for leases.

 

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
  • Residual value guarantees
  • Leases not yet commenced to which the lessee is committed
  • Restrictions or covenants imposed by leases
  • Information about sale and leaseback transactions.

 

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

For an example of what the disclosures might look like in practice please see Appendix A in our IFRS 16 in Practice guide.

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

Read more on accounting for leases:

IFRS 16: A closer look at discount rates

IFRS 16: Taking a closer look at sale and leaseback transactions

IFRS 16: A closer look at practical expedients available on transition for lessees

IFRS 16: Transition for lessees

IFRS 16: Lessee accounting - recognition of the right-of-use asset

IFRS 16: Initial recognition of the lease liability by lessees

IFRS 16: a closer look at short-term leases

IFRS 16 - a closer look at separating lease components

IFRS 16 - Definition of a lease

IFRS 16 – a closer look at ‘low value’

 

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