CA Varun Sethi - ICAI IFRS training - IAS 17 & IAS 23 - Oct 2015

ICAI Certificate course on IFRS/IndAS
IAS 17/ IndAS 17/ IFRIC 4
Accounting for Leases
&
IAS 23/ IndAS 23
Borrowing costs
October 2015
Presentation by : CA Varun Sethi
Contact no: +91 9899766487
Email: varunsethi81@gmail.com
2015
Faculty : CA Varun Sethi
Contact no: +91 9899766487
Email: varunsethi81@gmail.com

Accounting by
Borrower
GAAP
Reporting entity
Indian GAAP IFRS US GAAP
Global Accounting framework
for
‘Borrowing Costs’
Accounting by:
Local Bodies
NPO1
2

Example :
Sector /
companies
Sectors and
Industries
impacted
• Solar Power companies
• Projects involving financial closure
and long gestation periods
• Solar / Non Utility Power
Infrastructure
• Infrastructure projects like railways,
dams, bridges, Telecom tower
• Commercial Real Estate
• Power and Utilities – Electric power
stations
EPC (Engineering,
procurement, Construction)
Capital intensive
projects
Reporting and Accounting for ‘Borrowing costs’
Sector Wise/ Transaction Wise

Accounting by
Lessee/Lessor
GAAP
Reporting entity
Indian GAAP IFRS US GAAP
Global Accounting framework
for
‘Leases’
Accounting by:
Local Bodies
NPO1
2
*New leasing standard IFRS 16 /ASC 842/ IndAS 16 is expected in 2016 as a result of the ongoing IASB project on leases

Example :
Sector /
companies
Sectors and
Industries
impacted
• Non Utility generators - Solar Power
companies
• Infrastructure Cos -
• Solar / Non Utility Power
Infrastructure
• Telecom tower
• GMR
• Related party Vs. Third Party Financing
EPC (Engineering,
procurement, Construction)
Built to Suit (BTS) /
Turnkey projects
Reporting and Accounting for ‘Leases’
Sector Wise/ Transaction Wise
Example :
Sector /
companies
1. Asset Finance / Leasing
Companies (NBFC)

Proposed New Standard - Lease Accounting
Updates from IASB
(as of September 2015)
2015

New ‘Lease’ Accounting Standard – IASB updates
1. The IASB is supportive of an
approach that would present all
leases in a manner similar to today’s
financing leases (which the revised ED
refers to as Type A leases).
2. Under that approach, the lessee's
expense would be front loaded.
The board is more closely aligned on
the lessor model, which is expected
to result in financial reporting similar
to current (U.S. GAAP and) IFRS.
The IASB issued
1. first Leases exposure draft in September of 2010 &
2. a revised Leases exposure draft in May of 2013 (the "revised ED").
Lessee Accounting Lessor Accounting

2015
Scope

IAS 17/ IndAS 17: Leases : Scope
NOTE:
1. This Standard does not apply to agreements that are ‘contracts for services’ that do not
transfer the right to use assets from one contracting party to the other.
For Eg: ‘Executory contracts’and ‘agreements for services’that involve the use of equipment but do not
convey the right to use the equipment to the recipient of such services are not leases and should be accounted
for as a service agreement.
Includes
1 Initial measurement of investment
property.
2 Transfer ‘rights to use assets’ even if
substantial services performed by the
lessor.
Excludes
1 Leases to explore or use minerals, oil,
chemical and other natural resources.
2 Licensing agreement for certain
intangible assets like motion picture
films, video recordings etc.
3 Measurement of certain leased
investment property and certain
biological assets.

2015
Lease Classification

IAS 17/ IndAS 17: Leases : Criteria for classification of leases
*New leasing standard IFRS 16 /ASC 842/ IndAS 16 is expected in 2016 as a result of the ongoing IASB project on leases
Accounting for ‘Lessors’
1 Operating Leases
2 Finance Leases
Accounting for ‘Lessees’
1 Operating Leases
2 Finance Leases
Evaluation shall be made at ‘inception’ of the
arrangement based on all of the facts & circumstances.
Have substantially all risks and rewards of ownership of
leased asset been transferred?
1. Key
Question
2. Timing

IAS 17/ IndAS 17: Leases : Lease Classification
Have substantially all risks and rewards of ownership of
leased asset been transferred?
1. Key
Question
1 Finance Leases 2 Operating Leases
YES NO

Ownership transfers at end of lease?
Lease Classification: Indicators of a ‘Finance Lease’
Lease for majority of economic life?
Present value of minimum lease payments equals at least substantially
all of fair value of leased asset?
Lease assets specialized?
Additional indicators (Next slides…)
FINANCELEASE
1
2
3
4
5
Bargain purchase option?2
NO
NO
NO
NO
NO
Y
E
S
Y
E
S

Additional indicators
Indicators of a ‘Finance Lease’ – Additional indicators
Changes in fair value of residual borne by lessee?
Bargain lease renewal option?
OPERATING LEASE
FINANCELEASE
1
2
3
Cancellation losses borne by lessee?2
NO
NO
NO
Y
E
S
Y
E
S
The lessee in a sublease shall classify the lease in accordance with the ABOVE lease
classification criteria and account for it accordingly.

1. The determination of the fair value of the leased asset is made at the inception date
of a lease, whereas the net present value of the lease obligation is measured at the
beginning of the lease term.
For example
• Assume that on 1 January 20X1, Company A executes a long-term lease agreement to lease
an existing cargo vessel beginning on 30 June 20X2. To perform the 90% test, Company A
would compare the PV of MLPs under the lease as of 30 June 20X2 to the fair value of the
cargo vessel as of 1 January 20X1.
• Increases or decreases in the fair value of the cargo vessel from 1 January 20X1 to 30 June
20X2 would not be considered in the test.
1. Inception Date
2. Beginning of Lease Term
Lease Classification

2015
Accounting for Operating Lease

1. Prepaid / accrued lease rental
payable
1. Leased asset
2. Accrued / deferred lease rental
receivable
Operating Lease Accounting
Lessee accounting Lessor accounting
2. Lease rental expense 1. Depreciation expense
2. Lease rental income
1. If rental payments are not made on a straight-line basis, rental expense
nevertheless shall be recognized on a straight-line basis.
2. In such a case, Statement of financial position reflects deferral / prepayment.

A. Scheduled rent increases that are NOT dependent on future events:
• Scheduled rent increases, which are included in MLPs shall be recognized by lessees and
lessors
• on a straight-line basis over the lease term
• unless another systematic and rational allocation basis is more representative of the
time pattern
Uneven rental
payments
Operating Lease Accounting
B. Rent holidays :
• For operating leases that include uneven rental payments or rent holidays, rental expense
should be recognized by a lessee on a straight-line basis over the lease term
C. Contingent rentals :
• Increases or decreases in rentals that are dependent on future events such as future sales
volume, future inflation, future property taxes, and so forth, are contingent rentals that
affect the measure of expense or income as accruable.

A. Lease incentives :
• Lease incentives include both of the following:
• a. Payments made to or on behalf of the lessee
• b. Losses incurred by the lessor as a result of assuming a lessee's preexisting lease with
a third party.
• Lease incentives shall be recognized as reductions of rental expense by the lessee
(reductions in rental revenue by the lessor) on a straight-line basis over the term of the new
lease
Lease incentives Operating Lease Accounting

Lease incentives Operating Lease Accounting
Accounting Entry: Lease Incentives
To record loss on sublease assumed in conjunction with new lease agreement
At inception:
• Dr. Loss on sublease assumed by lessor $ 960
• Cr. Incentive from lessor $ 960
To record cash payment on new lease and amortization of incentive over the new lease
term
Recurring journal entries in Years 1-8:
• Dr. Lease expense $ 1,080
• Dr. Incentive from lessor (960 ÷ 8 years) $ 120
• Cr. Cash $ 1,200

2015
Accounting for Finance Lease - Lessee

Recognition:
1. Leased asset
2. Liability
Recognize:
1. Depreciation
2. Finance expense
Finance Lease Accounting - Lessee
Statement of financial position Profit or loss
Measurement
Initially record asset and liability at
lower of:
2. Present value of minimum lease
payments
3. Fair value

Finance Lease Accounting – Lessee
Computation of Minimum lease payments
Include
Non-cancellable lease payments
Guaranteed residual value
Purchase option if reasonably certain of
exercise
Lease payments under bargain renewal
option
Exclude
Contingent rent
Cost for services
Taxes if paid by and reimbursed to the
lessor

Lessee:
1. In determining the present value of the MLPs is the lower of
a) the lessee’s incremental borrowing rate or
b) the implicit rate in the lease, if it is practicable for the lessee to learn the implicit
rate computed by the lessor.
Discount rate Lease Classification
Lessor:
1. In determining the present value of the MLPs is the implicit rate in the lease

Finance Lease Accounting – Lessee
Initial :
1. The acquisition of an asset and
2. The incurrence of an obligation
Subsequent: Liability
1. Payment of MLP is reduction of
liability (Lease payable).
2. Finance charge
3. Contingent rents expensed as
incurred.
Subsequent: Asset
1. Depreciate asset over shorter of:
1. Lease term
2. Useful life (unless
reasonably certain lessee
will obtain ownership)

Finance Lease Accounting – Lessor
Initial recognition:
1. Receivable# (present value of
gross investment*)
2. Profit on sale
Subsequent recognition:
1. MLP collection recognized as
1. Reduction of receivable
2. Finance income calculated
using
effective interest method
*Gross investment (GI)* = MLPs (Incl. NC MLPs+GRV+Purchase option) + UGRV
# Net investment (NI) = Gross investment – Unearned Finance Income
# Net investment (NI) = GI discounted @ interest rate implicit in the lease

2015
Accounting for Lessors –
Manufacturer/ Dealer

Manufacturer/ dealers as Lessors
Revenue recognition:
Recognize sales revenue at
commencement of lease.
Measurement:
Revenue =
lower of fair value and PV of MLP.
Costs recognition:
1. Recognize costs of sales
Measurement:
1. Difference between carrying
amount of leased asset and PV
of UGRV.
Initial direct costs:
1. Expense when selling
profit recognized

2015
Accounting for ‘Sale and Leaseback’

Sale and Lease back Accounting
If SLB results in a finance lease:
1. Any excess of sales proceeds
over the carrying amount
2. shall be deferred and amortized
over the lease term.
If SLB results in operating lease:
1. If the transaction is established at
fair value,
2. any profit or loss shall be
recognised immediately.
3. Eg: Asset Light strategy

2015
Determining if arrangement contains a
lease

The arrangement involves
the use of ‘assets/
property, plant or
equipment’.
The property, plant or
equipment in the
arrangement is either
explicitly or implicitly
identified
The arrangement conveys
to the purchaser/lessee
the “right to use” the
specified property, plant or
equipment
FACTORS Determining whether an ‘arrangement’ contains a ‘lease’
Lease Vs Service Concession Arrangements
SCA within the scope of IFRIC 12/ Topic 853 are NOT within the scope of the guidance in this
standard/IFRIC.
Factor 1 Factor 1 Factor 2

1. The property, plant or equipment can be either
explicitly or implicitly identified.
2. Performance is dependent on the specified asset.
The arrangement involves
the use of ‘assets/
property, plant or
equipment’.
Determining whether an ‘arrangement’ contains a ‘lease’
Factor 1
Eg: An asset has been implicitly specified if, for example,
1. the owner-seller owns or leases only one asset with which to fulfill its obligation to
the purchaser and
2. it is not economically feasible or practicable for the owner-seller to perform its
obligation through the use of alternative asset.

1. If the contractual arrangement provides for cancellation by the owner without significant
termination penalties, we believe this is indicative that the manager does not have the ability or
right to operate the property.
2. If the termination penalty is significant (i.e., a barrier to cancellation by the owner), we believe
the manager generally has substantive rights under the arrangement.
Factor 2 Determining whether an ‘arrangement’ contains a ‘lease’

2015
lease: Examples

Practical Eg 1 Determining whether an ‘arrangement’ contains a ‘lease’
A production entity (the purchaser) enters into an arrangement with a 3rd party to supply a minimum quantity
of a specialty chemical needed in its production process for a specified period of time. The supplier designs
and constructs a facility adjacent to the purchaser’s plant to produce the needed chemical and maintains
ownership and control over all significant aspects of operating the facility. The agreement provides for all of
the following:
a. The facility is explicitly identified in the arrangement, and the supplier has the contractual right to supply
chemical from other sources. However, supplying chemical from other sources is not economically feasible or
practicable.
b. The supplier has the right to provide chemical to other customers and to remove and replace the facility’s
equipment and modify or expand the facility to enable the supplier to do so. However, at inception of the
arrangement, the supplier has no plans to modify or expand the facility. The facility is designed to meet only
the purchaser’s needs.

c. The supplier is responsible for repairs, maintenance, and capital expenditures.
d. The supplier must stand ready to deliver a minimum quantity of chemical each month.
e. On a monthly basis, the purchaser will pay a fixed capacity charge and a variable charge based on actual
production taken. The purchaser must pay the fixed capacity charge irrespective of whether it takes any of the
facility’s production. The variable charge includes the facility’s actual energy costs, which comprise
approximately 90 percent of the facility’s total variable costs. The supplier is subject to increased costs
resulting from the facility’s inefficient operations.
f. In the event that the facility does not produce the stated minimum quantity, the supplier must return all or a
portion of the fixed capacity charge.

Solution:
Based on an evaluation of the circumstances, the arrangement contains a lease within the scope of this
standard.
1. Property, plant, or equipment (the facility) is explicitly identified in the arrangement and
2. Fulfillment of the arrangement is dependent on the facility. While the supplier has the right to supply gas
from other sources, its ability to do so is non-substantive.
3. The purchaser has obtained the right to use the facility because, in particular, the fact that the facility is
designed to meet only the purchaser’s needs and the fact that the supplier has no plans to expand or
modify the facility — it is remote that any parties other than the purchaser will take more than a minor
amount of the facility’s output and
4. the price the purchaser will pay is neither contractually fixed per unit of output nor equal to the current
market price per unit of output as of the time of delivery of the output.

2015
leases: Vs
Service concession arrangements

40
IFRIC 4 Vs. IFRIC 12
Leases* Vs Service Concession arrangements
IFRIC 4: IFRS requires that arrangements that convey the right to use an asset in
return for a payment or series of payments be accounted for as a lease, even if
the arrangement does not take the legal form of a lease.
For eg:
Such arrangements have become very common in the renewable energy business,
where all of the output of wind or solar farms or biomass plants is contracted to a single
party under a power purchase agreement.

IFRIC 4 Vs. IFRIC 12
Leases* Vs Service Concession arrangements
Power purchase agreements (Take or pay arrangements)
1. The purchaser might take all or substantially all of the output from a specified facility. However,
this does not necessarily mean that the entity is paying for the right of use of the asset rather
than for its output.
2. If the purchase price is
o fixed per unit of output, or
o equal to the current market price at the time of delivery,
3. the purchaser is presumed to be paying for the output rather than leasing the asset.

‘IFRIC 12 – Service Concession Arrangements’
Key Concepts
2015

Infrastructure used in a public-to-private service concession arrangement for its entire
useful life (whole of life assets) is within the scope of this IFRIC if the conditions in ‘I’
above are met.
IFRIC 12 - Service concession arrangements
Application scope
I. the grantor controls or regulates what services the operator must provide with the
infrastructure, to whom it must provide them, and at what price; AND
II. the grantor controls—through ownership, beneficial entitlement or otherwise—any
significant residual interest in the infrastructure at the end of the term of the
arrangement.
This IFRIC applies to public-to-private service concession arrangements if:
Presentation by : CA Varun Sethi Restricted Circulation 2015

Lessee
Asset ownership
Service/
O&M
contracts
ROT BOO
100%
divestment/
Privatization
Capital Investment
Demand Risk
Typical duration
Primary IFRS
applicable to Operator
Residual interest
Grantor
Grantor
Shared Grantor
8-20 yrs 1-5 years
Grantor
IAS 17 IAS 18
Service Provider Owner
Category Operator
leases
assets from
grantor
BOT
25-30 yrs
Grantor Operator
Grantor OperatorOperator
Grantor and /or Operator Operator
25-30 yrs Indefinite/
License period
Grantor Operator
IFRIC 12 IAS 16
‘Operator’ Accounting under IFRS
Restricted Circulation 2015

‘IAS 17/IndAS 17’
First Time Adoption
First Time Adoption of IAS 17/ IndAS 17
2015

IFRIC 4 /
Appendix C
IndAS 17
assessment
Accounting for leases – First Time adoption – Voluntary exemption
If there is any ‘land lease’ newly classified as ‘finance lease’ at the transition date,
which was classified differently under previous GAAP, then the FTA may
• recognize assets and liability at fair value on that date; and
• any difference between those fair values is recognized in retained earnings.

‘IAS 17 Vs IndAS 17 Vs AS 19’
A comparison
2015

IndAS 17/
IFRIC 4 :
Requires
determining
arrangements
contain a lease
AS 19 does
not
Accounting for leases – A comparison – IndAS 17 Vs IAS 17

Accounting for
Initial direct
costs
(IDC)

Accounting for
Lease security
deposits

CA Varun Sethi - ICAI IFRS training - IAS 17 & IAS 23 - Oct 2015

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