The document outlines updates on IFRS 16, a new accounting standard regarding leases, which eliminates the distinction between operating and finance leases for lessees. Key changes include the recognition of a 'right of use' asset and lease liability on the balance sheet, impacting financial metrics like gearing and credit ratings. It also discusses financial instruments under IFRS 9, which simplifies accounting and introduces an expected credit loss model for impairment assessment.

1. The Updates on IFRS 16
Institute of Management Accountants (IMA)
Abu Dhabi Chapter
15 October 2018

2. New accounting standards:
IFRS 16

3. Learning Objectives
• Lease definition – what is a lease?
• Lease term, minimum lease payments and present value
• Lease classification under IAS 17 – finance vs operating lease
• Lessee accounting:
• Finance lease
• Operating lease
• Under new standard IFRS 16
• Lessor accounting
3

4. Definition - Lease
A contract is, or contains a lease if:
the contract conveys the rights to control the use of an
identified asset (or assets)
(IFRS 16 Leases)
4

5. Definition – Lease (continued)
Identified asset(s)?
1) May be implicit or explicit
2) No practical right of substitution
Lessee directs the use?
Lessee obtains the
economic benefits?
• Must meet all criteria to be classified as a lease
• Under previous standard IAS 17, arrangement where customer obtains
substantially all output would be lease even without control
Not covered by exemption?
1) Short-term lease < 12 months
2) Low value item < $5,000
5

6. Lease – Yes or No?
1) ABC enters into an agreement to sell electricity to a steel works. In order to fulfil this
agreement it builds a power station next to the steel works. ABC does not have access to
any other electricity generating assets.
2) XYZ enters into a contract to transport a specified quantity of goods by road. XYZ has a
large number of trucks that can fulfil the contractual requirements and decides on which
truck to use for each delivery.
3) Customer A enters into a contract with S, a ship owner, for the use of an identified ship.
The customer determines the cargo to be transported, its destination and timing. The ship
owner operates the ship and is responsible for maintenance. The ship owner can refuse
to transport certain items (e.g. explosives, arms) and can restrict transportation to high
risk destinations or through dangerous waters.
4) An oil company hires a drilling company to complete a five well drilling programme. The
drilling company uses a suitable rig and provides operating staff. The oil company
determines programme specifications such as well depth and order of drilling.
5) Leasing company S provides access to an agreed pool of components to an airline. The
airline is able to direct the use of these components and is responsible for maintaining
pool levels. When the airline needs access to the pool it will submit one of its own
components for maintenance and take a similar item from the pool. When the component
has been repaired it is then placed into the pool for future use.
6

7. Lease – Yes or No?
1) ABC enters into an agreement to sell electricity to a steel works. In order to fulfil this
agreement it builds a power station next to the steel works. ABC does not have access to
any other electricity generating assets.
(YES, specific asset - assumes the customer directs its use)
2) XYZ enters into a contract to transport a specified quantity of goods by road. XYZ has a
large number of trucks that can fulfil the contractual requirements and decides on which
truck to use for each delivery.
(NO, not a specific asset due to ease of substitution)
3) Customer A enters into a contract with S, a ship owner, for the use of an identified ship.
The customer determines the cargo to be transported, its destination and timing. The ship
owner operates the ship and is responsible for maintenance. The ship owner can refuse
to transport certain items (e.g. explosives, arms) and can restrict transportation to high
risk destinations or through dangerous waters.
(YES, customer directs use – ship owner’s rights are protective only)
7

8. Lease – Yes or No?
4) An oil company hires a drilling company to complete a five well drilling programme. The
drilling company uses a suitable rig and provides operating staff. The oil company
determines programme specifications such as well depth and order of drilling.
(NO, specific asset and customer directs use but unlikely to be greater than 1 year)
5) Leasing company S provides access to an agreed pool of components to an airline. The
airline is able to direct the use of these components and is responsible for maintaining
pool levels. When the airline needs access to the pool it will submit one of its own
components for maintenance and take a similar item from the pool. When the component
has been repaired it is then placed into the pool for future use.
(NO, not specific assets as pool is continually being rotated)
8

9. Finance Lease vs Operating Lease – Current
Finance lease – “…a lease that transfers substantially all the
risks and rewards incidental to ownership of an asset”
Ownership transfer
at end of lease
term
Present value of
minimum lease
payments substantially
all of fair value
IFRS 16 will eliminate the distinction for lessees but not lessors
Operating lease – “…a lease other than a finance lease”
“Bargain purchase”
option
Lease term for
major part of
economic life
Highly specialised
nature
Secondary period
below market rent
IAS 17 -Leases
9

10. Other Key Definitions
Lease term
• Non-cancellable period of contract
• Extension option if reasonably certain
Minimum lease payments
• Periodic lease rentals
• Initial direct costs
• ‘Balloon’ payment at end of lease
• Residual value guarantee / put option
• Purchase option if reasonably certain
Lease rate
• Interest rate implicit in lease
(unlikely to be known); or
• Incremental borrowing rate
Does not include:
• Extension at market value
• Cancellable period at significant penalty
• Contingent rentals
• Cancellation / termination fees
• Unguaranteed residual value
• Service charges
• Tax and insurance
10

11. Case Study – Finance or Operating Lease?
ABC Company enters into a lease contract. The following information is relevant:
1) Initial lease term is 5 years. Lease can be renewed for a further 2 years at rates to be
negotiated at the end of the initial lease term
2) The lease can be cancelled after 2 years by settlement of all remaining lease payments
plus a 10% cancellation penalty
3) The useful economic life of the leased asset is 8 years
4) ABC can purchase the asset after 5 years for 25% of current fair value; unguaranteed
residual value at end of the lease term is estimated at 20-30%
5) Monthly lease rental is AED 10,000 for the 1st two years and AED 20,000 for the
remainder of the initial lease period; payment is made annually in advance
6) ABC has an incremental borrowing rate of 5%
Is this lease likely to be classified as an operating lease or finance lease?
(15 minutes)
11

12. Lessee Accounting – Current (IAS 17)
Finance Lease
12

13. Lessee Accounting – Current (IAS 17) (continued)
Operating Lease
13

14. Case Study
Based on the lease classification determined in the previous case study, calculate the amounts
to be recognised in the Income Statement and Balance Sheet over the lease term?
(15 minutes)
14

15. Case Study - Answer
AED
Lease payments year 1-2 20,000
Lease payments year 3-5 60,000
Total lease payments 80,000
Year 1
(cumulative)
Year 2
(cumulative)
Year 3
(cumulative)
Year 4
(cumulative)
Year 5
(cumulative)
Lease payment 10,000 20,000 40,000 60,000 80,000
Lease expense (16,000) (32,000) (48,000) (64,000) (80,000)
Deferred asset /
(liability)
(6,000) (12,000) (8,000) (4,000) -
15

16. Leases – IFRS 16
16
• ALL leases recognized
on Balance Sheet (no
operating / finance
lease distinction
• No impact on lessor
accounting
• Effective 1 January
2019
• Can impact gearing,
credit rating and ability
to obtain external
finance

17. Case Study
For the previous case study, calculate the amounts to be recognised in the Income Statement
and Balance Sheet over the lease term under the new leasing standard IFRS 16?
(15 minutes)
17

18. Case Study - Answer
18
Year 1 Year 2 Year 3 Year 4 Year 5
Lease payment 10,000 10,000 20,000 20,000 20,000
Discount factor (5%) 1 0.9524 0.9070 0.8638 0.8227
Present value 10,000 9,524 18,140 17,276 16,454
Right of use asset Year 1 Year 2 Year 3 Year 4 Year 5
Opening balance 71,394 57,115 42,836 28,557 14,278
Depreciation (14,279) (14,279) (14,279) (14,279) (14,278)
Closing balance 57,115 42,836 28,557 14,278 -
Lease liability Year 1 Year 2 Year 3 Year 4 Year 5
Opening balance 71,394 64,464 57,187 39,047 20,000
Lease payment (10,000) (10,000) (20,000) (20,000) (20,000)
Lease interest (5%) 3,070 2,723 1,860 953 -
Closing balance 64,464 57,187 39,047 20,000 -

19. Lease Presentation – Income Statement
19
Note: IFRS 16 lease expense all below EBITDA
Year 1 Year 2 Year 3 Year 4 Year 5
IAS 17
Lease expense 16,000 16,000 16,000 16,000 16,000
IFRS 16
Depreciation 14,279 14,279 14,279 14,279 14,278
Lease interest 3,070 2,723 1,860 953 -
17,349 17,002 16,139 15,232 14,278

20. Lease Presentation – Balance Sheet
20
Year 1 Year 2 Year 3 Year 4 Year 5
IAS 17
Leased asset - - - - -
Lease liability - - - - -
Deferred liability (6,000) (12,000) (8,000) (4,000) -
Equity (6,000) (12,000) (8,000) (4,000) -
IFRS 16
Right of use asset 57,115 42,836 28,557 14,278 -
Lease liability (64,464) (57,187) (39,047) (20,000) -
Equity (7,349) (14,351) (10,490) (5,722) -

21. Lessor Accounting
Balance Sheet
• Continue to recognise leased asset
• Add initial direct cost to carrying amount
Income Statement
• Recognise lease income over lease term
• Depreciate existing asset
Finance lease
Balance Sheet
• Derecognise underlying asset
• Recognise finance lease receivable
Income Statement
• Recognise finance income
Operating lease
IFRS 16 will not change the accounting for lessors
21

22. Conclusion
• A contract is, or contains a lease if it the contract conveys the rights to
control the use of an identified asset (or assets)
• The current leasing standard IAS 17 distinguishes between an operating and
finance lease, where a finance lease transfers substantially all the risks and
rewards of ownership to the lessee
• IFRS 16 will have a significant impact on lessees by removing the distinction
between operating and finance leases
• Under IFRS 16 lessees will recognise the following:
• A ‘right of use’ asset (present value of minimum lease payments)
• A lease liability
• Depreciation and interest expense
• Lease expense in earlier years will be higher under IFRS 16 but below the
EBITDA line
22

23. New accounting standards:
IFRS 9

24. Financial Instruments – IFRS 9
• The International Accounting Standards Board (IASB) published the final version
of IFRS 9 Financial Instruments in July 2014.
• IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement,
and is effective for annual periods beginning on or after January 1, 2018.
• The new standard aims to simplify the accounting for financial instruments and
address perceived deficiencies which were highlighted by the recent financial
crisis.
• Three main areas are addressed by IFRS 9:
• Classification and measurement
• Impairment
• Hedging
24

25. Classification and Measurement of Financial Assets
25
IAS 39 Categories IFRS 9 Categories
• Held to maturity investments (at amortized cost)
• Loans and receivables (at amortized cost)
• FVTPL which included held for trading investments and
derivatives and certain instruments designated at FVTPL
• Available-for-sale (residual category with fair value changes
recognized in OCI)
These are replaced in IFRS 9 with categories that
reflect the measurement, namely:
• Amortized cost
• Fair value through other comprehensive income
(FVOCI), and
• FVTPL
IAS 39 bases the classification on specific definitions for each
category
IFRS 9 bases the classification of financial assets on
the contractual cash flow characteristics and the
entity’s business model for managing the financial
asset.
Overall, the IFRS 9 financial asset classification
requirements are considered more principle based
than under IAS 39.
IAS 39 allows certain equity investments in private companies for
which the fair value is not reliably determinable to be measured
at cost
Under IFRS 9 all equity investments are measured at
fair value

26. Impairment
• The impairment requirements under IFRS 9 are significantly different from those under IAS 39. The
following table highlights the key differences between the two standards.
*generally all financial assets will carry a loss allowance
26
IAS 39 Incurred Loss Model IFRS 9 Expected Credit Loss Model
• Delays the recognition of credit losses until there is
objective evidence of impairment.
• Only past events and current conditions are
considered when determining the amount of
impairment; effects of future credit loss events
cannot be considered, even when expected
• Expected credit losses (ECLs) recognized on Day 1
and subsequently depending on changes in debtor
credit, even if no actual loss events have taken place*.
• In addition to past events and current conditions,
reasonable and supportable forward-looking
information that is available without undue cost or effort
is considered.
• Different impairment models for different financial
instruments subject to impairment testing.
• The model will be applied to all financial instruments
subject to impairment testing.

27. Classification and Measurement - Equity Instruments
• All equity instruments that are held-for-trading* should be measured at FVTPL
• For equity instruments that are NOT held-for-trading, there is an irrevocable
policy choice to measure those as FVTOCI, in which case
 Dividends are recorded in P&L
 Changes in FV are recorded in OCI
 No impairment is recognized in P&L
 No reclassification of gains and losses from OCI to P&L on derecognition
*held-for-trading are equity investments that are purchased with the intent of selling them within a short period of time,
usually less than one year
27

28. Classification and Measurement – non Equity Instruments
• Two assessments:
 Contractual cash flows give rise to solely payments of principal and interest (the
SPPI test)
 Business model for managing the financial assets
• The outcome determines whether the investment is accounted for:
 At fair value through profit or loss
 At fair value through other comprehensive income (OCI)
(with or without recycling)
 At amortised cost
28

29. Implementation of IFRS 9 – Classification and Measurement
Solely Payment of Principal and Interest (SPPI) test
September 2017
Note:
The purpose of this questionnaire is to assess whether financial assets currently
classified as “loans and receivables” under IAS 39 qualify for “amortised cost”
classification under IFRS 9 (effective 1 January 2018), which will enable the
accounting and measurement to remain relatively unchanged. In order to qualify for
this classification the following conditions must be met:
• The loan must be held to collect contractual cash flows (“held to collect
business model”); and
• Contractual terms give rise to collection of cash flows on specific dates
that are solely payments of principal and interest (SPPI).
Interest is calculated on the outstanding principal and must represent consideration
for ONLY time value of money and credit (including liquidity) risk.

30. 30
Summary Information Summary Information
Loan counterparty Loan 1 Repayment term
Current book value Other key terms
Interest rate
True / False Comments if “False”
The loan balance is expected to remain unchanged until the end of 2017 What is the expected balance at end of 2017?
All receipts of principal and interest are up-to-date with no defaults Provide more details on overdue amounts and how long overdue
The loan is held purely to collect contractual cash flows Provide more details on trading (buy / sell) of the loan both historic and planned
Interest is calculated on outstanding principal only
Interest rate is appropriate given loan period and counterparty credit risk
Where interest rate varies during the loan term this is only due to changes in
the market index (e.g. LIBOR)
The interest rate is not linked to any other factor other than market index (e.g.
FX risk, business / equity performance)
If interest rate is hedged, the only reason is to achieve a fixed rate
If interest rate is capped, the cap is fixed and not linked to external factors
other than credit worthiness
If the loan can be prepaid this is outstanding principal and interest only NOT
fair value; penalties represent reasonable compensation for loss
If the loan can be extended, extension terms continue to represent loan term
and counterparty credit risk only
Prepayments and extensions are not dependent on any external factors,
other than related to credit worthiness