Assurance and advisory firm Nkonki will be hosting a roundtable session exclusively for CFOs with Darrel Scott, Board Member of the IFRS Foundation. Scott, who is in Johannesburg for the occasion, will provide global and industry insights on the newly-released IFRS 16, issued on 13 January 2016, to CFOs from many of South Africa’s leading companies.
“The session is designed to share insights and deliberate on how this new accounting standard will impact processes and financial reporting, and how industries across the globe will deal with this change,” says Sindi Zilwa, CEO of Nkonki. It will also provide an update on accounting developments in the medium term.
The International Accounting Standards Board (IASB) issued IFRS 16 Leases in January 2016. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, namely, the customer (‘lessee’) and the supplier (‘lessor’). IFRS 16 is effective from 1 January 2019. IFRS 16 completes the IASB’s project to improve the financial reporting of leases. IFRS 16 replaces the previous leases Standard, IAS 17 Leases, and related Interpretations.
IFRS 15 Revenue from contracts with customers Nadir Malik
IFRS 15 Revenue from contracts with customers
Overview of new Standard
Back ground of revenue recognition standard
5 step Model
Contract Cost
Specific guidance
Transition
Presentation and Disclosure
Impacts, challenges and issues
Q&A discussion
IAS-1: Presentation of Financial StatementsAmit Sarkar
IAS 1 Presentation of Financial Statements sets out the overall requirements for financial statements, including how they should be structured, the minimum requirements for their content and overriding concepts such as going concern, the accrual basis of accounting and the current/non-current distinction. The standard requires a complete set of financial statements to comprise a statement of financial position, a statement of profit or loss and other comprehensive income, a statement of changes in equity and a statement of cash flows.
Leases are an important and flexible source of financing— listed companies using IFRS Standards or US GAAP estimated to have US$3.3trillion lease commitments
Over 85% of lease commitments do not appear on balance sheet today
Therefore, it is difficult for investors and others to:
Get accurate picture of entity’s lease assets and liabilities
Compare companies that lease assets with those that buy
Estimate the amount of off balance sheet obligations: often
overestimated
Leases create assets and liabilities
Most leases are not reported on the balance sheet
Long-term liabilities of heaviest users of off balance sheet leases1 understated by:
26% Europe
22% North America
32% Asia Pacific
Huge variation across and within industries
A lease conveys the right to use an asset for a period of time in exchange for cash payments
Lessee reports lease assets and liabilities on balance sheet, except for short-term and for low-value asset leases, at present value of future lease payments
Discount rate: the rate implicit in the lease, or, if rate implicit not available, lessee’s incremental borrowing rate
Exclude variable payments and most optional payments
Portfolio application, simplified reassessment
Right of Use (ROU) Asset
Balance sheet presentation separately as an asset
Depreciated over the life of the lease
Depreciation carried in profit and loss
Reassessed for impairment
Liability
Balance sheet presentation separately as a liability
Interest expense (discount unwind) through profit and loss as interest
Simplified reassessment
Balance sheet
ROU assets together with PPE or as own line item
Lease liabilities in accordance with IAS 1
Income statement
Depreciation of all leased assets
Interest expense for all lease liabilities
Cash flow statement
Principal within financing activities
Interest within either operating or financing activities (IAS 7
option)
Subleases—Intermediate lessor
Account for head lease and sublease as two separate
contracts
Classify a sublease with reference to the ROU asset arising from the head lease
Should not offset lease assets and liabilities, or income and
expenses, unless meets existing IFRS guidance for offsetting
Sale and leaseback transactions
Sale must meet the requirements in IFRS 15
Seller/lessee recognises only gain related to rights transferred
Adjustment made for off market terms
In essence, no change to lessor accounting in IAS 17
Feedback on 2013 ED
Lessor accounting in IAS 17 is not broken
Concerns about cost and complexity
IFRS 16: enhanced disclosures
Information about the residual value risk
Operating leases: separate disclosures for leased assets and assets used by a lessor for other than leasing
IFRS 16 effective for annual periods beginning on or after 1 January 2019
Early application permitted if IFRS 15 Revenue from
Contracts with Customers applied
If cumulative catch-up transition method elected:
No restatement of comparatives
No need to apply IFRS 16 to leases ending within 12 months
Simplified mea
IFRS 15 Revenue from contracts with customers Nadir Malik
IFRS 15 Revenue from contracts with customers
Overview of new Standard
Back ground of revenue recognition standard
5 step Model
Contract Cost
Specific guidance
Transition
Presentation and Disclosure
Impacts, challenges and issues
Q&A discussion
IAS-1: Presentation of Financial StatementsAmit Sarkar
IAS 1 Presentation of Financial Statements sets out the overall requirements for financial statements, including how they should be structured, the minimum requirements for their content and overriding concepts such as going concern, the accrual basis of accounting and the current/non-current distinction. The standard requires a complete set of financial statements to comprise a statement of financial position, a statement of profit or loss and other comprehensive income, a statement of changes in equity and a statement of cash flows.
Leases are an important and flexible source of financing— listed companies using IFRS Standards or US GAAP estimated to have US$3.3trillion lease commitments
Over 85% of lease commitments do not appear on balance sheet today
Therefore, it is difficult for investors and others to:
Get accurate picture of entity’s lease assets and liabilities
Compare companies that lease assets with those that buy
Estimate the amount of off balance sheet obligations: often
overestimated
Leases create assets and liabilities
Most leases are not reported on the balance sheet
Long-term liabilities of heaviest users of off balance sheet leases1 understated by:
26% Europe
22% North America
32% Asia Pacific
Huge variation across and within industries
A lease conveys the right to use an asset for a period of time in exchange for cash payments
Lessee reports lease assets and liabilities on balance sheet, except for short-term and for low-value asset leases, at present value of future lease payments
Discount rate: the rate implicit in the lease, or, if rate implicit not available, lessee’s incremental borrowing rate
Exclude variable payments and most optional payments
Portfolio application, simplified reassessment
Right of Use (ROU) Asset
Balance sheet presentation separately as an asset
Depreciated over the life of the lease
Depreciation carried in profit and loss
Reassessed for impairment
Liability
Balance sheet presentation separately as a liability
Interest expense (discount unwind) through profit and loss as interest
Simplified reassessment
Balance sheet
ROU assets together with PPE or as own line item
Lease liabilities in accordance with IAS 1
Income statement
Depreciation of all leased assets
Interest expense for all lease liabilities
Cash flow statement
Principal within financing activities
Interest within either operating or financing activities (IAS 7
option)
Subleases—Intermediate lessor
Account for head lease and sublease as two separate
contracts
Classify a sublease with reference to the ROU asset arising from the head lease
Should not offset lease assets and liabilities, or income and
expenses, unless meets existing IFRS guidance for offsetting
Sale and leaseback transactions
Sale must meet the requirements in IFRS 15
Seller/lessee recognises only gain related to rights transferred
Adjustment made for off market terms
In essence, no change to lessor accounting in IAS 17
Feedback on 2013 ED
Lessor accounting in IAS 17 is not broken
Concerns about cost and complexity
IFRS 16: enhanced disclosures
Information about the residual value risk
Operating leases: separate disclosures for leased assets and assets used by a lessor for other than leasing
IFRS 16 effective for annual periods beginning on or after 1 January 2019
Early application permitted if IFRS 15 Revenue from
Contracts with Customers applied
If cumulative catch-up transition method elected:
No restatement of comparatives
No need to apply IFRS 16 to leases ending within 12 months
Simplified mea
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The Financial Accounting Standards Board establishes standards of financial accounting that govern the preparation of financial reports in the private sector. This presentation outlines those standards for leases.
Accounting and Financial Reporting – Current Developments .docxnettletondevon
Accounting and Financial Reporting – Current Developments
156
I. Changes Coming To Lease Accounting
The FASB's lease accounting project has nine lives and has survived two exposure drafts while
headed toward final passage. As of early 2015, the FASB is putting the finishing touches on a
new lease standard that, when passed, will make dramatic changes to the way companies
account for lease transactions. In particular, most leases will be capitalized, resulting in billions
of dollars of assets and liabilities being recorded on company balance sheets.
Although the lease accounting project has gone through numerous changes, the fundamental
concept that leases be capitalized is not going to change in the final document.
In this section, the author discusses the general concepts that are included in the most recent
lease exposure draft, with modifications that have been proposed by the FASB through their
ongoing deliberations.
Background
Under current GAAP, ASC 840, Leases (formerly FASB No. 13), divides leases into two
categories: operating and capital leases. Capital leases are capitalized while operating leases
are not. In order for a lease to qualify as a capital lease, one of four criteria must be met:
1. The present value of the minimum lease payments must equal or exceed 90% or more of
the fair value of the asset.
2. The lease term must be at least 75% of the remaining useful life of the leased asset.
3. There is a bargain purchase at the end of the lease.
4. There is a transfer of ownership.
In practice, it is common for lessees to structure leases to ensure they do not qualify as capital
leases, thereby removing both the leased asset and obligation from the lessee’s balance sheet.
This approach is typically used by restaurants, retailers, and other multiple-store facilities.
Consider the following example:
Facts:
Lease 1: The present value of minimum lease payments is 89% and the lease term is 74% of
the remaining useful life of the asset.
Lease 2: The present value of minimum lease payments is 90% or the lease term is 75% of the
remaining useful life of the asset.
Accounting and Financial Reporting – Current Developments
157
Conclusion: There is a one percent difference between Lease 1 and Lease 2. Lease 1 is an
operating lease not capitalized, while Lease 2 is a capital lease under which both the asset and
lease obligation are capitalized.
SEC pushes toward changes in lease accounting
In its report entitled Report and Recommendations Pursuant to Section 401(c.) of the
Sarbanes-Oxley Act of 2002 On Arrangements with Off-Balance Sheet Implications, Special
Purpose Entities, and Transparency of Filings by Issuer, the SEC targeted lease accounting as
one of the areas that results in significant liabilities being off-balance sheet.
According to the SEC Report that focused on U.S. public companies and a U.S. Chamber of
Commerce report:
a. 63 .
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In order to inform you of the upcoming changes in lease accounting and the impact on IFRS reporting for fleets, LeasePlan’s Head of Consultancy Matthew Walters answers the most important questions on this topic in the below Q&A.
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Personal Brand Statement:
As an Army veteran dedicated to lifelong learning, I bring a disciplined, strategic mindset to my pursuits. I am constantly expanding my knowledge to innovate and lead effectively. My journey is driven by a commitment to excellence, and to make a meaningful impact in the world.