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Basis For Conclusions on IFRS 16 Disclosure

Basis For Conclusions on IFRS 16 Disclosure

Basis For Conclusions on IFRS 16 Disclosure

In determining the disclosures for leases, the IASB considered the following:

(a) the disclosure requirements of IAS 17;

(b) the disclosure requirements for financial liabilities in IFRS 7 Financial Instruments: Disclosures;

(c) the disclosure requirements for non-current assets such as property, plant and equipment;

(d) work on other related projects such as the Disclosure Initiative (a broad-based initiative to explore how disclosures in IFRS financial reporting can be improved); and

(e) feedback received on the disclosure proposals in the 2010 and 2013 Exposure Drafts.

Basis For Conclusions on IFRS 16 Disclosure

The IASB received significant feedback regarding lessee disclosures. In particular:
(a) many lessees had significant concerns about the costs of complying with the disclosures proposed in the 2010 and 2013 Exposure Drafts. This was a particular concern for lessees with a high volume of leases with unique terms and conditions. These lessees suggested that there should be no need to expand the disclosure requirements beyond those in IAS 17 if the lessee accounting model in IFRS 16 provides the information that investors need. These lessees also argued that the proposed lessee disclosure requirements did not seem to be consistent with the IASB’s efforts to address ‘disclosure overload’ in other projects (ie increases in the volume of disclosures and a perceived reduction in the quality and usefulness of those disclosures).

(b) in contrast, many users of financial statements thought that the detailed disclosure requirements proposed in the 2010 and 2013 Exposure Drafts would provide useful information. Over the course of the project, the IASB held meetings with investors and analysts to discuss how particular disclosures would be used in their analysis and which disclosures would be the most useful.

(c) both preparers and users of financial statements had concerns that lengthy detailed disclosure requirements could lead to the use of ‘boilerplate’ statements rather than the provision of useful information. These stakeholders were particularly concerned about the risk of material information being ‘lost’ within lengthy and complex financial statement notes. Similarly, many stakeholders suggested that IFRS 16 should explicitly state that entities should apply materiality in determining the extent to which disclosures are required.

(d) some users of financial statements noted that the most useful information would be different for different lease portfolios. These users noted that, for leases with complex terms and conditions (which, for some entities, are the leases in which users are most interested), compliance with standardised disclosure requirements often does not meet their information needs.

In response to this feedback, the IASB decided to:
(a) include an overall disclosure objective in IFRS 16
(b) require a lessee to disclose quantitative information about its right-of-use assets, and expenses and cash flows related to leases and
(c) require a lessee to disclose any additional information that is necessary to satisfy the overall disclosure objective, and to supplement this requirement with a list of user information needs that any additional disclosures should address.

Basis For Conclusions on IFRS 16 Disclosure

Disclosures about right-of-use assets, and expenses and cash flows related to leases

The IASB decided that there are particular items of information that, if material, should be disclosed by lessees to meet the information needs of users of financial statements. The IASB noted the importance of comparable information being provided by different lessees and that comparability could be achieved by including some specific disclosure requirements in IFRS 16. These disclosure requirements relate to the information that users of financial statements have identified as being most useful to their analyses and, consequently, that they would like to have for all lease portfolios that are material to an entity.

Basis For Conclusions on IFRS 16 Disclosure:
Consequently, IFRS 16 requires a lessee to disclose:

(a) the carrying amount of right-of-use assets, and depreciation charge for those assets, split by class of underlying asset. This information is useful in understanding the nature of a lessee’s leasing activities and in comparing entities that lease their assets with those that purchase them.

(b) interest expense on lease liabilities. Together with the disclosure of the carrying amount of lease liabilities separately from other liabilities, this disclosure provides information about a lessee’s lease obligations and finance costs.

(c) the expenses related to short-term leases and leases of low-value assets accounted for applying paragraph 6 of IFRS 16, and the expense related to variable lease payments not included in the measurement of lease liabilities. These disclosures provide information about lease payments for which assets and liabilities are not recognised in the balance sheet.

(d) total cash outflow for leases. This disclosure was identified by users of financial statements as providing the most useful information about lease cash flows and is expected to help in forecasting future lease payments.

(e) additions to right-of-use assets. This disclosure provides comparable information about capital expenditure on leased and owned assets.

(f) gains and losses arising from sale and leaseback transactions. This disclosure helps to better understand the unique characteristics of sale and leaseback transactions and the effect that such transactions have on a lessee’s financial performance.

(g) income from subleasing right-of-use assets. This disclosure is useful because, along with the information about expenses related to leases discussed above, it provides a complete depiction of the overall income statement effect of an entity’s leasing activities.

Basis For Conclusions on IFRS 16 Disclosure

Maturity analysis
IFRS 16 requires a lessee to disclose a maturity analysis for lease liabilities applying paragraphs 39 and B11 of IFRS 7.

Users of financial statements identified the main objective of a maturity analysis as being to help them understand liquidity risk and estimate future cash flows. The IASB’s view is that the requirements of IFRS 7 achieve this objective, and also provide a lessee with the flexibility to present the maturity analysis that is most relevant to its particular lease portfolio.

The IASB considered whether IFRS 16 should instead include more prescriptive requirements for a maturity analysis similar to that required by IAS 17 (for example, by requiring a lessee to disclose undiscounted lease payments in each of the first five years and a total for the periods thereafter). Feedback from users of financial statements relating to the maturity analysis requirements of IAS 17 was generally positive. In particular, the prescriptive nature of the requirement ensured that different lessees provided information that was comparable.

Applying IFRS 7 to lease liabilities requires lessees to apply judgement in selecting time bands for the maturity analysis. The IASB thinks that, in a scenario in which disclosing undiscounted cash flows for each of the first five years and a total for the periods thereafter provides the most useful information to users of financial statements, the requirements of IFRS 7 should lead a lessee to disclose this level of detail. In contrast, in a scenario in which an alternative (and possibly more detailed) set of time bands provides the most useful information to users of financial statements, the requirements of IFRS 7 should lead a lessee to disclose that alternative and more useful set of time bands. For example, for a portfolio of 15–20 year leases, the requirements of IFRS 7 should lead a lessee to provide a more detailed maturity analysis than a single amount for the years beyond the fifth year.

Basis For Conclusions on IFRS 16 Disclosure

In addition, the IASB is of the view that it is appropriate to apply the same maturity analysis disclosure requirements to lease liabilities as those applied to other financial liabilities. This is because the lessee accounting model in IFRS 16 is based on the premise that a lease liability is a financial liability

The IASB decided not to require the disclosure of a maturity analysis of non-lease components. The IASB thinks that users of financial statements would find information about the maturities of any contractual commitments of an entity useful, regardless of the nature of the entity’s rights under the contract. However, the IASB noted that it could be misleading to require the disclosure of contractual commitments for services that are embedded within a lease without also requiring the disclosure of contractual commitments for services that are provided as part of other contracts. The IASB decided that adding such a disclosure requirement would be beyond the scope of the Leases project.

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