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Basis For Conclusions on IFRS 16 Presentation

Basis For Conclusions on IFRS 16 Presentation

Basis For Conclusions on IFRS 16 Presentation

Statement of financial position
The IASB decided that, if not presented separately in the balance sheet, right-of-use assets should be included within the same line item as similar owned assets. The IASB concluded that, if right-of-use assets are not presented as a line item, presenting similar leased and owned assets together would provide more useful information to users of financial statements than other approaches. This is because a lessee often uses owned assets and leased assets for the same purpose and derives similar economic benefits from the use of owned assets and leased assets.

However, the IASB noted that there are differences between a right-of-use asset and an owned asset, and that users of financial statements may want to know the carrying amount of each separately. For example, right-of-use assets may be viewed as being (a) less risky than owned assets, because a right-of-use asset may not embed residual asset risk; or (b) more risky than owned assets, because the lessee may need to replace the right-of-use asset at the end of the lease term, but may not be able to secure a similar rate for the replacement lease. Accordingly, IFRS 16 requires a lessee to provide information about the carrying amount of right-of-use assets separately from assets that are owned, either in the balance sheet or in the notes.

Similarly, the IASB decided that a lessee should present lease liabilities separately from other liabilities, either in the balance sheet or in the notes. In reaching this decision, the IASB noted that leasing is an important activity for many lessees. Although a lease liability shares many common characteristics with other financial liabilities, a lease liability is contractually related to a corresponding asset and often has features, such as options and variable lease payments, that differ from those typically found in other liabilities. Thus,presenting lease liabilities separately from other financial liabilities (along with the disclosure requirements discussed in paragraphs BC212–BC230) provides users of financial statements with information that is useful in understanding an entity’s obligations arising from lease arrangements. The IASB also notedthat paragraph 55 of IAS 1 requires a lessee to further disaggregate line items in the balance sheet if such presentation is relevant to an understanding of the lessee’s financial position.

Basis For Conclusions on IFRS 16 Presentation

Statement of profit or loss and other comprehensive income 

The IASB decided that a lessee should present interest expense on the lease liability separately from the depreciation charge for the right-of-use asset in the income statement. The IASB concluded that a lessee would provide more useful information to users of financial statements by presenting interest on the lease liability together with interest on other financial liabilities and depreciation of the right-of-use asset together with other similar expenses (for example, depreciation of property, plant and equipment).

Statement of cash flows 
The IASB’s decisions on the presentation of lease cash outflows are linked to the nature of the right-of-use asset and lease liability, and the presentation of expenses arising from a lease in the income statement. In the IASB’s view, it would be misleading to portray payments in one manner in the income statement and in another in the statement of cash flows.

Basis For Conclusions on IFRS 16 Presentation

Consequently, the IASB decided that a lessee should classify the principal portion of cash repayments of the lease liability as financing activities in the statement of cash flows and classify cash payments relating to interest consistently with other interest payments. This approach is consistent with the requirements in IAS 7 Statement of Cash Flows for cash flows relating to financial liabilities and provides comparability between interest paid on leases and interest paid on other financial liabilities. This approach also results in a lessee accounting for a lease consistently in the balance sheet, income statement and statement of cash flows. For example, a lessee

(a) measures and presents the lease liability similarly to other financial liabilities;

(b) recognises and presents interest relating to that liability in a similar manner to interest on other financial liabilities; and

(c) presents cash paid relating to interest on lease liabilities similarly to interest on other financial liabilities.

Basis For Conclusions on IFRS 16 Presentation

IFRS 16 is an International Financial Reporting Standard (IFRS) promulgated by the International Accounting Standards Board (IASB) providing guidance on accounting for leases. IFRS 16 was issued in January 2016 and will be effective for most companies that report under IFRS in 2019. Upon becoming effective, it will replace the earlier leasing standard, IAS 17.Users are permitted to transition to the new standard either by full retrospective application (i.e., restating all leases as if they had always been accounted for under IFRS 16, with the difference between asset and liability at the transition date charged to retained earnings) or by a cumulative catch-up methodology, in which finance leases continue unchanged while IAS 17 operating leases are converted to finance leases with the initial liability and asset equal to the present value of the remaining rent (using the lessee’s incremental borrowing rate as the discount rate for the present value).

A primary principle of IFRS 16 is that all lessee leases should be reported on the balance sheet, although there are exceptions for small items (e.g., under $5000) and for leases with a term of 12 months or less.Under IFRS 16, a lessee is required to recognize an asset for the right to use the leased item and a liability for the present value of its future lease payments.

IFRS 16 requires lessors to classify leases as either an “operating lease” or a “financing lease.”The lessor recognizes revenue under a financing lease as essentially interest payments on the amount financed. The lessor recognizes income under an operating lease on a systematic consistent with the benefits derived from the leased assets, which may be a straight-line basis.

IFRS 16 was developed in collaboration with the Financial Accounting Standards Board (FASB) in the United States, but while the new FASB leasing standard will share many common features with IFRS 16, such as reporting all large leases on the balance sheet, there will be some significant differences between the two standards.

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