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Basis For Conclusions on IFRS 16 Sale and Leaseback Transactions

Basis For Conclusions on IFRS 16 Sale and Leaseback Transactions

Basis For Conclusions on IFRS 16 Sale and Leaseback Transactions

Sale and leaseback transactions before the date of initial application 

In response to feedback from stakeholders, the IASB decided to provide transition requirements for sale and leaseback transactions that are consistent with the general transition requirements for all leases. Consequently, a seller-lessee should not perform any retrospective accounting specific to the sale element of a sale and leaseback transaction on transition to IFRS 16. A seller-lessee is required to account for the leaseback on transition to IFRS 16 in the same way as it accounts for any other lease that is in existence at the date of initial application.

The IASB considered requiring a lessee to reassess historic sale and leaseback transactions to determine whether the transfer would have been accounted for as a sale applying IFRS 15. However, the IASB concluded that the costs of performing the reassessment would not be justified.

The IASB also decided that a seller-lessee should apply the approach to gain or loss recognition on sale and leaseback transactions in IFRS 16 only to sale and leaseback transactions entered into after the date of initial application of IFRS 16. The IASB concluded that the costs of applying a retrospective approach would outweigh the benefits in terms of reported information.

Basis For Conclusions on IFRS 16 Sale and Leaseback Transactions

Consequential amendments
Investment property

IFRS 16 amends the scope of IAS 40 by defining investment property to include both owned investment property and investment property held by a lessee as a right-of-use asset. A summary of the IASB’s considerations in developing the amendments to the scope of IAS 40. Business combinations

The IASB decided that when the acquiree in a business combination is a lessee, the acquirer should measure the acquiree’s lease liability at the present value of the remaining lease payments as if the acquired lease were a new lease at the date of acquisition. The acquiree’s right-of-use asset should be measured at an amount equal to the lease liability, with an adjustment for any off-market terms present in the lease.

The IASB considered whether an acquirer should be required to follow the general principle in IFRS 3 Business Combinations and measure the acquiree’s right-of-use assets and lease liabilities at fair value on the date of acquisition. However, in the IASB’s view, the costs associated with measuring lease assets and lease liabilities at fair value would outweigh the benefits because obtaining fair value information might be difficult and, thus, costly. The IASB also noted that, when the acquiree is a lessee, the requirements of IFRS 3 (as amended by IFRS 16) for the measurement of lease assets and lease liabilities would result in the recognition of a net carrying amount for the lease at the date of acquisition that approximates the fair value of the lease at that date.

Basis For Conclusions on IFRS 16 Sale and Leaseback Transactions

The IASB also considered whether to require an acquirer to recognise assets and liabilities relating to any off-market terms if an acquiree is the lessee in a lease for which either the short-term lease or low-value asset lease exemptions described in paragraph 5 of IFRS 16 are applied. Such a requirement would be consistent with the general principles of IFRS 3, under which assets and liabilities relating to contracts with off-market terms are recognised separately in the balance sheet and not subsumed within goodwill on acquisition. However, the IASB observed that the effect of any such off-market terms would rarely be material for short-term leases and leases of low-value assets. Consequently, it decided not to include this requirement in IFRS 3.

Basis For Conclusions on IFRS 16 Sale and Leaseback Transactions

Transition for first-time adopters of IFRS
The IASB considered whether the transition relief for lessees of IFRS 16 should also apply to lessees applying IFRS 1 First-time Adoption of International Financial Reporting Standards.

The IASB decided that a first-time adopter of IFRS should be permitted to apply some of the transition reliefs available to an existing IFRS preparer. This is because first-time adopters will face issues similar to those faced by existing IFRS preparers, and the transition requirements provide relief when first applying the requirements of IFRS 16. However, the IASB decided that a first-time adopter is not permitted to apply those transition reliefs that depend upon the lease having previously been accounted for applying IAS 17. This is because the IASB is not aware of, nor is it possible to consider, the accounting for leases required by every other GAAP. The amounts recognised in accordance with other GAAPs could be significantly different from the amounts recognised applying IAS 17 and IFRS 16.

The IASB also decided that a first-time adopter should apply IFRS 16 at the date of transition to IFRSs as defined in IFRS 1. Accordingly, a first-time adopter is not able to apply the transition relief provided in IFRS 16, which permits a lessee not to restate comparative information. A first-time adopter is required to restate comparative information applying IFRS 1 for all elements of its financial statements. For this reason, the IASB concluded that it would be inconsistent and impractical for a first-time adopter to not restate comparative information about leases in its first IFRS financial statements.

The IASB also decided not to permit a first-time adopter of IFRS to apply the transition relief in IFRS 16 for leases classified as finance leases applying IAS 17. The transition relief in IFRS 16 requires an IFRS preparer to measure the carrying amount of the right-of-use asset and the lease liability at the date of initial application of IFRS 16 as the carrying amount immediately before that date applying IAS 17. The rationale for this requirement is that the requirements of IAS 17 for leases classified as finance leases were similar to the requirements of IFRS 16. However, as described in paragraph above, the IASB cannot consider the accounting required by every other GAAP for leases that would have been classified as finance leases applying IAS 17. Consequently, the IASB concluded that carrying forward a first-time adopter’s previous accounting could be misleading to users of financial statements, and could result in a lack of comparability with other IFRS preparers, perhaps for many years after first implementing IFRS.

Basis For Conclusions on IFRS 16 Sale and Leaseback Transactions

Comparison with FASB decisions
The IASB and the FASB reached different decisions about the lessee accounting model. The differences largely affect leases that were previously classified as operating leases. There are a number of other differences between IFRS 16 and the decisions made by the FASB, primarily because of the different decisions reached on the lessee accounting model.

Basis For Conclusions on IFRS 16 Sale and Leaseback Transactions

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