need to know / leases - project update - BDO International

14 LEASES - A PROJECT UPDATE
The proposals would require a lessee to reassess the carrying amount of each of its lease obligations if facts or
circumstances indicated that there had been a significant change in them since the previous reporting period. Changes in
obligations could arise as a result of reassessments of the lease term, of variable lease payments linked to an index or a
rate, of a reassessment of whether a purchase option will be exercised, and of other amounts that may become payable (for
example, under residual value guarantees).
Changes in lease payments that are due to a reassessment in the lease term would result in a lessee adjusting its obligation
to make lease payments and its right-of-use asset, as these relate to future periods.
Some leases include a clause under which the lessee guarantees the amount of the residual value of the leased asset at
the end of the lease term. Amounts expected to be payable under a residual value guarantee on the commencement date
are included in the lease liability and right-of-use asset. Changes in lease payments after the commencement date that
are due to a reassessment of amounts payable under residual value guarantees would change the obligation to make lease
payments and be recognised:
a) In net income to the extent that those changes relate to current or prior periods and;
b) As an adjustment to the right-of-use asset to the extent those changes relate to future periods.
The allocation between (a) and (b) would reflect the pattern in which the economic benefits of the right-of-use asset
would be consumed or have been consumed. If that pattern cannot be reliably determined the changes would be allocated
to future periods in their entirety. Amounts expected to be payable under residual value guarantees are reassessed only
when events or circumstances indicate that there has been a significant change in the expected amount. This is intended
to reduce the frequency with which lessees need to reassess amounts payable, and hence the carrying amounts of related
lease liabilities and right-of-use assets.
The IASB has retained the option in the 2010 ED, such that a lessee is permitted to measure a right-of-use asset at its
revalued amount, less any amortisation and impairment losses. The requirements are consistent with those set out in
IAS 16 Property, Plant and Equipment, in that all assets in that class of property, plant and equipment would be required
to be revalued. This links to the right-of-use assets being presented within the category of property, plant and equipment
to which the underlying asset would be allocated if it was owned by the lessee. Although the proposals would require the
recognition of gains and losses on the revaluation of right of use assets to be in accordance with IAS 38 Intangible Assets,
which is consistent with a right-of-use asset technically being an intangible right to use another entity’s asset, in practical
terms there is no difference between the recognition requirements of IAS 38 and IAS 16. However, for the purposes of the
revaluation itself the IAS 38 requirement for an active market to exist for an asset would not apply.
IAS 36 Impairment of Assets would be applied at each reporting date to determine whether a right-of-use asset is impaired,
and for the purposes of the recognition of any impairment loss.
Foreign exchange differences related to the liability to make lease payments would be recognised in profit or loss,
consistent with the guidance in IAS 21 The Effects of Changes in Foreign Exchange Rates.