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18 LEASES - A PROJECT UPDATE A lessor would apply the guidance in IAS 39 Financial Instruments: Recognition and Measurement, to assess whether the lease receivable is impaired. Changes in lease payments that are due to a reassessment in the lease term would result in an adjustment being made to the receivable and to any residual asset, the combined effect of which would be recognised in profit or loss. BDO comment The receivable and residual approach would be the most complex of the models to be applied, and there are certain aspects that may be controversial. For example, the accounting to be applied for the residual asset retained by the lessor is not simply to maintain the retained portion of the book value during the lease term, subject to impairment. Instead, the calculation is based on the following steps: 1. The expected residual value of the portion of the leased asset that has been retained by the lessor is calculated. This is based on the fair value of the asset at the commencement of the lease (in the example above this is CU4,040, a CU200 increase in comparison with the existing depreciated cost of CU3,840). 2. The expected residual value is then discounted back for the lease term, using the interest rate that the lessor charges the lessee. This gives the present value of the residual asset at the commencement of the lease (in the example above this is CU2,167). This amount will not appear in the lessor’s statement of financial position, instead representing a ‘memo’ amount that is required for the purposes of the overall calculation. 3. The difference between the present value of the residual asset and the existing depreciated cost that has been raecorded by the lessor is established. This difference is equal to the amount of the fair value increase (in this example, CU200) that relates to the residual asset that has not been disposed of by the lessor (in this example, CU107). The reason for this approach is to ensure that the lessor does not recognise any profit in respect of the residual asset that has not been disposed of, instead only recognising profit of the amount of the asset that relates to the lease term (in this example CU93). The operation of the calculation means that the total of the profit relating to the two components of the leased asset that are disposed of and retained (CU93 and CU107) will always equal the difference between the fair value and existing book value of the asset at the lease commencement date (CU200). 4. The accretion of the revalued residual asset (step 2 above) is then added each period to the carrying amount of the recognised residual asset (in the example above, this is CU2,060 at commencement of the lease). The difference between the ‘gross’ and ‘net’ residual asset (in the example above, CU107 which is the fair value uplift that relates the portion of the asset that is not covered by the lease), remains the same throughout the lease term. It does not initially seem clear why the residual asset recognised by the lessor is accreted each year using the amount that is calculated on the basis of the revalued amount of the asset. However, the approach appears consistent with the ‘whole asset’ approach that is required to be applied for the purposes of sale and leaseback transactions. The overall approach would seem to be that the whole of the leased asset is derecognised, with the retained portion then being recognised at the discounted amount of its expected depreciated fair value at the end of the lease. This amount is then reduced to the extent of the portion of the difference between the existing carrying amount of the leased asset, and its fair value, at the commencement date of the lease that relates to the residual asset that the lessor has retained. Although, from a conceptual perspective, this would seem largely to be an appropriate approach it is complex. Some might also question why the recognised (net) residual asset is accreted using amounts calculated on the basis of the revalued amount of the asset. This is because a portion of the accretion then represents part of the revaluation (because the accretion is based on the revalued amount and not the lower existing carrying amount). Under the leases proposals, this would be recognised in profit or loss as finance income, but under IAS 16 any revaluation credit would be recorded in Other Comprehensive Income. Others may have concerns about the accretion of a non-financial asset, as accretion is normally applied only to financial assets and liabilities. It might be suggested that a more straightforward approach would be to measure the residual asset on the same basis as it was measured before the commencement date of the lease (that is, for the example above, depreciated cost meaning that the lessor would measure the residual asset at CU2,060 throughout the lease term (unless it was impaired). This approach might also simplify the accounting for leased assets that have previously been revalued, with amounts recorded in Other Comprehensive Income, as it would appear that under the IASB’s proposed model there would be a further adjustment to reallocate a proportion of the gain recorded in OCI. It will be interesting to see comments received by the Boards, and their associated redeliberations once the comment period has closed.
LEASES - A PROJECT UPDATE 19 ‘Operating lease’ approach The proposed model is similar to the current operating lease model. A lessor would not recognise a lease receivable and would continue to recognise the underlying asset. Lease payments receivable would be recognised as income on a straight line basis or another systematic basis, if more representative of pattern of earning rentals. The differences between the two approaches can be summarised as follows: “Residual and receivables” approach “Operating lease” approach Statement of financial position 1. Receivables - right to receive lease payment (present value plus direct costs) 2. Residual asset - The IASB tentatively decided that revaluation of the residual asset should be prohibited Leased (ROU) asset - measured at fair value or cost Income statement Profit on transfer of ROU (presentation based on business model) Interest income on both the lease receivable and the residual asset Rental income-straight-line basis or another systematic basis Depreciation or fair vale changes Presentation A lessor that applied the residual and receivable approach would include the following information: In its statement of financial position, present: –– The lease receivable and the residual asset separately on the face of the statement, adding to a total for lease assets; or –– The lease receivable and residual asset as one amount for lease assets, with those two components being disclosed in the notes. In its statement of comprehensive income: –– Present the accretion of the residual asset as interest income –– Present the amortisation of initial direct costs as an offset to interest income –– Present lease income and lease expense in either separate line items or net as a single line item, on the basis of which best reflects the lessor’s business model –– Separately identify income and expense either by separate presentation in the statement of comprehensive income or by disclosure in the notes to the financial statements –– If disclosed and not presented, notes should reference the line item where income is presented. In its cash flow statement, classify cash inflows from leases within operating activities.
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