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22 LEASES - A PROJECT UPDATE REASSESSMENT OF THE DISCOUNT RATE The discount rate would not be reassessed if there was no change in the lease payments. The discount rate would be reassessed when the changes below were not reflected in the initial measurement of the discount rate: 1. When there is a change in lease payments that is due to a change in the assessment of whether the lessee has a significant economic incentive to exercise an option to extend a lease or to purchase the underlying asset. 2. When there is a change in lease payments that is due to the exercise of an option that the lessee did not have a significant economic incentive to exercise. The revised discount rate would be the spot rate at the reassessment date (that is, the rate that would be applied to a new lease that was entered into on that date), which would then be applied to the remaining lease payments (for example, the remaining payments due in the initial lease plus the payments due during the extension period or upon exercise of a purchase option). SHORT TERM LEASES A short-term lease is a lease that, at the date of commencement of the lease, has a maximum possible term, including any options to renew, of 12 months or less. Cancellable leases would meet the definition of short-term leases if the initial noncancellable period, together with any notice period, is less than one year. A lessee would not be required (but would be permitted) to recognise lease assets and liabilities arising from short term leases. For those leases, assuming the lessee did not elect to recognise assets and liabilities arising from them, lease payments would be recognised in profit or loss on a straight-line basis over the lease term, unless another systematic and rational basis was more representative of the time pattern in which use is derived from the underlying asset. It is not yet clear whether the option to recognise lease assets and liabilities arising from short term leases would need to be applied to all of those leases, or whether an entity could choose which of its short term leases to capitalise. A lessor would be permitted to elect, as an accounting policy for a class of underlying asset(s), to account for all short-term leases by not recognising lease assets or lease liabilities and by recognising lease payments in profit or loss on a straight-line basis over the lease term, unless another systematic and rational basis was more representative of the time pattern in which use is derived from the underlying asset. This would result in an accounting approach which would be similar to operating lessor accounting in accordance with IAS 17. SALE AND LEASEBACK TRANSACTIONS The first step would be to determine whether a sale had occurred, which would be assessed using the control criteria set out in the revenue recognition project. If no sale had taken place, then the entire transaction would be accounted for as a financing arrangement. When a sale of an asset has occurred and then the asset is leased back, the transaction would be accounted for as a sale and then a leaseback. If the consideration was at fair value, the gains and losses arising from the transaction would be recognised when the sale occurred. If the amount of consideration was not fair value, the assets, liabilities, gains and losses recognised would be adjusted to reflect current market rentals. The seller/lessee would adopt the whole asset approach in a sale and leaseback transaction. This means that in a sale and leaseback transaction, the seller/lessee sells the entire underlying asset and leases back a right-of-use asset relating to the underlying asset.
LEASES - A PROJECT UPDATE 23 DISCLOSURE The main disclosure requirements for lessees would include: –– A reconciliation of opening and closing balance of right-of-use assets (both finance and straight line), disaggregated by class of underlying asset –– A reconciliation of the opening and closing balance of lease liabilities (both finance and straight line), including interest and unwinding of discount –– A maturity analysis of the undiscounted cash flows that are included in the lease liability –– Information about the principal terms of any significant lease not yet commenced –– Expenses recognised in the period for variable lease payments that were not included in the lease liability –– Qualitative information related to short-term lease arrangements that would result in a material change to expenses in the next reporting period as compared to the current period. The main disclosure requirements for lessors would include: –– A table of all lease related income items recognised in the reporting period disaggregated into (a) Profit, recognised at lease commencement (split into revenue and cost of sales if that is how the lessor has presented the amounts in the statement of comprehensive income) (b) Interest income on the lease receivable (c) Interest income on the residual asset (d) Variable lease income (e) Short-term lease income. –– A qualitative description of purchase options in leasing arrangements (including the extent to which the entity is subject to such agreements). –– A reconciliation of the opening and closing balance of the lease receivable and residual assets. –– A maturity analysis of the undiscounted cash flows those are included in the right to receive lease payments (at least the undiscounted cash flows to be received in each of the first five years after the reporting date and a total of the amounts for the years thereafter). The analysis should reconcile to the right to receive lease payments. –– Information about the basis and terms on which variable lease payments are determined. –– Information about the existence and terms of options, including for renewal and termination. The main disclosure requirements for lessors of investment property would include: –– A maturity analysis of the undiscounted future non-cancellable lease payments (at least the undiscounted cash flows to be received in each of the first five years after the reporting date and a total of the amounts for years thereafter). –– Minimum contractual lease income and variable lease payment income within the table of lease income. –– The cost and carrying amount of property on lease or held for leasing by major classes of property according to nature or function, and the amount of accumulated depreciation in total. – – Information about leases that are not within the scope of the receivable and residual approach, including the basis on which variable lease payments are determined, the existence and terms of options (including renewal and termination) and any restrictions imposed by lease arrangements.
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