IFRS 16 – An overview - KPMG
嚜澠FRS 16 每
An overview
The new normal for lease accounting
March 2021
home.kpmg/ifrs
Contents
1
IFRS 16 at a glance
1.1 Key facts
1.2 Key application issues
2
2.1
2.2
2.3
2.4
2.5
2
2
3
Lessee accounting
Lessee accounting model
Initial measurement of the lease liability
Initial measurement of the right-of-use asset
Subsequent measurement of the lease liability
Subsequent measurement of the right-of-use
asset
2.6 Recognition exemptions for lessees
2.7 Presentation and disclosure
4
4
5
11
12
15
17
20
3
3.1
3.2
3.3
3.4
3.5
Lessor accounting
Lessor accounting model
Lease classification
Operating lease model
Finance lease model
Presentation and disclosure
23
23
24
27
28
29
4
4.1
4.2
4.3
4.4
Lease definition
Overview
Identified asset
Economic benefits from using the asset
Right to direct the use
31
31
32
38
40
5
5.1
5.2
5.3
5.4
5.5
Separating components
Overview
Identify separate lease components
Identify separate non-lease components
Allocate the consideration
Allocate the variable consideration
46
46
46
48
50
53
6
6.1
6.2
6.3
6.4
6.5
6.6
Lease term
Overview
The non-cancellable period
The enforceable period
The reasonably certain threshold
Renewable and cancellable leases
Changes in the lease term
56
56
57
57
60
62
64
7
7.1
7.2
7.3
Lease modifications
Definition
Lessee modification accounting
Lessor modification accounting
68
68
70
75
8
Sub-leases
80
9
Sale-and-leaseback
82
Appendix I: List of examples
86
Keeping in touch
88
About this publication
Acknowledgements
90
90
The new normal for lease
accounting
IFRS 16 Leases has now been successfully adopted by companies reporting under
IFRS? Standards. It is the new normal for lease accounting around the world.
IFRS 16 had a significant impact on the financial statements of lessees with
＆big-ticket＊ leases, from retailers to banks to media companies. Although lessors
found much that was familiar in IFRS 16, they faced new guidance on a number
of aspects, from separating lease and non-lease components, to more radical
accounting changes for more complex arrangements such as sale-and-leaseback
transactions and sub-leases.
Many implementation challenges have become day-to-day application issues.
Some of these are technical accounting challenges 每 e.g. identifying which
transactions are or contain leases. Other challenges relate to systems and
processes 每 e.g. gathering the data required to drive lease accounting and support
the ongoing judgements required to apply IFRS 16.
Some of these challenges could not have been foreseen. The COVID-19 pandemic
has resulted in record numbers of changes to lease agreements. An in-depth
understanding of IFRS 16＊s detailed guidance on lease modifications is currently
essential, and many lessees have taken advantage of the new practical expedient
for rent concessions.
This publication provides an overview of IFRS 16＊s accounting models for lessees
and lessors. It then takes a deeper dive into critical areas such as lease definition
and accounting for lease modifications.
If you are looking for a practical overview of IFRS 16, or just a refresher, you＊ve
come to the right place. We have included examples and insights to help you
understand the requirements and their impacts on the financial statements. If you
want to know more, see our detailed publications on lease accounting available at
home.kpmg/ifrs16.
Kimber Bascom
Brian O＊Donovan
Marcio Rost
KPMG global IFRS leases leadership team
KPMG International Standards Group
? 2021 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
2 | IFRS 16 每 An overview: The new normal for lease accounting
1
IFRS 16 at a glance
1.1
Key facts
This publication provides an overview of IFRS 16 and how it affects the financial
statements of the lessee and the lessor. It includes examples and insights.
The publication begins with an overview of the lessee and lessor accounting
models, summarising the impact of IFRS 16 on their respective financial
statements. To apply their respective models, the lessee and the lessor need
to follow preliminary steps that are discussed in more detail in the subsequent
chapters: identify the lease (see Chapter 4), separate components (see Chapter 5)
and determine the lease term (see Chapter 6). The lessee will need to choose
whether to apply the recognition exemptions (see Section 2.6).
The following diagram illustrates the relationships between key elements of the
standard, and shows where each is discussed in this publication.
Many chapters include links to our more detailed guidance. You can also find more
general guidance on IFRS 16 in Chapter 5.1 in our publication Insights into IFRS
and at home.kpmg/ifrs16.
? 2021 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
1 IFRS 16 at a glance 3
1.2 Key application issues
1.2
Key application issues
Applying IFRS 16 involves significant judgements and accounting policy elections
that may impact the recognition of assets and liabilities, and their measurement.
Applying the definition of a lease
Assessing whether an arrangement is, or contains, a lease determines whether
an arrangement is on- or off-balance sheet for a customer. The assessment can be
complex and is required for each new contract. It includes consideration of:
每 supplier＊s substitution rights: even if the supplier has the right to substitute the
leased asset, there could still be a lease unless the supplier has the practical
ability to substitute the asset throughout the period of use and it would benefit
economically from the substitution (see 4.2.3); and
每 who takes the relevant decisions that affect the economic benefits arising from
the lease asset throughout the lease term: this assessment can be particularly
judgemental when both the supplier and the customer take some decisions, or
many decisions are predetermined (see 4.4.1每2).
Determining the lease term
The assessment of the lease term is a critical estimate and a key input into the
amount of the lease liability for the lessee. For lessees, the lease term also
determines whether a lease is eligible for the recognition exemption for short-term
leases. For lessors, it affects lease classification and income recognition.
每 Determining the enforceable period is complex when relevant laws and
regulations in the local jurisdiction create enforceable rights and obligations
in addition to those set out in the written lease agreement. Determining the
broader economic penalties incurred by the lessee and lessor when exercising a
termination right also presents interesting challenges (see Section 6.3).
每 Determining the lease term for renewable and cancellable leases, including
assessing the enforceable period, was a complex implementation issue on which
the IFRS Interpretations Committee has provided guidance (see Section 6.5).
Lease modifications
The guidance on lease modifications has been a key area of focus for many
companies due to the economic impact of the COVID-19 pandemic (see
Chapter 7).
Key accounting policy choices and exemptions
每 A lessee can elect not to apply the lessee accounting model to leases with a
lease term of 12 months or less that do not contain a purchase option (by class
of underlying asset) and leases for which the underlying asset is of low value
when it is new (on a lease-by-lease basis) (see Section 2.6).
每 A lessee can elect, by class of underlying asset, to combine each lease
component and any associated non-lease components and account for them as
a single lease component (see Section 5.3).
每 A lessee may apply a practical expedient that simplifies the accounting for
eligible rent concessions that are a direct consequence of the COVID-19
pandemic (see 7.2.4).
每 Both the lessee and the lessor may apply the standard to a portfolio of lease
contracts if certain conditions are met (see Section 5.2).
? 2021 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
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