act audit office · 6/5/2019 · • the trade receivables do not have a significant financing...
TRANSCRIPT
ACT Audit OfficeNew Accounting Standards Training
5 June 2019
Disclaimer
© GAAP.com.au Pty Ltd and Australian Financial Reporting Solutions – June 2019 – all rights
reserved
This presentation is intended for instruction. It is general information only, and is not specific
business advice or financial advice and no person should rely on the contents without first obtaining
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as accounting standards.
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Agenda
9:30 – 10:15 Financial Instruments
10:15 – 11:00 Revenue
11:00 – 11:15 Break
11:15 – 12:45 Revenue
12:45 – 1:45 Lunch
1:45 – 3:15 Wrap up of revenue (if needed)
Leases
3:15 – 3:30 Break
3:30 – 4:30 Leases
Understanding AASB 9 Financial Instruments
Classification changesA
AS
B 1
39 Fair value through
profit and loss
Held-to-maturity investments
Loans and receivables
Available-for-sale
AA
SB
9
Amortised cost
Fair value through profit or loss
Fair value through OCI – debt instruments
Fair value through OCI – equity instruments
AASB 9 Financial Instruments
Classification of assets
Amortised cost if
held within a business model whose
objective is to hold assets to
collect contractual cash flows
contractual terms give rise to
cash flows that are solely
payments of principal and interest
+
Fair value through P&L otherwise
Fair Value through OCI – debt instruments
Fair Value through OCI – equity instruments
AASB 9 Financial Instruments
Business model test
business model whose objective is
to hold assets to collect contractual cash flows
• Business model:
– determined by key management personnel
– not an instrument-by-instrument approach
– does not relate to a choice but rather is a matter of fact that can
be observed by the way an entity is managed and information is
provided to its management
– a single entity may have more than one business model
• Test failed, if:
– frequent sales
– performance evaluated on fair value basis
AASB 9 Financial Instruments
Cash flow characteristics test
contractual terms give rise to cash flows that are solely
payments of principal and interest
• Interest defined as
– consideration for time value of money and credit risk
• Assessment made in in the currency in which the financial asset is
denominated
• Test failed, if a contractual term changes the timing or amount of
payments of principal or interest, unless it
– is a variable interest rate that is consideration for the time value
of money and the credit risk
– is a prepayment or extension option that meets certain
conditions
Classification summary
Contractual cash flow test
satisfied?
Is the business model to
collect contractual cash
flows AND for sale?
Choose to hold at FVTPL
(to avoid accounting
mismatch)?
Business model test
satisfied?
Choose to designate
equity instruments as
FVOCI?
Amortised cost Fair value through P&LFair value through
OCI
No
YesNo Yes
No
Yes
No
Yes
Yes
No
Choose to hold at
FVTPL (to avoid
accounting mismatch)?
No
Yes
Classification of financial liabilities
Financial liability Basis
Financial liabilities at fair value through
profit and loss (e.g. derivatives)
Fair value
Financial liabilities that arise when a
transfer of assets does not qualify for
derecognition/continuing involvement
approach applies
Consideration received
Reflects obligations retained
Financial guarantee contacts Higher of amount of loss allowance and
amount initially recognised less
cumulative recognised under AASB 15
Commitments to provide loan at below
market interest rates
As above
Contingent consideration under AASB 3 FV with changes recognised in P&L
All financial liabilities subsequently measured at amortised cost, except for:
Impairment
• Incurred loss model Vs expected credit loss model
Any ideas of the difference?
Overview of the impairment
requirements
12
Change in credit risk since initial recognition
Interest revenue
Gross basis
‘Performing’ ‘Under-performing’ ‘Non-performing’
Impairment recognition
12-month
expected credit losses
Lifetime
expected credit losses
Stage 1 Stage 2 Stage 3
Lifetime
expected credit losses
When significant increase in credit risk occurs
Gross basis Net basis
© IFRS Foundation
Overview of models
General approach
“3 buckets”
Recognise 12 months or lifetime expected credit loss depending on whether there is a significant
increase in credit risk
Simplified approach
Lifetime expected credit losses from Day 1.
Available for:
- trade receivables
- contract assets
- lease receivables
Measurement of expected credit
losses (ECL)
ECL are a probability-weighted estimate of credit losses (ie the present value of all cash
shortfalls) over the expected life of the financial instrument:
• Maximum period is the maximum contractual period of exposure to credit risk
o Include cash flows expected from collateral and other credit enhancements that are part of
contractual terms
• Unbiased and probability-weighted outcome: must consider possibility that credit loss will/will
not occur
Past events Current conditions Future economic conditions
• Time value of money – discount at effective interest rate or an approximation thereof
+ +
Particular measurement methods are not prescribed
ECL shall be measured in a way that reflects:
• Reasonable and supportable information: available without undue cost or effort at the reporting
date, reflecting:
© IFRS Foundation
Determining significant increases in
credit risk
• Assumption low credit risk at reporting date?
• Has credit risk increased significantly?
• Use change in risk of a default over expected life
• Compare default risk at reporting date with initial
recognition
• Consider reasonable and supportable information
indicates a significant increase in credit risk
– Not available use past due
– Available use it
– Rebuttable presumption re 30 days past due
IASB example: Practical expedient
Provision matrix
• Company M, a manufacturer, has a portfolio of trade receivables of $30 million in 20X1 and
operates only in one geographical region.
• The customer base consists of a large number of small clients.
• Trade receivables are categorised by common risk characteristics reflecting customers’ abilities to
pay all amounts due in accordance with the contractual terms.
• The trade receivables do not have a significant financing component.
• Loss allowance = lifetime time expected credit losses.
• A provision matrix is used to determine the expected credit losses for the portfolio, based on its
historical observed default rates over the expected life of the trade receivables and is adjusted for
forward-looking estimates.
– In this case, it is forecast that economic conditions will deteriorate over the next year.
* Refer to Example 12 in paragraph IE74-IE77 of
IFRS 9 Financial Instruments
Practical expedient
Provision matrix (continued)
Current 1–30 days
past due
31–60 days
past due
61–90 days
past due
More than 90 days
past due
Default rate 0.3% 1.6% 3.6% 6.6% 10.6%
* Refer to Example 12 in paragraph IE74 of IFRS 9
Financial Instruments
Company M estimates the following provision matrix:
Gross carrying amount Default rate Lifetime ECL allowance
$ $
A B AxB
Current 15,000,000 0.3% 45,000
1–30 days past due 7,500,000 1.6% 120,000
31–60 days past due 4,000,000 3.6% 144,000
61–90 days past due 2,500,000 6.6% 165,000
More than 90 days past due 1,000,000 10.6% 106,000
30,000,000 580,000
Hints
• When using simplified approach need to ‘group’ your
receivables into similar risks:
– Type of customers
– Geographical region
– Age
– Currency
– Customer rating.
• Default rates:
– Derive the default rates from your historical credit loss
experience
– Adjust them for forward looking information.
• Disputed invoices – should the invoice have been raised
in the first place. Not necessarily an impairment.
Inter-agency receivables
• Inter-agency loans and receivables between ACT Government
agencies are expected to have low credit risks.
• Treasury’s policy is that directorates, territory authorities and
territory-owned corporations consolidated into the WOG financial
statements will not measure any loss allowance for
receivables collectible from other ACT Government
agencies consolidated into the WOG financial statements.
• Inter-agency receivables should be assessed individually and
confirmed with the relevant agency to ensure agreement
between the agencies on the underlying amount of the
receivable.
Transition disclosures
Ongoing disclosures
AASB 1058 / AASB 15
Brainstorming: What are the key impacts at your
clients for revenue?
What about AASB 1004?
• Income guidance in AASB 1004 is being replaced by
AASB 1058 Income of Not-for-Profit Entities.
• AASB 1004 will still include guidance on:
Two standards for Not-for-Profit revenue
AASB 1058
Consideration to acquire an asset is
significantly less than the fair value
of the asset principally to enable an entity to further
its objectives
Revenue likely to be recognised on
day 1
AASB 15
In substance, contract is with a
customer
Agreement is enforceable AND
Performance obligations are
sufficiently specific
Revenue may be able to be spread
What does enforceable mean?
• “Separate party is able to enforce is through legal or
equivalent means.”
• “Equivalent means” – presence of a mechanism outside
the legal system that establishes the right of a separate
party to oblige the entity to act in a particular way or be
subject to consequence is required.
Terms which would result in
enforceability
• Refund in cash or kind if non-performance;
• Customer has a right to enforce specific performance or
claim damages;
• Customer has the right to take a financial interest in
assets purchased or constructed with funds provided;
• Parties are required to agree on alternative uses of the
resources provided;
• Administrative process exists to enforce agreements.
Other considerations for
enforceability?
• Australian law
• Legal form – what about Memorandum of
Understanding, Heads of Agreement, Letters of Intent
• Enforcement mechanisms – Ministerial direction
• Doesn’t depend on history – need the ability to enforce
• Must relate to current funds – not future funds.
Sufficiently specific performance
obligations
• Promise has to be sufficiently specific to be able to
determine when the obligation is satisfied.
• Judgement will be required taking into account
conditions specified in the arrangement, whether explicit
or implicit.
• Consider:
– Nature of type of goods and services
– Cost or value of the goods or services
– Quantity of the goods or services and
– The period over which the goods or services must be
transferred.
Timeframe for promises
• Timeframe alone is not enough
• Need to have a time frame to know when the promise
has been satisfied.
Timing of income recognition
Does the entity have a liability
or other performance obligation
in relation to the asset
received?
Immediate recognition of
income (AASB 1058)
Income may be able to be
deferred as obligation is
performed (AASB 15)
No
Yes
Focus on AASB 15
What transactions are within the
scope of AASB 15?
Scope exemptions:
• Lessor income – AASB 117 / AASB 16
• Financial instruments and other rights and obligations
within the scope of AASB 9, AASB 139, AASB 10,
AASB 11, AASB 127, AASB 128
• Insurance contracts – AASB 4 / AASB 17
• Non-monetary exchanges between entities within the
same business to facilitate sales
Applies to all revenue from contracts with
customers
Overall principle – what?
Recognise revenue in a way that
shows the transfer of
goods/services promised to
customers in an amount reflecting
the expected consideration in
return for those goods or services.
1. Identify the contract with
the customer
5. Recognise revenue as
the performance
4. Allocate the transaction
price to the performance
obligations
2. Identify the performance
obligations
3. Determine the transaction
price
The 5 steps to revenue
recognition
Customer must be able to benefit from the good / service either on its own or with other readily
available resources
The good / service is separately
identifiable from other goods / services in the
contract
Performance obligation - To be
distinct
Principal or agent
If another party is involved in providing goods or services to a customer → determine if
entity’s promise is a performance obligation:
to provide the specified goods or services itself
to arrange for the other party to provide those goods or
services
Entity is principal → recognise revenue in the gross amount of
consideration to which it expects to be entitled
Entity is agent → recognise revenue in the amount of fee
or commission to which it expects to be entitled
Indicators that an entity controls the specified
goods and service (and is a principal)
• The entity is primarily responsible for fulfilling the
promise to provide the good or service
• The entity has inventory risk before the goods or service
have been transferred to a customer or after transfer of
control
• The entity has discretion in establishing the price for the
specified goods or services
What is control?
Control is the ability to direct the use of,
and obtain substantially all of, the
remaining benefits associated with the
asset. Also an ability to prevent other
entities from directing the use of, and
obtaining the benefits from, an asset
Transfer of control over time or at
a point in time
Control is transferred
over time
Yes
Yes
No
Control is transferred at a point in time
Does customer control the
assets as it is created or
enhanced?
Does customer receive and
consume the benefits as the
entity performs?
Does the asset have an
alternative use to the entity?
No
No
Yes
Does entity have the enforceable right to
receive payment for work to date and
expect to fulfil the contract as promised?
No
Yes
Contract costs
Costs to obtain a contract
• Costs which would not have been incurred if the contract has not
been won
• Recognised as an asset if they are expected to be recovered
• If expected period is less than 12 months then expense as a
practical expedient
Costs to fulfill a contract
• If these costs are within the scope of other standards (e.g. AASB
102, AASB 116 or AASB 138) - treatment is in accordance with
appropriate standard
• If not, then you should capitalise them only if certain criteria are met
Costs to fulfil a contract
Are the costs incurred within the scope of
another standard?
Are the costs expected to be recovered?
Do the costs generate or enhance
resources that will be used to satisfy
performance obligations?
Do the costs relate directly to a contract?
No
Yes
Yes
Yes
Yes
No
No
No
Capitalise costs
(subject to amortisation and impairment)
Expense costs as incurred
Account for costs in
accordance with relevant
standard
Licences
What is a licence (AASB 15)?A licence establishes a customer’s rights to the intellectual property of an entity.
Licences of intellectual property may include, but are not limited to, licences of any of the following:
a. Software and technology
b. Motion pictures, music and other forms of medial and entertainment
c. Franchises and
d. Patents, trademarks and copyrights.
Where the contract includes a promises to grant a licence in addition to other promised goods or services, the separate performance obligations need to be identified where the licence is distinct.
Revenue recognition – licences (AASB 15)
Is the licence distinct?
Account for licence as a separate performance
obligation
Right to access the IP as it exists
through the period?
Control passes over time
Right to use the IP as it exists at a point
in time?
Control passes at a point in time
Account for licence and other promised
goods or services as a single performance
obligation
Apply general AASB 15 guidance re:
transfer of control
Yes No
AASB 2018 – 4 Australian Implementation
Guidance for NFP Public Sector Licensors
• Aim to reduce diversity since treatment under AASB 15
is not clear as refers to IP licences only.
• Amendments, guidance and illustrative examples to:
– Distinguish licences from taxes
– Determine the nature of licences
– Understand performance obligations.
• Includes practical expedients for short-term or low-value
licences.
Which standard for licences?
AASB 15
• Licences of IP
• Non-IP licencesthat do not contain a lease.
AASB 16
• Licences that are in substance leases or contain leases –excluding licences of IP.
Recognition exemptions
• Elect not to apply the requirements of AASB 15 to:
– Short-term licences (class of licence) and
– Licences for which the transaction price is of low value (licence
by licence).
• If choose to apply the exemption then recognise revenue
either upfront or straight line basis (or other systematic
basis).
• No exemption available for licence with variable
consideration.
AASB 1058 Income of Not-for-Profit Entities
Two standards for NFP income
AASB 1058
• Consideration to acquire an asset is significantly less than the fair value of the asset principally to enable an entity to further its objectives
AASB 15
• In substance, contract is with a customer
• Agreement is enforceable
• Performance obligations are sufficiently specific
Three party relationship
• Customer – party that promises consideration in
exchange for goods or services
• Customer may direct goods or services to be provided to
third party beneficiaries on their behalf.
Government NFP service
providerCommunity
at large
Steps in AASB 1058
Recognise asset at fair
value
• Cash - recognise as a financial asset under AASB 9 Financial Instruments
• Leased assets – recognise a right-of-use asset under AASB 16 Leases
• Property, plant and equipment (PPE) - recognise under AASB 116 Property, Plant and Equipment, and
• Intangible assets – recognise under AASB 138 Intangible Assets
Recognise credit on balance sheet
• Contribution by owners (AASB 1004)
• Revenue or contract liability (AASB 15)
• Lease liability (AASB 16)
• Financial instrument (AASB 9)
• Provision (AASB 137).
Excess is recognised as income
• One exception for assets controlled by the entity
Acquisition or construction of an
asset controlled by the entity
• Not a contract with a customer since no transfer of goods / services
• Liability to be recognised for fair value of asset transferred (cash) less related amounts.
• Need to be an asset that would be recognised on the books.
• Income recognised as asset constructed.
Does not require the entity to
transfer a financial asset, good or service to the
transferor
Obliges the entity to refund amounts
if the financial asset is not applied in accordance with
the terms of the transfer
Requires the entity to use the financial asset to acquire or
construct non-financial asset to
identified specifications
What does this look like in the financials?
On receipt of funds to construct an asset:
Dr: Cash
Cr: Performance obligation liability
As asset is constructed:
Dr: Capital WIP
Dr: Performance obligation liability
Cr: Cash
Cr: Income
On completion of asset:
Dr: Asset
Cr: Capital WIP
Peppercorn (below market value)
leases
• AASB 2018 – 8 Amendments to Australian Accounting Standards – Right-of-Use Assets of Not-for-Profit Entitiesissued in December 2018
• Provides a temporary option for not-for-profit lessees to elect to measure a class (or classes) of right-of-use (ROU) assets arising under ‘concessionary leases’ at initial recognition, either:
– At cost, which incorporates the amount of the initial measurement of the lease liability, or
– At fair value
• Concessionary leases in this context are leases that have significantly below-market terms and conditions principally to enable the entity to further its objectives
• Permanent option will be considered at a later date
What do entities have to do in relation
to peppercorns?
• Identify the peppercorns / concessionary leases in place at 1 July 2019
• Collect information for additional disclosures - information that helps users of financial statements to assess:
a. the entity’s dependence on leases that have significantly below market terms and conditions principally to enable the entity to further its objectives; and
b. the nature and terms of the leases, including:i. the lease payments
ii. the lease term
iii. a description of the underlying assets and
iv. restrictions on the use of the underlying assets specific to the entity
• Disclosures are provided individually for each material peppercorn / concessionary lease or in aggregate for leases involving right -of-use assets of a similar nature
Volunteer
services
Let’s review the National Partnership agreements
- Rebate scheme
- Child care
- Health infrastructure
Transition
Treasury policy on revenue
What will the financial statements
look like – Not-for-Profits?
Approach
Modified approach
Current year (2019 / 2020)
Mostly AASB 15
Comparative (2018 / 2019)
AASB 111 / AASB 118 /
AASB 1004
Opening balance sheet
1 July 2019
Assuming a June year end
With the modified approach –
Entities need to also present the
current year figures using the ‘old’
standards
Specific audit considerations -
revenue?
• Do you understand the major revenue streams of your
clients?
• Has the relevant standard been considered – AASB 15
or AASB 1058?
• Judgements around performance obligations – one or
multiple?
– Do the identified performance obligations meet the definition of a
performance obligation per AASB 15?
– Is principal v agency relevant?
Presentation
and
Disclosure
Contract assets and liabilities
Contract asset
Entities right to payment in
exchange for goods or services that has been transferred to customer when that right is conditional on something other than the passage of
time
Receivable
Entities right to payment that is unconditional
Contract liability
An entity’s obligation to
transfer goods or services to a
customer for which the company has received payment from the customer
If entity recognises revenue prior to receipt of
consideration
If entity receives
consideration prior to
satisfying performance
obligation
Disclosure principle
• Disclose sufficient information to enable users of
financial statements to understand the nature, amount,
timing and uncertainty of revenue and cash flows arising
from contracts with customers
• Disclose qualitative and quantitative information
Contracts
with
Customers
Significant
judgements
Assets
recognised
Specific disclosures in relation
to…
• Disaggregation of revenue – categories reflecting nature,
amount, timing and uncertainty of revenue
• Contract balances – contract assets and liabilities
• Transaction price allocated to unsatisfied performance
obligations
• Significant judgements
• Performance obligations
• Determining transaction price and the amounts allocated
to the performance obligations
• Contract cost assets.
Revenue: Disaggregation disclosures
• Disaggregation of revenue
– Entity-specific and / or industry specific factors
– Categories that show nature, amount, timing, and uncertainty of
revenue and cash flows affected by economic factors
– Sufficient information about relationship of disaggregated revenue
and revenue of each reportable segment (only if AASB 8 applies)
Type of good or service
GeographyType of contract
Short-term or Long-
term contracts
Timing of transfer
Sales channels
Performance obligations disclosures – for example…
NFP DISCLOSURES
• No additional AASB 15 disclosures for NFP
• AASB 1058 disclosure principle:
• “To disclose sufficient information to enable users of financial statements to understand the effects of volunteer services and othertransactions where an entity acquires an asset for consideration that is significantly less than fair value principally to enable the entity to further its objectives on the financial position, financial performance and cash flows of the entity.
• Paragraphs 24–41 specify requirements relating to thisobjective.”
EXTRACTS OF AASB 1058
DISCLOSURES
What else????
AASB 16 Leases
Which pronouncements are being
replaced?
AASB 117 Leases
Interpretation 4 Determining whether an arrangements contains a
lease
Interpretation 115 Operating Leases –
Incentives
Interpretation 127 Evaluating the Substances of
Transactions Involving the Legal Form of a
Lease
AASB 16 effective for annual reporting periods
beginning on or after 1 January 2019
Scope of AASB 16Applies to all leases for the lessor and lessee except:
Scope exclusion Relevant standard
Leases to explore for or use minerals, oil, natural
gas and similar non-regenerative resources
None specified – likely
standards are AASB 6 or
AASB 138
Leases of biological assets within the scope of
AASB 141 Agriculture held by a lessee
AASB 141 Agriculture
Service concession arrangements in the scope of
Interpretation 12
Interpretation 12 Service
Concession Arrangements
Licences of intellectual property granted by a
lessor within the scope of AASB 15
AASB 15 Revenue from
Contracts with Customers
Rights held by a lessee under licensing
agreements within the scope of AASB 138 for such
items as motion picture films, video recordings,
plays, manuscripts, patents and copyrights
AASB 138 Intangible Assets
Treasury Territory Policy prohibits application of AASB 16
to intangible assets
Headlines – what is changing?
Changes to lessor accounting
No significant changes – substantially carry forward of AASB 117
requirements – operating v finance lease classification
Some additional disclosures
Changes to lessee accounting
Former operating leases capitalised. Most leases will be accounted for
using a similar approach to the finance leases of today
Balance sheet – increase in leased assets and financial liabilities
Income statement – decrease in operating expenses, increases in finance
costs
Statement of cash flows – decrease in operating cashflows, increase in
financing cash flows
No impact on the lessee’s economic position or commitments to pay cash
What is a lease?
A lease is a contract or part of a contract that
conveys the right to control the use of an
identified asset for a period of time in
exchange for consideration.
Application of the lease
definition
Is there an identified asset?
• Is the asset explicitly specified in the contract?
• Is asset implicitly specified when made available to the customer?
• Does the supplier have a substantive right to substitute another asset?
• Does the lease relate to a portion of capacity?
Application of the lease
definition Does the customer has the right to
substantially all the economic benefits?
• Consider direct and indirect benefits, e.g. using, holding or sub-leasing
• Consider only economic benefits within the defined scope of a customers right to use the asset
• Benefits arising from ownership of the asset (e.g. tax benefits) are not considered
• A right that solely protects the suppliers interest in the underlying asset is not considered.
Does the customer have the right to direct the use of the identified
asset?
• Normally present if the customer has the right to decide how and for purpose the asset is used
• If relevant decisions about use of the asset are predetermined, the customer has control if it:
• has the right to operate the asset or
• designed the asset (or aspects) of it) in a way that predetermines its use
Contract is or contains a
lease
Contract does not contain
a lease
Does the lessee obtain
substantially all economic
benefits from the use of the
asset?
Does the lessee direct the use of
the asset?
Is there an identified asset?
No
No
No
Yes
Yes
Yes
Yes
Yes
Two exceptions from recording leases
Account for leases similar to current operating leases – with lease
payments recognised as an expense on a straight-line basis over
lease term
TREASURY TERRITORY POLICY REQUIRE THE USE OF
BOTH THESE EXCEPTIONS, WHERE APPLICABLE
Short term leases
Low value assets
Short-term lease exception
Short-term if it has a lease term of 12 months or less at
the commencement date.
– If lease includes a purchase option then it is not
short-term.
Lease term excludes any option period unless the
lessee is reasonably certain to exercise the option (or
reasonably certain not to exercise an option to
terminate the lease).
Accounting policy choice must be made consistently
for each class of underlying asset.
Low value assets
• Assess the value of the asset when new
• Basis of conclusion refers to US$5,000 – not a ‘bright-
line’ rule
• Low value IT equipment, office equipment and furniture
• Accounting policy choice on lease-by-lease basis
• Treasury Territory Policy uses $10,000
Lease term
Non-cancellable
period of the lease
Optional renewal
periods (if reasonably
certain)
Periods after an optional termination
date if reasonably
certain not to terminate
early
Lease term starts when the lessor makes the underlying
asset available for use by the lessee – commencement date
Consider enforceability of leases.
to do lease accounting
AASB 16 Fundamental Principle
All leases on
statement of
financial
position
(balance sheet)
Two exceptions
Income statement
Interest and depreciation
expense
Impairment of right-of-use
asset
Variable lease payment not
dependent on an index
Balance sheet
Right to use asset (tangible)
Lease liability
Example new lease – after adoption of
AASB 16
Example
Statement of cash flows impact
• Remove cash flows relating to rent
expense
• Include principal component of
lease payments
Operating cash
flows
Financing cash
flows
Interest component of the lease payments can be included in
either operating or financing cash flows
Separating lease and non-lease
components
• Where the contract contains a lease and an agreement
to purchase or sell other goods or services (non-lease
components) then the non-lease components are
identified and accounted for separately. The
consideration is allocated between the lease and non-
lease components on the basis of their stand-alone
selling prices
– E.g. lease for property typically includes maintenance and
security and use of common areas
• Practical expedient – choose not to separate on a class
of asset basis – Agencies can choose.
Measurement of lease liability
Lease liability
Fixed
payments
less lease
incentives
Penalty for
termination
if reflected
in lease
term
Lease
payments
during option
periods (if
reasonably
certain)
Variable
lease
payments
dependent
on a rate or
indexExercise
price of
purchase
option (if
reasonably
certain)
Residual
value
guarantees
Discount rate
• Present value of the lease payments is calculated using
the interest rate implicit in the lease
• i.e. rate that causes the present value of the lease payments and
unguaranteed residual to equal the sum of the fair value of the
underlying asset and any initial direct costs of the lessor.
• If not readily determined then use lessee incremental
borrowing rate.
Where the interest rate is not implicit in the lease,
Treasury will work with the Asset Liability Management
Team within Treasury to determine the incremental rates
for use by ACT Government agencies.
Initial measurement of the right of use
asset
Right of use asset
Dismantling, removal and restoration
costs
Prepayments less lease incentives
Initial direct costs
Lease liability
Subsequent measurement of right-
of-use asset
Cost less accumulated depreciation and accumulated impairment. Depreciation in accordance with AASB 116.
Cost model
Right of use asset is measured at fair value through profit and loss
AASB 140 fair value model
Option to revalue all right of use assets that relates to that class of property, plant and equipment
AASB 116 fair value model
Treasury to provide guidance on subsequent
measurement
Reassessment of an extension
option • An entity enters into a 5 year lease for a site on 1 January 20X1.
• Annual rent is $5,000 payable in advance
• Contract contains an option for the entity to extend the lease for
a further 5 years at an annual rent of $6,000.
• At commencement date, management concludes that exercise
of the option is not reasonably certain based on relevant facts
and circumstances:
• Property is located in an area where previously the entity
hasn’t had a presence
• Leasehold improvements have an expected useful life of 5
years
• The rentals during the extension period are not expected to
be below market.
Reassessment of an extension
option continued • Management concludes that the lease term is 5 years. The
discount rate is 4%.
Dr: Right of use asset 23,150
Cr: Lease liability 18,150
Cr: Cash 5,000
• On 31/12/20X3, it is evident that the location has been
successful and management determines that this is a
significant change of circumstances that makes exercise of
the option reasonably certain.
• The lease term is reassessed to be 10 years of which 7 years
remain. The discount rate is 3% (due to a drop in the
incremental borrowing rate).
Reassessment of extension option
continued The lease liability is re-measured at 31/12/20X3 – the new liability is the present value of:
$5,000 * 2 (due 1/1/20X4 and 1/1/20X5) $36,533
$6,000 * 5 (due 1/1/X6 – 1/1/X10)
• Lease liability before reassessment = $9,808.
Dr: Right of use asset 26,725
($36,533 - $9,808)
Cr: Lease liability 26,725
Lease modification
• “A change in the scope of a lease or the consideration
for a lease, that was not part of the original terms and
conditions of the lease”
• For example – adding or removing the right to use an
underlying asset or extending or shortening the
contractual lease term.
• Lessees and lessors of finance leases are required to
account for a lease modification depending on conditions
in place.
Accounting for lease modifications - lessee
Subleases
• Original lessee generally continues to account
for the original lease (head lease) as a lessee
and accounts for the sublease as the lessor
(intermediate lessor).
• Landlord considers lease classification based
on right-to-use asset rather than underlying
asset when classifying as operating or finance
• When the head lease is a short term lease,
the sublease is classified as an operating
lease.
– Otherwise the sublease is classified as either a
finance or operating lease depending on the
terms.
• An intermediate lessor who subleases cannot
account for the head lease as a lease of low
value assets.
Lessor
Original lessee /
Intermediate
lessor
Lessee /
sublessee
Classification of a sublease
• Entity F (original lessee / intermediate lessor) leases a new building for 5 years.
• The building has an economic life of 30 years. One year into the lease Entity F subleases the building for the remaining 4 years.
• The sublease is classified with reference to the right-of-use asset in the head lease (and not the underlying building)
• When assessing the useful life criterion – the sublease term of 4 years is compared with the 4 years right-of-use asset remaining in the head lease rather than the remaining 29 years useful life of the building.
Head Lessor
Head lessee / sub-lessor
Sub-lessee
Head lease classified as
either operating or
finance
Recognise ROU for lessee
and then classify sub-lease
as operating or finance
lease. Either retain ROU
or show finance lease
receivable
ROU recognised
• How have we confirmed completeness of the leases population?
• Identification of non-lease components and allocation of lease
payments?
• Determination of makegood provisions?
• Evidence to support the lease term?
Specific audit issues - Leases
Review:
- the lease spreadsheet
- the lease offer
Transition
Transition method
Modified retrospective – do not restate comparatives. Cumulative
effect of adopting AASB 16 is recognised as an adjustment to
equity on date of initial application.
- No parallel reporting
- Comparison between discounted operating leases at 30 June 2019 and
lease liabilities at 1 July 2019
- Other optional practical expedients
Practical expedients
Definition of
a lease
Not required to assess whether an agreement
contains a lease – mandated in Treasury
Territory Policy where entity has previously
assessed the agreement under existing
standards
Low value
assets
Not required to make adjustments on transition
for lease in which the underlying asset is of low
value
Investment
property
accounted
for using fair
value
No adjustments for leases which were
previously accounted for as investment property
using fair value model in AASB 140 – applied
prospectively
Practical expedients
Leases ending
within 12 months
of transition
No adjustments on transition but extensions treated like new
lease - Mandated
Simplified right of
use measurement
Lease by lease choice - either:
1. ROU measured historically –
what would the carrying
amount be on transition if the
ROU had been recorded at
the start of the lease
Mandated for land and
buildings where historical
information is readily
available.
2. ROU = lease liability – no
historical data needed
Mandated for land and
buildings where historical
information is not readily
available and all other
leases.
Discount rates –
portfolio basis
Same discount rate applied across leases with reasonably
similar characteristics – NOT to be used – Treasury will advise
rate.
Practical expedients
Onerous leases Adjust ROU on transition by the onerous lease
provision rather than performing an impairment
test - Mandated
Initial direct costs Not required to factor costs into ROU on
transition, therefore no need to work out what
these costs were - Mandated
Finance leases ROU / lease liability balances are the same as
existing finance lease balances – Mandated.
Use of hindsight In relation to extension / termination options –
Mandated.
Overall comments
• Obtain the clients analysis of the impact of the new
standards – “no impact” still requires an analysis
• Are you considering the whole agreement?
– Have position papers taken into account all relevant facts and
circumstances?
– Have you considered why the agreement was entered into?
• What agreements / contracts are in place? How many
are you going to look at?
– How did you determine that number?
• Who else at the client do you need to talk to? – get
outside the finance department.
• What system changes have the client introduced?
Further information
Carmen Ridley [email protected]
www.gaap.com.au
0438 029 867
Colin Parker, Jim Dixon, Stephen LaGreca, Carmen Ridley, Sonya Sinclair
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