leases ifrs 16 and the discount rate - pwc.nl · 6/14/2018 · ifrs 16 summary 2 ifrs 16 summary...
TRANSCRIPT
Seminar - Hot topics treasury
Leases IFRS 16 and the discount rate
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14 June 2018
PwC 14 June 2018
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1 Welcome and introduction 3
2 IFRS 16 summary 5
3 Discount Rate 15
Contents
2Seminar - Hot topics treasury
PwC 14 June 2018
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Welcome andintroduction
1 Welcome and introduction
3Seminar - Hot topics treasury
PwC 14 June 2018
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With you today
1 Welcome and introduction
4Seminar - Hot topics treasury
Karin MeijerDirectorCapital Markets andAccounting Advisory ServicesT: +31 (0)88 792 2635M: +31 (0)6 [email protected]
Dino TsafantakisSenior AssociateCapital Markets andAccounting Advisory ServicesT: +31 (0) 88 792 3693M: +31 (0)6 1399 [email protected]
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IFRS 16 summary
2 IFRS 16 summary
5Seminar - Hot topics treasury
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IFRS 16 Summary
2 IFRS 16 summary
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Lessee has to recognise a right-of-use asset and a leaseliability for almost all leasecontracts
Exemptions for short-termleases and leases of lowvalue assets
Lessor accounting staysalmost the same asunder current guidance
IFRS 16 waspublished on13 January 2016
Effective date1 January 2019
Enhanced disclosurerequirements
Earlier applicationpermitted (togetherwith IFRS 15)
Lessee has to present interest expense(on lease liability) and depreciationcharge (for right-of-use asset) separately
Lease liability represents the presentvalue of the lease paymentsdiscounted at the interest rateimplicit in the lease if readilydeterminable. If not readilydeterminable, incremental borrowingrate is used.
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Scope of IFRS 16
2 IFRS 16 summary
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Lease = A contract, or part of a contract, that conveys the right to use an asset (the
underlying asset) for a period of time in exchange for consideration.
All leases are in the scope of IFRS 16, except for:
Items Scope
Lease to explore for or use non-regenerative resources Out of scope
Biological assets within the scope of IAS 41 Out of scope
Service concession arrangements within the scope ofIFRIC 12
Out of scope
Licences of intellectual property granted by lessor withinthe scope of IFRS 15
Out of scope
Rights held by lessees under certain licensing agreements(motion picture films, patents, copyrights etc.)
Out of scope
Other intangible assets Policy choice for lessees
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Exemptions
2 IFRS 16 summary
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• Lease term of 12 months or less (may include periods covered by options)
• Accounting policy choice (by class of underlying assets)
• Reassessment in case of modification or change in lease term
• Only applicable for Lessee
Short-termleases
• Assets with a value, when new, of USD 5,000 or less
• Accounting policy choice (lease-by-lease basis)
• Only applicable for LesseeLow value
assets
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Definition of a lease
2 IFRS 16 summary
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Does the customer have the right to obtain substantially all of the economicbenefits from the use of the asset throughout the period of use ?
Supplier
Contract contains a lease Contract does not contain a lease
yes
yes
Customer
yes no
no
no
Customer
operates the asset or
has designed the asset?
Predetermined
Is there an identified asset?
Who has the right to direct how and for what purpose the asset is usedthroughout the period of use ?
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Lessee accounting – Lease Liability
2 IFRS 16 summary
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Fixed payments
Variable lease payments
Residual value guarantees
+
+
Exercise price of apurchase option
+
Penalties for terminating
+
Only if they depend on index/rate
Measured using index/rate as atcommencement date
Expected payments lessee has to makeunder guarantee
If the lessee is reasonably certain toexercise the option
If the lease term reflects the terminationby the lessee
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Lessee accounting – initial measurement
2 IFRS 16 summary
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Right-of-use asset Lease liability
Restoration costs
Initial direct costs
Lease payments
Discount rate
Lease payments made beforeor at commencement date
Provision
Lease liability
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Transition – Effective Date
2 IFRS 16 summary
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Definition of a lease
No mandatory reassessment (i.e. contracts are “grandfathered”);practical expedient
If entity chooses the practical expedient it shall be applied to allcontracts
Effective date
Annual reporting periods beginning on or after 1 January 2019
Date of initial application (DIA): Beginning of the period in whichthe entity first applies the standard
Early adoption permitted in conjunction with IFRS 15
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Transition – Approach
2 IFRS 16 summary
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Lessee
Retrospectively in accordance with IAS 8
Simplified approach
or
Simplified approach
Retrospectively with cumulative effect as adjustment toopening balance of retained earnings (or other componentof equity, if appropriate) on DIA
No restatement of comparative information
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Transition – Lessee
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Simplified approach
Previously operating lease
• Lease liability =• remaining lease payments• discounted using incremental
borrowing rate at date of initialapplication
• Right-of-use asset =• retrospective based on incremental
borrowing rate at date of initialapplication, or
• amount of lease liability
• Not required to apply if remaining leaseterm < 12 months
Previously finance lease
• Lease liability = carrying amount of leaseliability immediately before date of initialapplication
• Right-of-use asset = carrying amount oflease asset immediately before date ofinitial application
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Discount Rate
3 Discount Rate
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Interest Rate Implicit in the Lease
3 Discount Rate
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Rate at which
Interest Rate Implicit in the Lease
Present value oflease payments
Fair value ofunderlying asset
Present value ofunguaranteedresidual value
Lessor’s initialdirect costs
Generally needs to be estimated by the lessee!
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Incremental Borrowing Rate
3 Discount Rate
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The incremental borrowing rate is defined as the rate of interest that a lessee would have to pay to borrow,over a similar term and with a similar security, the funds necessary to obtain an asset of a similar value to thecost of the right-of-use asset in a similar economic environment.
Con-tract
Creditworthiness
Base rate
• Relevant economic environment(political environment, inflation, etc)
• Reference to available risk free rates(e.g. government bonds)
• Should represent currency and date of entering into lease
• Reflect credit worthiness of local lessee entity
• Term of the lease (i.e. duration of the lease)
• Consider group structure and financing arrangements
• Risk is reduced by asset serving as security
• Nature and quality of underlying assets
• Amounts of funds ‘borrowed’
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Incremental Borrowing Rate – Practical ExampleSimplified Approach
3 Discount Rate
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Inflationdifferential
Credit spreadContractspecificelement
Country riskpremium
Base rate
• Bid zero couponUS TreasuryStrips.
• Bid zero couponEUR GermanGovernmentStrips.
• credit ratings:AA, A, BBB, BB,B.
• For example aseparate countryrisk premium forSpain
• AUD ID • Contract specificelement, couldbe a discount(high qualityunderlyingcollateral)
Based on
• Circa 80% of thetotal leaseexposure isdenominated inUSD.
• For example 5credit ratings,resulting in 5different creditspreads
• Spain is the onlycountry in thepopulation with aspread.
• Majority of theexposure is inUSD (c. 80%),with no ID.
• EUR is the 2nd
largest exposure(c. 7%), withlimited ID.
• The AUD can beconsidered.
• For instance 5variations
Contract termgroup
• Four groups:
(1) 0 - ≤ 5 years(2) 5 - ≤ 10 years(3) 10 - ≤ 15 years(4) > 15 years
Based on Based on Based on Based onBased on
For example assume4 groups based onthe terms in theoperating leaseportfolio
1 5 2 3 4 5
As result, number of potential discount rates 600
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Incremental borrowing rateImportant considerations
3 Discount Rate
19Seminar - Hot topics treasury
Base Rate
Credit Spread
Contract specific risk element
• Often lower that the historical IBR
• Does not contain all elements of the interest rate implicit in the lease
• Significant impact on transition and in future periods
• Comparability to peers
Lease LiabilityInterest Rate
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