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Transcript
Overview of IFRS
Presented by:
CA. Rishi Khator
FCA, CPA, CIFRS
E-Mail – [email protected]
Scope
All leases Other than -- For minerals, oil, natural gas, and similar
regenerative resources and licensing
agreements for films, videos, plays,
manuscripts, patents, copyrights, and
similar items. [IAS 17.2]
Property held by lessees that is accounted
for as investment property for which the
lessee uses the fair value model set out in
IAS 40.
Cont….
Investment property provided by lessors
under operating leases (see IAS 40).
Biological assets held by lessees under
finance leases (see IAS 41).
Biological assets provided by lessors under
operating leases (see IAS 41).
Definitions
1. A lease is an agreement whereby the lessor conveys to the
lessee in return for a payment or series of payments the right to
use an asset for an agreed period of time.
2. A finance lease is a lease that transfers substantially all the risks
and rewards incident to ownership of an asset.
3. An operating lease is a lease other than a finance lease.
4. A non-cancellable lease is a lease that is cancellable only:
(a) upon the occurrence of some remote contingency; or
(b) with the permission of the lessor; or
(c) if the lessee enters into a new lease for the same or an
equivalent asset with the same lessor; or
(d) upon payment by the lessee of an additional amount such
that, at inception, continuation of the lease is reasonably
certain.
4.
The inception of the lease is the earlier of the date
of the lease agreement and the date of a
commitment by the parties to the principal
provisions of the lease.
5.
The lease term is the non-cancellable period for
which the lessee has agreed to take on lease the asset
together with any further periods for which the
lessee has the option to continue the lease of the
asset, with or without further payment, which
option at the inception of the lease it is reasonably
certain that the lessee will exercise.
6. Minimum lease payments are the payments over
the lease term that the lessee is, or can be required,
to make excluding contingent rent, costs for services
and taxes to be paid by and reimbursed to the lessor,
together with:
(a) in the case of the lessee, any residual value
guaranteed by or on behalf of the lessee; or
(b) in the case of the lessor, any residual value
guaranteed to the lessor:
(i) by or on behalf of the lessee; or
(ii) by an independent third party financially capable
of meeting this guarantee.
7. However, if the lessee has an option to purchase the
asset at a price which is expected to be sufficiently
lower than the fair value at the date the option
becomes exercisable that, at the inception of the
lease, is reasonably certain to be exercised, the
minimum lease payments comprise minimum
payments payable over the lease term and the
payment required to exercise this purchase option.
8. Fair value is the amount for which an asset could be
exchanged or a liability settled between
knowledgeable, willing parties in an arm’s length
transaction.
9. Economic life is either:
(a) the period over which an asset is expected to be
economically usable by one or more users; or
(b) the number of production or similar units
expected to be obtained from the asset by one or
more users.
10. Useful life of a leased asset is either:
(a) the period over which the leased asset is expected
to be used by the lessee; or
(b) the number of production or similar units
expected to be obtained from the use of the asset
by the lessee.
11. Residual value of a leased asset is the estimated fair
value of the asset at the end of the lease term.
12. Guaranteed residual value is:
(a) in the case of the lessee, that part of the residual
value which is guaranteed by the lessee or by a
party on behalf of the lessee (the amount of the
guarantee being the maximum amount that could,
in any event, become payable); and
(b) in the case of the lessor, that part of the residual
value which is guaranteed by or on behalf of the
lessee, or by an independent third party who is
financially capable of discharging the obligations
under the guarantee.
13. Unguaranteed residual value of a leased asset is the
amount by which the residual value of the asset
exceeds its guaranteed residual value.
14. Gross investment in the lease is the aggregate of the
minimum lease payments under a finance lease from
the standpoint of the lessor and any unguaranteed
residual value accruing to the lessor.
15. Unearned finance income is the difference between:
(a) the gross investment in the lease; and
(b) the present value of
(i) the minimum lease payments under a finance
lease
(ii) any unguaranteed residual value accruing to the
lessor, at the interest rate implicit in the lease.
16.
Net investment in the lease is the gross investment
in the lease less unearned finance income.
17. The interest rate implicit in the lease is the discount
rate that, at the inception of the lease, causes the
aggregate present value of
(a) the minimum lease payments under a finance lease
from the standpoint of the lessor; and
(b) any unguaranteed residual value accruing to the
lessor, to be equal to the fair value of the leased
asset.
18. The lessee’s incremental borrowing rate of
interest is the rate of interest the lessee would have
to pay on a similar lease or, if that is not
determinable, the rate that, at the inception of the
lease, the lessee would incur to borrow over a similar
term, and with a similar security, the funds necessary
to purchase the asset.
19. Contingent rent is that portion of the lease
payments that is not fixed in amount but is based on
a factor other than just the passage of time (e.g.,
percentage of sales, amount of usage, price indices,
market rates of interest).
Service Concession Arrangements Defined
(IFRIC-12)
1. An arrangement whereby a government or other public sector
body contracts with a private operator to develop (or upgrade),
operate and maintain
2. Grantor's infrastructure assets such as roads, bridges, tunnels,
airports, energy distribution networks, prisons or hospitals.
3. The grantor controls or regulates what services the operator
must provide using the assets, to whom, and at what price, and
also controls any significant residual interest in the assets at the
end of the term of the arrangement.
Objective of IFRIC 12
• How certain aspects of existing IASB
literature are to be applied to service
concession arrangements.
Types of Service Concession Arrangements
• IFRIC 12 draws a distinction
between two types of service
concession arrangement.
Type 1
1. Operator receives a financial asset,
2. An unconditional contractual right to receive a specified or
determinable amount of cash or another financial asset from
the government in return
3. For constructing or upgrading a public sector asset, and then
operating and maintaining the asset for a specified period of
time.
4. Includes guarantees by the government to pay for any shortfall
between amounts received from users of the public service and
specified or determinable amounts.
Type 2
1. Operator receives an intangible asset
2. A right to charge for use of a public sector asset
3. It constructs or upgrades and then must operate and
maintain for a specified period of time.
4. A right to charge users is not an unconditional right
to receive cash because the amounts are contingent on
the extent to which the public uses the service.
General
1. IFRIC 12 allows for the possibility that both types of
arrangement may exist within a single contract:
2. To the extent that the government has given an unconditional
guarantee of payment for the construction of the public sector
asset, The operator has a financial asset;
3. To the extent that the operator has to rely on the public using
the service in order to obtain payment, the operator has an
intangible asset.
Accounting – Financial asset model
1. The operator recognises a financial asset to the extent that it has
an unconditional contractual right to receive cash or another
financial asset from or at the direction of the grantor for the
construction services.
2. The operator has an unconditional right to receive cash if the
grantor contractually guarantees to pay the operator
(a) specified or determinable amounts or
(b) the shortfall, if any, between amounts received from users
of the public service and specified or determinable amounts,
even if payment is contingent on the operator ensuring that the
infrastructure meets specified quality or efficiency requirements.
3. The operator measures the financial asset at fair value.
Accounting – Intangible asset model
1. The operator recognises an intangible asset to the
extent that it receives a right (a licence) to charge users
of the public service.
2. A right to charge users of the public service is not an
unconditional right to receive cash because the
amounts are contingent on the extent that the public
uses the service.
3. The operator measures the intangible asset at fair
value.
Accounting Operating revenue
• The operator of a service concession
arrangement recognises and measures
revenue in accordance with IASs 11 and
18 for the services it performs.
Accounting by the Government (Grantor)
1. IFRIC 12 does not address accounting for the
government side of service concession
arrangements.
2. However, the International Public Sector
Accounting Standards Board (IPSASB) has
started its own project on service concession
arrangements, which will give serious
consideration to accounting by grantors.
3. The principles applied in IFRIC 12 will be
considered as part of the project.
Effective Date
IFRIC 12 is effective for annual periods
beginning on or after 1 January 2008.
Earlier application is permitted.
LEASES
(IAS-17)
October 1980
Exposure Draft E19 Accounting for
Leases
September 1982
IAS 17 Accounting for Leases
1 January 1984
Effective Date of IAS 17 (1982)
1994
IAS 17 (1982) was reformatted
April 1997
Exposure Draft E56, Leases
December 1997
IAS 17 Leases
1 January 1999
18 December 2003
Effective Date of IAS 17 (1997), Leases
Revised version of IAS 17 issued by
the IASB
The summary of IAS 17 below reflects
those revisions
1 January 2005
Effective date of IAS 17
(Revised 2003)
16 April 2009
IAS 17 amended for
Annual Improvements
to IFRSs 2009
1 January 2010
Effective date of the
April 2009 revisions to
IAS 17
RELATED INTERPRETATIONS
IFRIC
4 Determining
arrangement contain lease
whether
an
IFRIC 12 Service Concession Arrangements
SIC 15 Operating Leases - Incentives
SIC 27
Evaluating the Substance of
Transactions in the Legal Form of a Lease
SUMMARY OF IAS 17
Objective of IAS 17
Prescribe, for lessees and lessors, in respect of
finance and operating leases.
Appropriate accounting policies
Disclosures
Classification of Leases
A lease is classified as a finance lease if it
transfers substantially all the risks and
rewards incident to ownership.
All other leases are classified as operating
leases.
Classification is made at the inception of the
lease. [IAS 17.4]
Situations that would normally lead to a lease being
classified as a finance lease include the following: [IAS
17.10]
the lease transfers ownership of the asset to the lessee
by the end of the lease term;
the lessee has the option to purchase the asset at a
price which is expected to be sufficiently lower than
fair value at the date the option becomes exercisable
and at the inception of the lease, it is reasonably
certain that the option will be exercised;
the lease term is for the major part of the economic life
of the asset, even if title is not transferred;
at the inception of the lease, the present value of
the minimum lease payments amounts to at least
substantially all of the fair value of the leased
asset; and
the lease assets are of a specialised nature such
that only the lessee can use them without major
modifications being made.
If the lessee is entitled to cancel the lease, the
lessor's losses associated with the cancellation are
borne by the lessee;
gains or losses from fluctuations in the fair
value of the residual fall to the lessee (for
example, by means of a rebate of lease
payments); and
the lessee has the ability to continue to lease
for a secondary period at a rent that is
substantially lower than market rent.
Land and Building
Elements would normally be considered separately.
The minimum lease payments are allocated between the
land and buildings elements in proportion to their relative
fair values.
The land element is normally classified as an operating
lease unless title passes to the lessee at the end of the lease
term.
The buildings element is classified as an operating or
finance lease by applying the classification above in IAS 17.
[IAS 17.15]
However, separate measurement of the land and buildings
elements is not required if the lessee's interest in both land
and buildings is classified as an investment property and
the fair value model is adopted.
Accounting by Lessees
The following principles should be applied in the
financial statements of lessees:
Finance Lease
At commencement of the lease term should be
recorded as an asset and a liability at the lower of the
fair value of the asset and the present value of the
minimum lease payments
Discounted at the interest rate implicit in the lease, if
practicable, or else at the enterprise's incremental
borrowing rate
(Like EMI) Finance lease payments should be
apportioned between the finance charge and the
reduction of the outstanding liability
The finance charge to be allocated so as to produce
a constant periodic rate of interest on the
remaining balance of the liability
The depreciation policy for assets held under
finance leases should be consistent with that for
owned assets.
If there is no reasonable certainty that the lessee
will obtain ownership at the end of the lease - the
asset should be depreciated over the shorter of the
lease term or the life of the asset
Operating Lease
Lease payments recognised
as an
expense in the income statement over
the lease term
On a straight-line basis, unless another
systematic basis is more representative
of the time pattern of the user's
benefit.
Incentives – SIC 15 (July 1999) For
operating Lease
Incentives
(e.g. rent free period or
contribution to relocation cost) for the
agreement of a new or renewed
Be recognised by the lessee as a reduction of
the rental expense over the lease term,
Accounting by Lessors
The following principles should be applied in the
financial statements of lessors:
Finance Lease
At commencement record a finance lease in the
balance sheet as a receivable,
At an amount equal to the net investment in the
lease; [IAS 17.36]
Recognise finance income based on a pattern
reflecting a constant periodic rate of return on the
lessor's net investment outstanding in respect of the
finance lease;
Operating Lease
Assets held be presented in the balance
sheet of the lessor according to the nature
of the asset.
Lease income should be recognised over
the lease term on a straight-line basis,
unless another systematic basis is more
representative
Incentives – SIC 15 (July 1999) For
operating Lease
Incentives for the agreement of a new
or renewed
Recognised as a reduction of the rental
income over the lease term
Manufacturers or dealer lessors
Include selling profit or loss in the same
period as they would for an outright sale.
Artificially low rates of interest are charged,
selling profit should be restricted to that
which would apply if a commercial rate of
interest were charged. [IAS 17.42]
Initial Direct Cost
Incurred by lessors in negotiating leases
must be recognised over the lease term.
They may no longer be charged to expense
when incurred.
This treatment does not apply to
manufacturer or dealer lessors where such
cost recognition is as an expense when the
selling profit is recognised.
QUESTIONS AND ANSWERS FROM 1-5
Sale and Leaseback Transactions
Finance Lease
For a sale and leaseback transaction that results in
a finance lease, any excess of proceeds over the
carrying amount is deferred and amortised over
the lease term.
Operating lease
At fair value - the profit or loss should recognised
immediately;
Sale price < fair value - profit or loss should be
recognised immediately, except if a loss is
compensated for by future rentals at below market
price,
Sale price > fair value - the excess over fair value should
be deferred and amortised over the period of use; and
Fair value < Carrying amount - a loss equal to the
difference should be recognised immediately
E.g. FV – Rs.100, CA – Rs.90, SP Rs.110
Please refer Case Study – 1
Disclosure: Lessees - Finance Lease
[IAS 17.31]
Carrying amount of asset;
Reconciliation between total minimum
lease payments and their present value;
Amounts of minimum lease payments at
balance sheet date and the present value
thereof, for:
the next year;
years 2 through 5 combined;
beyond five years;
Contingent rent recognised as an expense;
total future minimum sublease income
under noncancellable subleases; and
general description of significant leasing
arrangements, including contingent rent
provisions, renewal or purchase options,
and restrictions imposed on dividends,
borrowings, or further leasing.
Disclosure: Lessees - Operating Lease
[IAS 17.35]
amounts of minimum lease payments at balance
sheet date under noncancellable operating leases
for:
the next year;
years 2 through 5 combined;
beyond five years;
total future minimum sublease income under
noncancellable subleases;
lease and sublease payments recognised in
income for the period;
contingent rent recognised as an expense;
and
general description of significant leasing
arrangements, including contingent rent
provisions, renewal or purchase options,
and restrictions imposed on dividends,
borrowings, or further leasing
Disclosure: Lessors - Finance Lease
[IAS 17.47]
reconciliation between gross investment in the
lease and the present value of minimum lease
payments;
gross investment and present value of
minimum lease payments receivable for:
the next year;
years 2 through 5 combined;
beyond five years;
unearned finance income;
unguaranteed residual values;
accumulated allowance for
uncollectible lease payments
receivable;
contingent rent recognised in
income; and
general description of significant
leasing arrangements.
Disclosure: Lessors - Operating Lease
[IAS 17.56]
amounts of minimum lease payments at balance
sheet date under noncancellable operating leases
in the aggregate and for:
the next year;
years 2 through 5 combined;
beyond five years;
contingent rent recognised as in income; and
general description of significant leasing
arrangements.
IFRIC-4
An entity can enter into an arrangement,
comprising a transaction or a series of
related transactions that does not take the
legal form of a lease but conveys a right to
use an asset in return for a payment or series
of payments. Examples of arrangements in
which one entity (the supplier) may convey
such a right to use an asset to another entity
(the purchaser), often together with related
services, include:
Cont.
outsourcing arrangements
arrangements in the telecommunications
industry, in which suppliers of network
capacity enter into contracts to provide
purchasers with right to capacity
take-or-pay and similar contracts, in which
purchasers must make specified payments
regardless of whether they take delivery of the
contracted products or services.
Scope Of IFRIC 4
This interpretation does not apply to arrangements
that are:
or contain, leases excluded from the scope of IAS
17 (AC 105) Leases
public-to-private service concession arrangements
within the scope of IFRIC 12 (AC 445) Service
Concession Arrangements.
Issues
How to determine whether an arrangement is, or
contains, a lease as defined in IAS 17 (AC 105)
Leases
When the assessment or a reassessment of
whether an arrangement is, or contains, a lease
should be made
If an arrangement is, or contains, a lease, how the
payments for the lease should be separated from
payments for any other elements in the
arrangement.
SIC-27
SIC 27 addresses issues that may arise when an
arrangement between an enterprise and an investor
involves the legal form of a lease.
Accounting for arrangements between an enterprise
and an investor should reflect the substance of the
arrangement.
All aspects of the arrangement should be evaluated to
determine its substance,
ISSUES
ARE A SERIES OF
TRANSACTIONS
LINKED?
ISTHE ARRANGEMENT
IN SUBSTANCE A
LEASE UNDER IAS 17
(AC 105)?
WHERE ARRANGEMENT IN SUBSTANCE NOT A LEASE:
_ do
separate investment account and lease payment
obligations that might exist represent assets and liabilities of
the entity?
_ how
does the entity account for other obligations resulting
from the arrangement?
_ how
does the entity account for a fee it might receive from an
investor.
Classification of leases of land Latest
Development
Prior to amendment, IAS 17 Leases
generally required a lease of land with an
indefinite useful life to be classified as an
operating lease.
This was inconsistent with the general
principles of the Standard,
Following the amendment, leases of land
are classified as either ‘finance’ or
‘operating’ using the general principles of
IAS 17.
The amendment is particularly significant
for jurisdictions where property rights are
obtained under long-term leases and the
substance of those leases differs little from
buying a property.
Entities will need to reassess existing leases.
Effective Jan.1, 2010