Staff paper

Agenda reference: 2

Global Preparers Forum meeting

Date November 2024

Project Post-implementation Review (PIR) of IFRS 16 Leases

Topic Phase 1–Identifying matters to be examined

Contacts Rashida Abdryashitova ([email protected])

Tim Craig ([email protected])
Raf Markowski ([email protected])

This paper has been prepared for discussion at a public meeting of the Global Preparers
Forum (GPF). This paper does not represent the views of the International Accounting
Standards Board (IASB) or any individual IASB member. Any comments in the paper do
not purport to set out what would be an acceptable or unacceptable application of IFRS®
Accounting Standards. The IASB’s technical decisions are made in public and are reported
in the IASB Update.
 2

Purpose of this session

• To gather your views on the implementation and ongoing application of IFRS 16 Leases.
• To help the IASB scope a request for information (RFI)—that is, to identify matters to
include in the RFI for public consultation.

Contents from slide

Questions 3
PIR process 5
Background to IFRS 16 9
Expected effects of IFRS 16 13
Detailed information to support outreach 20
Appendix A—IFRS 16 vs. US GAAP (Topic 842) 31
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Questions—overall assessment and effects

What is your overall assessment of IFRS 16? Are there any fundamental questions (‘fatal
1 flaws’) about the clarity and suitability of core objectives or principles that indicate the
requirements are not working as intended?
Slide 10 describes the objective of IFRS 16.
The Effects Analysis accompanying IFRS 16 describes the likely costs and benefits
2 (effects) of IFRS 16.
a) Have actual ongoing costs and benefits significantly differed from the expected
effects? If so, please explain why.
b) Were the implementation costs significantly different from those expected?
c) How challenging was transition to IFRS 16? What transition requirements were
helpful, and would you recommend the IASB do anything differently in future standard-
setting projects?
Slides 13–19 describe the expected effects of IFRS 16. Slide 29 provides an overview of transition
methods.
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Questions—application
Are there application questions that the IASB or the IFRS Interpretations Committee
3 (Committee) needs to answer:
• urgently; or
• endeavour to start working on before the next five-yearly agenda consultation; or
• consider in the next five-yearly agenda consultation?
It would be most helpful if for each matter raised you could explain whether:
• it is pervasive (for example, it is likely to affect transactions that occur frequently in various industries and
jurisdictions).
• it has substantial consequences (for example, there is widespread diversity in practice that significantly reduces
comparability of financial information prepared applying IFRS 16).
• it can be addressed by the IASB or the Committee. Please describe your suggested solution.
• the benefits of any action are expected to outweigh the costs (considering the extent of disruption to current
practice and the importance of the matter).
Please also explain how the matter is being addressed in practice today and whether, in your view, the question is
appropriate for submission to the Committee.
Slide 7 describes the prioritisation framework. Slides 20–30 provide an overview of IFRS 16 topic areas.
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PIR process
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PIR—what is the objective?

To assess whether the effects of applying new requirements on users of
OBJECTIVE financial statements, preparers, auditors and regulators are as intended
when the IASB developed those new requirements

Overall, are the Fundamental questions (ie ‘fatal flaws’) about the core objectives or
requirements principles—their clarity and suitability—would indicate that the new
working as requirements are not working as intended
intended?

Are there specific Specific application questions would not necessarily prevent the IASB
application from concluding that the new requirements are working as intended, but
questions? may nonetheless need to be addressed if they meet the criteria for
whether the IASB would take further action
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PIR—how does the IASB respond to identified matters?

Consider whether to take action, based on the extent to which:
• the objective of the new requirements is not being met
• benefits to users are significantly lower than expected
• costs of application are significantly higher than expected
Determining the timing of taking action
most
To address as soon as possible High priority
Determine the prioritisation of the
matters based on the extent to which: ! Matter relates to core objective or principles
! Solution needed urgently
• matter has substantial consequences
• matter is pervasive most To endeavour to start before Medium
next agenda consultation priority
• matter relates to an issue that can be
addressed by the IASB or the
Committee some
To obtain more information in
Low priority
• the benefits of any action would be next agenda consultation
expected to outweigh the costs few or
none
Matters requiring no further action
 8

PIR—what is the process and where are we?

Phase 1
Phase 2
Determine the scope of the
Consider feedback
request for information (RFI)

Publish project
Start when sufficient
Publish RFI report and feedback
information is available
statement

June 2024 H2 2024 H1 2025

IASB starts Outreach, mainly with Request for

the PIR of consultative groups information to be
IFRS 16 published
 9

Background to IFRS 16
 10

IFRS 16 at a glance
Objective

To ensure that lessees and lessors provide relevant information in a

manner that faithfully represents leases. This information gives a
basis for users of financial statements to assess the effect that
leases have on the financial position, financial performance and
cash flows of an entity.

• Replaced IAS 17 Leases

• Brings almost all leases onto the balance sheet of lessees
• Significant change for lessees; little change for lessors
Effective from
• Enhanced disclosure requirements
1 January 2019
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What has changed for lessees?

Financial position Financial performance
IAS 17 IFRS 16 IAS 17 IFRS 16

Finance Operating Finance Operating

All leases All leases
leases leases leases leases
Revenue x x x

Assets ⟰ --- Operating costs
Single
⟰⟰⟰ (excl. depreciation ---
expense
---
and amortisation)

Liabilities $$ --- $$$$$$$ EBITDA 

Off balance  Depreciation

Depreciation --- Depreciation
sheet rights / --- ⟰⟰ --- and amortisation

obligations* $$$$$ Operating


profit
*According to the Effects Analysis, listed entities using IFRS or US Finance costs Interest --- Interest
GAAP disclosed almost US$3 trillion of off balance sheet lease
commitments. Profit before

tax
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Activities since IFRS 16 was issued

A solid foundation for the PIR
The IASB, together with the Committee, has put significant efforts into monitoring and
supporting the implementation and application of IFRS 16

Issued amendments to IFRS 16 to address some

of the matters raised by stakeholders: Provided educational
• May 2020—Covid-19-Related Rent materials such as articles
Concessions and webcasts
• August 2020—Interest Rate Benchmark
Reform―Phase 2
• March 2021—Covid-19-Related Rent
Concessions beyond 30 June 2021 Analysed application
• September 2022—Lease Liability in a Sale and questions and issued nine
Leaseback agenda decisions
• minor consequential amendments from other
standards
 13

Expected effects
of IFRS 16
 14

Expected effects—an overview

The IASB expected the benefits of IFRS 16 to outweigh the costs

Regulators

Users

Preparers
COSTS
Preparers
Users • Implementation costs

BENEFITS • Ongoing costs

• Improved quality of financial reporting

• Improved comparability
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Expected benefits—quality
Improved information available to all users of financial statements.

Improved quality of financial reporting

More faithful representation of an entity’s assets and liabilities and greater transparency about the
entity’s financial leverage and capital employed. Previously only more sophisticated investors and
analysts adjusted for off balance sheet leases, while others did not.

Reduced need for investors and analysts to adjust amounts reported on a lessee’s balance sheet and
income statement.

Reduced need for entities to provide non-GAAP information* about leases—IFRS 16 provides a richer set
of information than was previously available, giving further insight into a lessee’s operations and funding.

Improvements in how lessees manage their lease portfolios, and possible improvements in how some
lessees finance and operate their businesses.

*Also referred to as APMs—alternative performance measures or MPMs—management-defined performance measures.

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Expected benefits—comparability
Improved comparability between entities

Improved comparability between entities that lease assets and entities that borrow to buy
assets, while also reflecting the economic differences between these transactions.

Better information about changes in an entity’s financial flexibility when it extends or shortens
the length of its leases.

Reduced opportunities for entities to structure leasing transactions to achieve off balance
sheet accounting.

Reduced incentive for entities to enter into sale and leaseback transactions only for
accounting purposes, because of the recognition of assets and liabilities arising from the
leaseback and the restriction on any gain recognised on sale of an asset.
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Expected implementation costs

Preparers Users

Set up of systems and Depending on: Education and updates to

processes methodologies to analyse
• the size of an entity’s
financial statements
lease portfolio
• the terms and
Determination of
discount rates % conditions of those Regulators, tax authorities
leases
• the systems already in
Costs relating to IFRS 16 if the
Communication and place to account for
respective regulations depend
education leases applying IAS 17
on the accounting in IAS 17
 18

Expected ongoing costs

Except for discount rates, the data required to apply IFRS 16 is similar to that required to apply IAS 17.
Once an entity has updated its systems, the IASB expects costs to be only marginally higher compared
to those incurred when applying IAS 17.

% Costs to arise from determining discount rates for each new or modified lease.

Costs to arise from reassessment of the lease term—and thereby a reassessment of the
discount rate and lease payments—after its initial determination when required by IFRS 16.

Costs of remeasuring lease liabilities in relation to leases that include inflation-linked

payments.

Costs of applying the disclosure requirements in IFRS 16.

Reduced costs because a lessee is no longer required to classify leases as finance leases or
operating leases.
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Key cost reliefs

Short-term leases
Recognition • Expense in profit or loss
exemptions • Disclose, if material
Leases of low-value assets

Combining lease and services

Variable lease payments (other than inflation-linked) excluded

Measurement
Simplifications Optional payments included when reasonably certain
and practical
expedients Measurement of lease assets relating to former off balance sheet leases

Transition Comparative amounts

Leases ending within 12 months of the date of initial application

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Detailed information to
support outreach
 21

IFRS 16—topic areas

1 Identifying a lease 2 Lease term 3 Lessee

4 Lessor 5 Sale and leaseback 6 Transition

transactions

7 Interaction with other IFRS Accounting Standards

 22

1. Identifying a lease
Right to control the use of an identified asset for a period of time in exchange for consideration.

Control principle

IFRS 16 retains the definition of a lease in

Identified asset IAS 17 but changes the application guidance.

Right to obtain substantially all ‘benefits’ Customer has

the economic benefits from Lease
element control
use of the identified asset

Supplier has
Service
Right to direct the use of the ‘power’ control
identified asset element
 23

2. Lease term
The non-cancellable period for which a lessee has the right to use an underlying asset together with
periods covered by an extension (or termination) option if the lessee is reasonably certain to exercise (or
not to exercise) that option.

Rent-free
Non-cancellable period Extension option 1 Extension option 2
period

Commencement
Lessee cannot enforce
date
Lessee reasonably the extension of the
certain to exercise lease without the
agreement of the lessor
Lessee’s
assessment
of options

Lease term
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3. Lessee—initial measurement Lease payments

Right-of-use asset Lease liability during the lease term
Other variable lease
Decommissioning or payments
restoration costs (recognised in profit or loss)
Initial direct costs
Discount using rate implicit in Optional payments
Payments at or before
the lease or incremental (that are reasonably certain
commencement date
borrowing rate to occur)
(less incentives received)
Residual value guarantees
Variable lease payments
(linked to an index or a rate)
Initial measurement of lease Present value of lease
liability payments = lease liability Fixed payments
(and in-substance fixed) less
incentives receivable
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3. Lessee—subsequent measurement
Right-of-use asset Lease liability
Increase the carrying amount Reduce the carrying amount
Cost model to reflect interest on the lease to reflect the lease payments
liability made

Remeasure the carrying amount to reflect any reassessment or

Revaluation model
lease modifications (unless a lease modification is accounted
for as a separate lease)

Fair value model

(investment property)
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.

Reassessment—reflects a change in (1) the lease term, (2) the assessment of an

option to purchase, (3) the residual value guarantee or (4) future lease payments
that depend on an index or a rate.
 26

3. Lessee—disclosures
Objective: to disclose information that, together with the information provided in the
primary financial statements, gives a basis for users to assess the effect that leases have
on the financial position, financial performance and cash flows of the lessee.

Quantitative and qualitative information that would satisfy the objective

• Breakdown of lease-related expenses Entity-specific additional information, for

• Total cash outflow for leases example:
• Information about right-of-use assets • The nature of the lessee’s leasing
by class of asset being leased activities
• Maturity analysis of the lease liabilities • The effect of extension and termination
options, or variable lease payments, on
• Gains or losses from sale and
future cash outflows to which the
leaseback transactions
lessee is potentially exposed
• Income from subleasing
 27

4. Lessor
Substantially no change to lessor accounting compared to IAS 17. Disclosure is enhanced.

Dual classification model Enhanced disclosures

Finance lease Operating lease Maturity analysis of lease payments in
each of the first five years

Subleases—Intermediate lessor Separate disclosures for leased

assets and assets used by a lessor
Account for head lease and sublease as two
separate contracts Information about residual asset risk

Classify a sublease with reference to the right- Components of lease income in the
of-use asset arising from the head lease period
 28

5. Sale and leaseback transactions

Does the transfer of an asset satisfy the requirements in IFRS 15 Revenue from Contracts with
Customers to be accounted for as a sale of the asset?

Seller–lessee Buyer–lessor
• Measure the right-of-use asset at the
• Recognise the transferred asset
proportion of the previous carrying
applying applicable Accounting
Transfer of the amount of the asset that relates to the
Standard.
rights retained.
asset is a sale • Apply lessor accounting
• Recognise any gain or loss that relates
requirements in IFRS 16.
to the rights transferred.

• Continue to recognise the transferred • Do not recognise the transferred

asset. asset.
Transfer of the
• Recognise a financial liability equal to • Recognise a financial asset equal
asset is not a sale to the transfer proceeds and apply
the transfer proceeds and apply IFRS 9.
IFRS 9.
 29

6. Transition
Full retrospective Retrospective with the cumulative effect
recognised at the date of initial application
Definition of a lease An entity permitted to apply IFRS 16 to contracts previously identified as leases and
not to apply IFRS 16 to contracts that were not previously identified as leases.
Comparative information Applying IFRS 16. Applying IAS 17.
Right-of-use assets As if IFRS 16 had Previous operating leases
(ROU) and lease always been applied. • ROU measured (1) as if IFRS 16 had always been applied but
liabilities at the date of using the lessee’s incremental borrowing rate (IBR) at the date of
initial application initial application; or (2) at an amount equal to the lease liability.
• Lease liability = remaining lease payments discounted using IBR at
the date of initial application.
Previous finance leases
The carrying amount of the ROU and lease liability at the date of initial
application = the carrying amount of the lease asset and lease liability
immediately before that date measured applying IAS 17.
Disclosures As required by Same but instead of paragraph 28(f) of IAS 8 some additional
paragraph 28 of IAS 8. information required.

Lessors (except for intermediate lessors) not required to make any adjustments on transition.
 30

7. Interaction with other IFRS Accounting Standards

Examples

• Measurement of unguaranteed residual values and expected credit losses (ECL)

• Lessee accounting for lease payments forgiven

IFRS 9
Assessment of whether the transfer of an
Sale and leaseback of an asset in
asset is a sale in a sale and leaseback
a single-asset entity IFRS 10 IFRS 15 transaction

IFRS 16
Impairment testing of right-of-use
Presentation of the ECL allowance of a
assets, for example determining
the cash flows to include and the
IAS 36 IAS 1 lease receivable in the statement of
financial position
appropriate discount rates to use
IAS 16
Distinguishing between a lease and a sale or purchase
 31

Appendix A
IFRS 16 vs. US GAAP
(Topic 842)
 32

IFRS 16 and Topic 842—comparison

1 Lease liabilities are measured in the
US GAAP (FASB model) same way applying IFRS 16 and the FASB
model, except that inflation-linked
Former ON balance Former OFF balance
payments are reassessed when those
IFRS 16
payments change applying IFRS 16 but
sheet leases sheet leases
are not when applying the FASB model.
Statement of financial position 2 Right-of-use assets are measured at an
All leases on balance sheet    amount that achieves the recognition of a
Exemption for short-term leases   
Recognition single lease expense typically on a
Exemption for leases of low-value
 --- --- straight-line basis.
assets
Lease liabilities on a discounted 3 Applying IAS 7 Statement of Cash Flows,
1 1 1
basis
Measurement interest payments can be presented within
Initial right-of-use asset=lease liability   
Depreciation of right-of-use assets Typically straight-line Typically straight-line Typically increasing 2
operating, investing or financing activities.
Statement of profit or loss IFRS 18 Presentation and Disclosure in
Operating costs Depreciation Depreciation Single expense Financial Statements has made limited
Finance costs Interest Interest --- changes to the statement of cash flows.
Statement of cash flows IFRS 18 is effective from 1 January 2027.
Operating activities Interest 3 Interest Interest and principal
Financing activities Principal Principal --- IFRS 16 is the result of the joint
Other main differences
Partial gain or loss project of the IASB and the FASB.
Sale and leaseback transactions Full gain or loss recognition
recognition Both boards reached different
Determined by
Subleases—classification by an intermediate lessor as
either operating or finance lease
reference to the right- Determined by reference to the underlying asset decisions about the lessee
of-use asset
accounting model.
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