Audit Partner at RSM Poland
We previously focused on establishing and discussing the leasing and non-leasing components and on how to divide fees between these parts of the contract. The following articles will cover topics related to the modifications of lease contracts and variable fees. We receive many queries about IFRS 16 and the application of the new regulations as of 1 January 2019, so let us start by looking at the application of the standard for the first time.
Firstly, individuals can apply the new standard in the same way as any other new standards - with a full retrospective approach. Therefore, if we assume that we will apply IFRS 16 for the first time in 2019 and that we will show comparable data for one period (2018) then as of 1 January 2018, this retrospective approach requires us to treat IFRS 16 as if the new standard has always been in force.
However, for entities that previously applied IAS 17, the International Accounting Standards Board has decided that it will be appropriate to apply certain exceptions for convenience.
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Namely, as at the day of the initial application of IFRS 16 which is the first day of the period in which IFRS 16 was applied (in our considerations this day is 1 January 2019), companies may apply IFRS 16 to contracts that were originally identified according to IAS 17 as a lease - regardless of whether an operational or a financial lease. And here is a small reminder: according to IAS 17, a lease contract was any contract in which a lessor gave a lessee the right to use an asset for a specified period of time in return for payment or a series of payments.
On the other hand, if in the previous years the entity using the contract correctly concluded that the contract did not include a lease (financial or operational) according to IAS 17, then such company is not obliged to analyse whether the contract meets the criteria to be classified as a lease under IFRS 16 (e.g. rental agreement for an indefinite period).
Depending on the situation, possible solutions can be multiplied. However, all the relevant disclosures in the financial statements, in particular regarding the application of exemptions, should be kept in mind.
However, let us return to the situation in which an entity did not disclose lease agreements in its balance sheet, but it would like to or would be obliged to apply IFRS 16 retrospectively as from 1 January 2018 for the first time (e.g. as at the date of the transformation of its financial statements into IFRS).
In January 2016, a company signed a contract for the use of a car worth 100 units for a period of 60 months. On 1 January 2018, the value of the right to use the asset and the value of liabilities according to IFRS 16 should be determined:
- the value of other fees (3 years at 18.3 units per year) equals 55 units, and after discounting them at a rate of 4% (set for 1 January 2016), it makes up a rounded amount of 51 units;
- the value of the right to use will, therefore, be accepted at the level of 51 units.
Thus, as at 1 January 2018, the effects of the transition to IFRS 16 (the full retrospective approach) in the amount of 51 units are properly allocated to assets (right to use the assets) and financial liabilities. Assuming on 1 January 2018 that the company will be using the asset for the next 3 years (until the end of the contract), then - using a linear amortisation rate - depreciation costs in 2018 and the subsequent years will amount to 17 units annually.
On the other hand, the value of lease liabilities after 2018 will decrease by the payment (18.1 units) and increase by the accrued interest (for simplicity, let us assume that interest is calculated in arrears). In 2018, the result related to the lease shall be amortisation (17 units) and interest (2 units). As at 31 December 2018, the value of the assets will amount to 34 units and the value of liabilities - 34.6 units. As at the end of 2019, the value of the assets will be 17 units and of the liabilities - 17.6 units. The 2019 profit and loss account will show depreciation of 17 units and interest of 1.4 units. In the last year of using the right to use the assets, the remaining part of the depreciation (17 units) and interest of 0.7 units will be presented in the profit and loss account.
And is it possible not to use adjustments to the comparable data? Yes, it is. But this issue and the issue of the modified retrospective approach will be discussed in the next article.
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