We have recently written a lot about recognising revenue from construction and advisory services; today it is time for the next industry; this time, we are going to analyse the sale of non-material products. How should the revenue from the sale of the license and the service of software installation be recognised in the books?
Quality financial reporting, confirmed by an unqualified opinion of an auditor, seals the victory, proving that the information flow in the entity is flawless, the underlying aim of reporting is understood and the business is correctly reflected in the financial statements.
Last year we wrote a lot in our blog about the new IFRS 16 standard that significantly changes the concept behind considering contracts in terms of the necessity to disclose transactions in the lessee’s balance sheet. We are going to continue on this topic, answering another batch of the most frequently asked questions concerning this standard.
For quite some time now we have been observing the increased activity of entities, asking questions about leases and requesting the analysis of contracts they have signed to use specific assets, be it lease or rental.
Some time ago we wrote about changes pertaining to preparing financial statements and submitting them to a relevant court register, mainly about the fact that as of March 2018 they can be filed only electronically (e.g. in PDF format); yet, this form, simple as it may seem, has caused a lot of trouble, primarily due to the lack of personal identification numbers (PESEL) of board members and the lack of electronic signatures. Since filing financial statements online has proven to be troublesome, we may only guess that as of 1 October 2018 we are going to face a genuine disaster in this respect. Why is this so? Let me explain.
The last time we discussed lease contract modifications. The next thing that should be addressed and is present in the economic reality is the leaseback. It is very often the case that entities first purchase a given fixed asset (a building, specialist equipment or manufacturing machine) but then, given the lack of funds or as a consequence of streamlining the financing of their investments, decide to sell this asset and lease it back later.
In this article, resuming the topic of IFRS 16, we will have a look at situations in which a lease contract has been modified. In the opening remarks it is worth recalling that any changes of the interest rate, being the basis for calculating the lessor’s interest, or any changes of the index (e.g. inflation level), being the basis for calculating lease payments, are already included in the variable payments and shall not be discussed here any further. Any such changes result only in the need to make adjustments to the outstanding liabilities and adjust the right-of-use assets accordingly.
Much has been said so far about possible exclusions from the new standard, the valuation of assets and liabilities, discount, implementation of the new standard or lease components. Another issue that should be considered on the so-called inception date is the definition of a lease contract. According to IFRS 16, a contract is a lease if, in return for payment, it has the right to exercise control, including but not limited to obtaining economic benefits, over the use of an identified asset for an agreed period of time.
In the last article we mentioned that individuals may apply the new standard in the same way as other new standards – with a full retrospective approach. The modified retrospective approach may be of much greater interest. We cannot forget the opening balance adjustment completely, nevertheless the International Accounting Standards Board agreed to significant savings in time and costs when changing standards and implementing IFRS 16 by limiting the restatement of comparative years.
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.
