IFRS 16 Webinar

Lessee modifications

__________

28 November 2018

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Introduction

Ruben RogPartner

Sam CurwenManager

Niels EbbinkhuijsenDirector

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ResourcesPublications

First Impressions Transition Options Lease Definition Discount Rates Lease Payments Illustrative Disclosures

Media

IFRS 16 Podcast

E-learnings

IFRS 16 E-learnings

Publications

Lease Modifications Real Estate Leases

IFRS 16 Update Mail

IFRS 16 Website

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Agenda

Impact for lessees

What is a lease modification?

Effective date of a modification

Modifications and transition options

1

2

3

4

Wrap up and Q&A5

What is a lease modification?

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Lease modification

A lease modification is: • a change in the scope of a lease, or • the consideration for a lease,……

that was not part of its original terms and conditions.

Lease reassessments take place when:• there are changes in the lease payments, or • lease term,……..

based on contractual clauses in the original contract.

Lease modification Lease reassessment

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Modification and reassessment examples

Lease modification Lease reassessment

• Negotiate to add the right to use an additional asset

• Negotiate to increase the lease term

• Negotiate to terminate the lease

• Negotiate to change the consideration payable for the lease

• A reassessment of whether a renewal option will be exercised

• A reassessment of whether a purchase option will be exercised

• A reassessment of the amount expected to be paid under a residual value guarantee

• A change in future lease payments form a change in the CPI index used to determine those payments

Impact for lessees

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Lease modifications – accounting

Is the modification in substance a separate new

lease?

Yes

Account for as separate lease

No

No

Is the modification a decrease in scope?

Yes

Modify existing lease

Adjust ROU asset

Modify existing lease

Recognise gain or loss / adjust ROU asset

Modify the existing lease

1 2 3

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Lease modifications - examples

Increase in scope: additional assets

Increase in lease term

Decrease in scope

1

2

3

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Increase in scope – quantity of assetsCase• 10 years lease of a aircraft (A1)

• Lease payments are €1.000.000 p.a.

• Incremental borrowing rate is X%

Y0 Y2 Y4 Y6 Y8 Y10

Scenario 1• End of Year 4, lessee signs an

amendment to lease an additional aircraft (A2) for an €1.200.000 p.a. for 6 years

• Market rent of A2 is €1.200.000

• Incremental borrowing rate is Y%

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Increase in scope – quantity of assetsScenario 1

• Amendment for A2 = market rent• Y4 = Separate lease

Account for as separate lease

Recognise new lease liability

= present value €1.200.000 for remaining 6 years at revised discount rate

No change for A1

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Increase in scope – quantity of assetsCase• 10 years lease of a aircraft (A1)

• Lease payments are €1.000.000 p.a.

• Incremental borrowing rate is X%

Y0 Y2 Y4 Y6 Y8 Y10

Scenario 2• End of Year 4, lessee signs an

amendment to lease an additional aircraft (A2) for an €1.000.000 p.a. for 6 years

• Market rent of A2 is €1.200.000

• Incremental borrowing rate is Y%

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Increase in scope – quantity of assetsScenario 2

• Amendment for A2 ≠ market rent• Y4 = effective date of

modification

Modify existing lease

Calculate modified lease liability

= present value €2.000.000 for remaining 6 years at revised discount rate

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Increase in the lease termCase• 20 year lease of an industrial building, no extension options

• Lease payments are €150.000 per annum

• Incremental borrowing rate is X%

Y0 Y6 Y12 Y18 Y24 Y30

Scenario• End of Year 18 – an extension is agreed for an additional 10 years

• No change in annual lease payment

• Incremental borrowing rate is Y%

Effective date of modification

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Increase in the lease termScenario

Modify existing lease

Calculate modified lease liability

Adjust ROU asset

It DOES NOT increase the scope of the lease by adding the right to use one or more underlying assets

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Increase in the lease term

Pre-modification

Lease liability €279.000

ROU asset €187.000

Difference to pre-modificationlease liability:

= €1.586.000 - €279.000

= €1.307.000

Accounting

Post modification

Lease liability €1.586.000

ROU asset €1.494.000

Remeasured lease liability:

€150.000 p.a. for 12 yearsdiscounted at Y% :

= €1.586.000

Adjustment

Cr Lease liability €1.307.000

Dt ROU asset €1.307.000

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Decrease in scopeCase• 10 year lease for right to use 10.000 m²

warehouse space• Lease payments are €100.000 p.a.• Incremental borrowing rate is X%

Y0 Y2 Y4 Y6 Y8 Y10

Scenario• Contract modified to lease 7.500 m² for

last 4 years• Lease payments are €85.000 • Incremental borrowing rate is Y%

10.000 m² warehouse spaceLease payments €100.000

7.500 m² warehouse spaceLease payments €85.000

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Decrease in scope

Modify existing lease

Calculate modified lease liabilityRecognise gain or loss / Adjust

ROU asset

Decrease the pre-modification ROU asset and lease liability

Recognise any gain or loss in the P&L

Adjust lease liability to reflect remeasurement

Post the corresponding adjustment to the ROU asset

Step 1

Step 2

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Decrease in scopeDecrease the pre-modification ROU asset and lease liability

Recognise any gain or loss in the P&LStep 1

Pre-modification

Lease liability €355.000

ROU asset €309.000

Post step 1 values

Lease liability €266.000

ROU asset €232.000

Adjustment

Dt Lease liability €89.000

Cr ROU asset €77.000

Cr P&L (Gain) €12.000

Contract modified to lease 7,500m² down from 10.000m² for last 4 years

i.e. a 25% reduction in space

Reduce lease liability and ROU asset by 25%

Lease liability €89.000 (25% * €355.000) ROU asset €77.000 (25% * €309.000)

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Decrease in scopeAdjust lease liability to reflect remeasurement

Post the corresponding adjustment to the ROU asset Step 2

Post step 1 values

Lease liability €266.000

ROU asset €232.000

Post modification

Lease liability €234.000

ROU asset €200.000

Adjustment

Dt Lease liability €32.000

Cr ROU asset €32.000

• Lease payments are €85.000

• Incremental borrowing rate is Y%

Remeasure the lease liability: 4 years of €85.000 discounted at Y%

= €234.000

Leading to an amount to post of = €32.000

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Decrease in scope

Y0 Y2 Y4 Y6 Y8 Y10

10,000 m² warehouse spaceLease payments €100,000

7,500 m² warehouse spaceLease payments €85,000

Pre-modification

Lease liability €355.000

ROU asset €309.000

Adjustment

Dt Lease liability €121.000

Cr ROU asset €109.000

Cr P&L (Gain) €12.000

Post modification

Lease liability €234.000

ROU asset €200.000

Effective date of a modification

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Effective date

Effective date of a = Date that both parties agree to the modification lease modification (i.e. date the modified contract is signed)

IFRS 16.45 : Measure the modified lease liability on this date (unless modification is accounted for as separate lease)

The timing of the recognition depends on the type and nature of the lease modification

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Increase in scope- forward starting exampleCase• 8 year lease of a building

• Lease payments are €400.000 p.a.

• Incremental borrowing rate is X%

Y1 Y3 Y4 Y5 Y6 Y8

Scenario • End of Y2 – lease amended to include the rental of the

underground car park from Y5 for €30.000 p.a.

• Relative stand alone prices are €375.000 for building rental and €75.000 for the car park

• Incremental borrowing rate is Y%

Y2 Y7

Effective date of modification Car park available for use

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Increase in scope- forward starting exampleObservable stand-alone prices %

Building €375.000 83%

Car park €75.000 17%

Allocation of consideration Calculation

Building €357.000 83% * €430.000

Car park €73.000 17% * €430.000

These values are then used to remeasure the lease liability for each component at the modification date

What is the relative cost based on stand-alone rates?

The allocation of consideration

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Increase in scope- forward starting example

Y1 Y3 Y4 Y5 Y6 Y8Y2 Y7

Effective date of modification:• Remeasure building

component

• Recognise impact of building remeasurement

• Measure car park component

Car park available for use:• Recognise car park lease

Increase in scope, other than lease term

Modifications and transition options

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Transition options

Modified retrospective

Reconstruct ROU asset

Full retrospective

Modified retrospective

ROU asset = lease liability

Reconstruct prior modifications at transition

Reconstruct prior modifications at transition

Ignore prior modifications at transition

Wrap up and Q&A

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Key points

• Lessees will need to either remeasure the lease liability and ROU asset or recognise a new lease when a lease modification takes place

• A modification which decreases the scope of the lease may lead to a gain or loss

• In multiple element modifications each modification is addressed separately

• Lessees will need to introduce process elements and controls to ensure modifications are identified and accounted for correctly

Thank you

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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2018 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved.