Excerpt – User Guide IFRS 16

This article is an excerpt from the user guide for IFRS 16.

6.1 Register start date and end date of lease payment correctly

The start date and the end date of lease payment are one of the factors that determine your lease’s cash flow which is one of the main contributions to the lease’s liability. Therefore, it is important to register start date of lease payment and end date of lease payment correctly in our solution to reflect the real cash flow of the lease contracts’ payments and hence give a correct calculation.

6.1.1 The documentation of the calculation

Before registering the start date and the end date of lease payment, we recommend you read through the documentation of the calculation to know how the start date and end date of lease payment influence the IFRS 16 calculation in the calculation model and how to register leases with certain kind of start date and end date in the solution correctly in order to reflect the real cash flow.

6.1.2 Actual lease payment pattern

In order to register the start date and end date of lease payment correctly, you need find out the actual cash flow pattern for the lease contract. We recommend you check the lease contract or your recent invoices of the lease payments to find out when and for which period you pay the leases. After you have established the payment pattern for a lease, you can register the start date and the end date of lease payment accordingly. The payment pattern needs to be correct for reconciliation to actual invoices and accruals in you accounting records.

6.1.3 How start date and end date affect cash flow in calculation model

The calculation model registers cash flow based on a date, frequency, and amount as opposed to direct cash flow registration (i.e. a list of dates and amounts). This makes registering simple or regular cash flows easier, but there are certain caveats one must pay attention to when it comes to irregular payments or date choices. The most common of these is that the end date is always inclusive, meaning that if a lease starts 01.01.2019 and ends 01.01.2020 the calculation considers this a 1 year and 1 day long lease, not a 1 year lease. The number of payments that occur is based on the number of months in a given payment period, rounded up, and will for a monthly paid lease with these dates result in 13 payments and not 12 as one might expect. If the lease is in fact 1 year and 1 day lease with 12 payments one can either register a second payment period that lasts the final day with a payment of 0, or one can set the depreciation end date to be 1 day later than the end of the lease payments.

7. Rent free periods/period with different lease payments

A contract where rent is not paid, or paid in a lower amount,  in a period after ROU asset are available for use by a lessee, a rent free period or a period with low rent is registered as follows (please remember that you shall ONLY register periods after 01.01.19) :

In this example the contract started from 1. January 2019. It has a rent-free period until 30 June 2019 and then continue with lease payment 170,000 each quarter until 31. December 2025 the end date of the contract. This can also be done by using the field for start date for depreciation.

In the calculation interest will be calculated and added to the lease liability in the rent-free period. Please note that the lease liability will increase in the rent-free period.

Please note that rent free period is only relevant after the ROU asset are available, if a contract is entered for a future period and the ROU asset is not available, the lease liability should not be recognized before the underlying asset is available. See IFRS 16.22.

8. Foreign currency exchange

At the date of implementation, the exchange rate at that date should be used to measure lease liability and ROU asset.

IFRS 16 does not provide specifics for foreign exchange effect. Foreign currency exchange differences follow IAS 21 consistently with other financial liabilities, a lessee’s lease liability is a monetary item and consequently, if denominated in a foreign currency, is required to be remeasured using closing exchange rates at the end of each reporting period applying. (BC 196 Foreign currency exchange) (The Basis of Conclusion from IFRS 16)

The exchange differences relating to lease liabilities denominated in a foreign currency should be recognized in profit or loss.

The value of the ROU asset does not have any effect of the change in foreign currency and should be recognized to the exchange rate at the date of the transaction (IAS 21.23) or at the rate of the initial implementation. In ShareControl all contracts are kept in the currency it is registered.

8.1 Foreign entities

We do recommend using the foreign currency translation function in your consolidation system to handle different currencies. This means that the input for Share Control should be recorded in the reporting entities based on their functional currencies. This can be handled by the accounting integration function (additional product).

In the recently released 2020 version you can choose between calculating contracts in foreign currency at the closing exchange rate or to the average exchange rate. This can be found in the Currency Settings section of Application settings which is found on the menu page. If “Use closing currency rats only” is unchecked, as shown below, then the calculation will use average exchange rates for income statement captions.

You can choose between exchange rate from Norges Bank or Sveriges Riksbank.

You will now automatically convert income statement captions (interest and depreciation) to the average rate for the actual month and balance sheet captions to the closing rate for the period choose.

The exchange rate difference will be automatically calculated both in the reconciliation spreadsheet and in the footnote disclosure, both for the liability and the right of use asses. This is useful for currency translation for foreign operation. For individual contracts please see below.

The currency effects are shown as illustrated below in the footnote.

And in the complete fixed asset footnote (pro-version).

If you want to review the exchange rates used click the “Edit currency table” button on the menu page and in the currency tab you can review the exchange rates used (in this example the exchange rates are retrieved from Norges Bank).

You can also review all or some of the foreign exchange rate formulas in the spreadsheet by using the setting below. Where “Show some” means that only changes and balance sheet captions will have the conversion shown as an Excel formula while all other results will be pre-calculated.

8.2 Contract currencies different from the entity’s functional currency

In the situation a lease contract is entered in a foreign currency other than the entities functional currency, the ROU asset is required to be recorded applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction (IAS 21.21). In subsequent periods non‑monetary items that are measured in terms of historical cost in a foreign currency shall be translated using the exchange rate at the date of the transaction (IAS 21.23). Subsequent changes in the ROU asset like index regulation, extend of lease periods etc shall be measured spot exchange rate between the functional currency and the foreign currency at the date of the transaction.

In the 2020 version of ShareControl this functionality is available if you use this option under ”, by answering yes to this question. Please note that this option needs to be turned on under settings to be disclosed, see below

If the lease currency is in USD and the functional currencies of the company that held the lease set EUR in this field. This will be shown as below (exchange rate at 01.01.19 is set to 0.9 in the example below)

Please do not use this field if you will translate a foreign operation, then see section 8.1.

Set the exchange rate at the commencement of the lease (or 01.01.19 if the lease was there at the implementation of IFRS 16). If you want to use the exact same exchange rate as in the calculation sheet, look up the exchange rate from the exchange rate table. Please note that the calculation uses monthly average exchange rates and not spot rates when converting monthly changes of lease liability and right-of-use asset, so if you want the same exchange rate you also have to use the average rate for the month of the transaction.

The right of use asset is now kept at the exchange rate registered and you will see that for the individual contracts in the calculation file.

Subsequent changes in the lease need to be registered at the exchange rate at the date of change. You need to register the exchange rate at each change in the contract, like rate adjustment, exercise of an option etc. In the illustration below we have made the index adjustment with an exchange rate USD to EUR at 0.89 on January 1. 2020.

In the calculation this can be viewed as follows

The change in ROU asset in EUR is the USD change of USD 52.073 * 0,89 = 46.355 and the ROU is kept in the EUR functional currency.

9. Business combination (IFRS 3. 28 A and B)

In a business combination the acquirer shall measure the lease liability at the present value of the remaining lease payments (as defined in IFRS 16) as if the acquired lease were a new lease at the acquisition date. The acquirer shall measure the right-of-use asset at the same amount as the lease liability, adjusted to reflect favourable or unfavourable terms of the lease when compared with market terms.

In a business combination the acquisition date for each lease needs to be identified and registered under IFRS 16 scope.

 

The start date of the IFRS 16 calculation will in this case be the date of acquisition registered. You might register the actual start date of the contract under the section information about the lease liability, if you need that date for other purposes.

In the calculation file the information will appear as follows:

13. Log change: Adjust index or rate and log other change

After you have completed the opening balance after IFRS 16, we have updated to log lease changes, a new button appears for each contract:

Adjust index or rate gives you access to the menu Index or rate  adjustments which is the adjustment you need most frequently to do for your contracts.

Log other change is for the more complicated adjustments like Exercise an option that previously has not been exercised, Lease modification and Termination before the end of the lease term.

13.1 Adjust index or rate

This is a change that you would register yearly for a contract with index regulation since IFRS 16 requires you change the lease liability if there is a change in future lease payments caused by a change of an index or rate.

Click this to make the adjustment to the CPI and discount rate . This function can be open to all so that CPI adjustment or change of discount rate can be made by all users (but restrict the use for other changes).

Fill in the date for the lease change and edit the lease payment or discount rate (if it is an adjustment to discount rate, set the “Type of lease adjustment ” as “Interest”) from that day and set the date for the next index adjustment.

Start with the date of the change.  This is used to identify the month of the change. If a change takes effect in January, the change date needs to be in January. Please note that we use full months so the change will have a month depreciation and interest in the month of the change. In case a change happens in the end of a month and the preference is to account for the change from February, please use February 1 as the date of the change.

Click save and update the calculation file with the changes by clicking update leases.

You will find the change (here 01.01.20) as shown below, and the depreciations will change accordingly.

Please note that changes must be done in a subsequent manner, you cannot choose a date before the date of the last change. You cannot choose a date after the contract period either.

If the change in the cash flow is after the date the net present value effect of the change is recorded (Change date), you can use “Date of minimum lease payments change” under “General” to set the date when the change in the cash flow happens, so changes registered to the lease payments will take effect at this date instead of at the change date itself. For example, if you set the Change date on January 2020, but the “Date of minimum lease payments change” is set on April 2020, then the net present value effect of change is recorded on January 2020, but the change to the fixed payment cash flow happens in April 2020.

If adjustment to index or rate is a modification to the lease, you can answer “Yes” to the question “Is the change a lease modification”.

We recommend that you use the reminder function to set the date for the next index regulation to have an overview on the front page:

You can click on the relevant contract in the overview and then click “Adjust index or rate” or “Log other change” (submenu to “Log change”) to make adjustment to the CPI or discount rate.

13.4 Exercise an option that previously has not been exercised

Click  “Log other change” (submenu to “Log change”) and register the date the change is effective

(in this case the change will be accounted 1 November 2019)

Turn on the option by change the field reasonably certain to extend from No to Yes.

Click save and update the calculation file with the changes by clicking “Update leases”.

Review the change in Lease liability and ROU asset. (see below)

You will also find the change both in the reconciliation menu and the change menu.

13.5 Terminate a lease contract (in the lease period)

Please note that you cannot delete a lease contract after track changes is turned on. If a lease is terminated before the end of the lease term, the termination must be used. It is important to distinguish between a reassessment of an existing lease contract and a lease modification. Reassessment relates to change in estimates used in the lease accounting. Modification is a change in the scope of a lease, or in considerations for a lease, that was not a part of its original terms and conditions.

Situation A: A termination that is an option in the original contract. In this case the reduction in the cash flow reduces/increases the future depreciations and do not result in a gain or loss on termination, except in those cases where the termination har immediately effect.

In this case answer no to the question “is the change a lease modification”.

Situation B: You agree to terminate an existing agreement and enter a new agreement with the same landlord. The termination of the existing contract was not part of its original terms.

In this situation the termination of the existing contract is a lease modification and the answer should be yes. Enter the date the termination is effective to stop the cash flow at this date. Future depreciations are not changed and a gain and loss is recognised. The new contract is entered from the commencement date.

If a lease is terminated before it’s expired, do as follows.

Press  “Log other change” for the lease you will terminate and enter the date for the change (this is not the date the termination takes effect).

Please note that the “Date of termination” is the date that will be used in the calculation. Termination fee will be included at the date registered (Date of termination penalty fee) .Update the calculation file as described and review that the lease is terminated as expected, in this case the termination is effective in November 2019.

You will also find the change both in the reconciliation menu and the change menu.

In the reconciliation menu the gain or loss is also calculated.

Please see the example guidance for excampes of different lease modifications.

13.6 Purchase option

If a purchase option is to be registered or you need to change the purchase option price, please make the modification here. We do recommend you have the same amount as residual as the purchase option price value. This amount will be the remaining book value of the contract.

In the calculation the change will appear as follows, with the net present value of change:

13.7 Change in discount rate

Change in discount rate for an existing contract follows IFRS 16.40. This can result from a change in the lease term or change in the assessment to purchase the underlying asset.

The discount rate is changed here on the date of the change of the cash flow, for change in discount rate for contracts that is based on a rate we refer to the sections where we discuss changes based on an index or rate.

13.8 Residual value guarantee

A residual value guarantee is initially registered under lease liability. A change (IFRS 16.42) in the assessment of that guarantee is registered here.

15.4 Transition relief for leases ending within 12 months and low value assets lease

Use the section IFRS 16 scope to identify these leases:

If your lease is considered to fall under one of these categories and you decide to use the relief. Information about minimum lease payments and periods need to be completed:

We recommend that after completion of the relevant information for short term or low asset value leases, consider moving these contracts to a separate library called Short term or low value leases if you want them to be separated from other contracts.  Use the move function under the cogwheel: If they are included with other contracts, they will not be included in the calculation of the lease liability or ROU asset.

In excel, both short-term lease and low asset value lease are included in the overview but the details about lease payments is not available for individual contract, since the lease payments are not part of the lease liability and ROU asset.

To sort these contracts, use the filter as below:

To show low asset value leases:

To show Short-term leases

They are also included in the note disclosure.  (Expenses relating to short-term leases and Expenses relating to lease of low-value assets, excluding short-term leases of low-value assets.)

Please note that you do not need to include these leases for footnote disclosures. If you have significant number of short term and/or low asset value leases, information about expenses might be easier monitored by separating the expense in the financial statement.

 

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