IFRS 16 perpetual lease

All topics related to IFRS Standards.
Post Reply
LindaL
Posts: 5
Joined: 28 Oct 2019, 13:00

IFRS 16 perpetual lease

Post by LindaL »

We have a lease on a building which is currently 50 years, but we have a right of renewal which basically gives us the right of use indefinitely. Currently we recognise the rent payments in the P&L but under IFRS 16, will we have to recognise the lease as an asset? We have had the lease since 2012 and every calculation I do to try to sort out the effect of IFRS16 on the P&L comes up with a ridiculous result, large costs in the P&L, due to the effect of the interest. Can someone provide me with an EXCEL calculation of what the effect will be over such a long time. The rent payments go up every 5 years by 3% and are paid monthly £300k per month
User avatar
Marek Muc
Site Admin
Posts: 3228
Joined: 15 Oct 2018, 17:21
Contact:

Re: IFRS 16 perpetual lease

Post by Marek Muc »

Hi,

it seems that it is a lease to be recognised under IFRS 16 :) If the period beyond 50 years is covered by renewal options, you probably are not reasonably certain to exercise them at this point (given the time horizon). So, start with a 50-year period

an excel template is available in the example below, adjust it to your lease - how does the discounting expense + RoU amortisation compare to rent expense recognised prevoiusly under IAS 17 for your lease? it shouldn't be a dramatic difference...
https://ifrscommunity.com/knowledge-bas ... _liability
LindaL
Posts: 5
Joined: 28 Oct 2019, 13:00

Re: IFRS 16 perpetual lease

Post by LindaL »

If my rent goes up 3% every 5 years do I essentially 'reset' the calculation back to 0? Therefore even though my lease is for 50 years, do I only calculate the NPV for 5 years at at time
User avatar
Marek Muc
Site Admin
Posts: 3228
Joined: 15 Oct 2018, 17:21
Contact:

Re: IFRS 16 perpetual lease

Post by Marek Muc »

No, just take this increase into account when estimating future cash outflows
LindaL
Posts: 5
Joined: 28 Oct 2019, 13:00

Re: IFRS 16 perpetual lease

Post by LindaL »

Thanks for your help. My calculations now work, the only problem is that the difference is huge between recognising the rent payments and recognising the depreciation plus interest. Our lease started back in 2012 and our payments started at £3m per year and added 13% every 5 years. The way the calculation works is it 'front loads' the interest into the early years of the asset just like a mortgage does. Previously in the first 6 years of the lease I recognised £22m, but if I use 13% as the discount rate then I have to recognise a further £10m. Surely it cant be right that it is such a big difference, is it just that I have to find a discount rate that I am happy with?
User avatar
Marek Muc
Site Admin
Posts: 3228
Joined: 15 Oct 2018, 17:21
Contact:

Re: IFRS 16 perpetual lease

Post by Marek Muc »

yes, the higher the rate the more front-loaded the total expense

13% seems high, what country/functional currency are we talking about?
LindaL
Posts: 5
Joined: 28 Oct 2019, 13:00

Re: IFRS 16 perpetual lease

Post by LindaL »

Sorry - my error - the lease goes up by 13% every 5 years which works out to 3%pa

If I put up my interest rate my difference goes down, rather than the other way round. I think because of the length of the lease. Is it possible to use a different interest rate for the discount than the original NPV of the lease payments?

I think I actually need to get a valuation on the lease as to what it would cost to buy it today (or back in 2011 when all this started), because at the moment the asset value before depreciation is around £80m because that is the NPV of the rent payments.
User avatar
Marek Muc
Site Admin
Posts: 3228
Joined: 15 Oct 2018, 17:21
Contact:

Re: IFRS 16 perpetual lease

Post by Marek Muc »

Re. Discount rate:
https://ifrscommunity.com/knowledge-bas ... count-rate

Are you adopting IFRS 16 with full retrospective or modified retrospective method?
LindaL
Posts: 5
Joined: 28 Oct 2019, 13:00

Re: IFRS 16 perpetual lease

Post by LindaL »

Ooh that looks interesting. I have been doing some digging into that and I think the Modified Retropsective Approach might be the way to go. At the end of the day, I am more bothered about the impact on my P&L than about comparisons with prior years.

Thank you for your help on this Marek, I am much more comfortable with the calculations now. Its nice to know this forum is here to be able to ask questions. :D
Post Reply