Property lease transfer between subsidiaries - nil consideration

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DSD
Posts: 4
Joined: 18 Aug 2021, 15:59

Property lease transfer between subsidiaries - nil consideration

Post by DSD »

Hi,
I'm struggling to wrap my head around the implications for the following situation and was wondering whether anyone could help.

We have a property lease which is being transferred from one group company to another (so the lease is essentially being assigned such that the company B will take on the remaining lease terms from company A, with the terms otherwise remaining unchanged) for nil consideration.
In terms of the treatment in Company A (relinquishing the lease), my understanding is that we would just remove the asset and lease liability, with the difference resulting in a gain to the P&L.

In Company B, however, I'm a bit confused as to the treatment.

Usually, a lessee would value the lease liability using the NPV of future payments using the discount rate at the inception of the lease, so would this be the correct treatment (use a new discount rate compared to the original lease) and bring an asset and liability onto the books of commensurate value?

This seems to make most sense to me from my understanding, but seems strange that from a group perspective the lease for all intents and purposes would be the same, but one entity would be able to recognise a profit on disposal, and then another group entity would then recognise an asset and liability at a much different value (since interest rates have changed so much since the agreement of the original lease, to the date of this lease modification).
I did also start to look at how one would deal with intra-group transactions, but presumably since this is actually an agreement with a landlord (third party separate from the group) this wouldn't constitute one?

Sorry for all the questions: I just want to sense-check if my logic is right (disposal of asset and liability Company A with a small gain, and then the recognition of liability and asset in company B using new discount rate, with no sort of eliminations required on consolidation) or if I'm completely off!

Any help would be greatly appreciated!
SirAnonymous
Posts: 5
Joined: 14 Mar 2023, 08:11

Re: Property lease transfer between subsidiaries - nil consideration

Post by SirAnonymous »

Hi,
Yes we had a similiar situation and followed the same process (which was accepted by our auditors). i.e. lease modification triggered in the company A (per IFRS 16 para 45) as in effect the lease term has been shortened by termination of the lease in company A and transfer to company B.
Therefore ROU asset and lease liabilty reduced to zero and difference recognised in P&L (per IFRS 16 para 46)
In company B we treated the lease like any new lease with a recalculation done of the present value at a new discount rate over the lease term.
DSD
Posts: 4
Joined: 18 Aug 2021, 15:59

Re: Property lease transfer between subsidiaries - nil consideration

Post by DSD »

Thank you - I appreciate the response!
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