IFRS 16 for small Airlines with all dry operating leases
Posted: 30 Aug 2020, 00:59
Hi,
One of our domestic airlines had all aircrafts on dry operating leases (reported off balance sheet). Now they have to adopt IFRS 16. They are paying lease rentals and remaining period of lease is 144 months. The Pakistan Civil Aviation Authority requires a minimum threshhold of equity for renewal of operating licence. Adopting IFRS 16 is resulting in significant decline in equity. The calculation for recognising Right to Use Asset and Lease obligation, was performed, on remaining lease term using LIBOR as of July 1, 2019 as incremental borrowing rate. The financial year end is June 30. There is no right to purchase in the lease agreement nor it is a non-cancellable lease . In addition to that the National Aviation Policy is limiting operations of a passenger aircraft to maximum of 25 years. There is no way to have useful life longer enough to get some margin in depreciation expense. All rentals are paid in USD and their is huge exchange rate volatility.
My questions if anyone can help?
1) Should only remaining lease rentals be accounted for in adopting IFRS 16 or Maintenance Reserves (paid monthly) will also have to be taken into account
2) If this Airline succeeds in recognition with lessor by including purchase option or succeeds in converting the lease as non cancellable lease, will this convert the entire agreement into financial lease? I think these amendments will automatically make this arrangement a financial lease.
Would appreciate responses from members
One of our domestic airlines had all aircrafts on dry operating leases (reported off balance sheet). Now they have to adopt IFRS 16. They are paying lease rentals and remaining period of lease is 144 months. The Pakistan Civil Aviation Authority requires a minimum threshhold of equity for renewal of operating licence. Adopting IFRS 16 is resulting in significant decline in equity. The calculation for recognising Right to Use Asset and Lease obligation, was performed, on remaining lease term using LIBOR as of July 1, 2019 as incremental borrowing rate. The financial year end is June 30. There is no right to purchase in the lease agreement nor it is a non-cancellable lease . In addition to that the National Aviation Policy is limiting operations of a passenger aircraft to maximum of 25 years. There is no way to have useful life longer enough to get some margin in depreciation expense. All rentals are paid in USD and their is huge exchange rate volatility.
My questions if anyone can help?
1) Should only remaining lease rentals be accounted for in adopting IFRS 16 or Maintenance Reserves (paid monthly) will also have to be taken into account
2) If this Airline succeeds in recognition with lessor by including purchase option or succeeds in converting the lease as non cancellable lease, will this convert the entire agreement into financial lease? I think these amendments will automatically make this arrangement a financial lease.
Would appreciate responses from members