IFRS-16 (ROU)

All topics related to IFRS Standards.
Locked
sam
Posts: 32
Joined: 25 Jul 2019, 06:13

IFRS-16 (ROU)

Post by sam »

There is a inter-company long term lease agreement between two group companies. Leased assets includes building, plant & machinery and tools and equipment etc. For the sake of simplicity, it was agreed between the two parties to charge rent equal to the amount of depreciation incurred by the owner.

Then such leasee give the same leased assets to another third party on rent.

Now my questions are as below:

1) Is there any need to record ROU / lease liability in the books of leasee for rental charges between group companies? (for both movable like tools/equipment and immovable properties like buidling)

2) If this is mandatory to record ROU/lease liability in the books of leasee, then what would be elimination entries on consolidation level/group level in order eliminate the inter-company rental income from group profit

Also give reference to the relevant para of IFRS :)

thanks
JRSB
Trusted Expert
Posts: 1309
Joined: 01 Mar 2020, 01:10
Location: UK

Re: IFRS-16 (ROU)

Post by JRSB »

I can't see how it would be different to any normal lease in the standalone books. Are the tools perhaps low value or short term?
User avatar
exIFRS
Trusted Expert
Posts: 234
Joined: 01 Mar 2020, 08:44
Location: London

Re: IFRS-16 (ROU)

Post by exIFRS »

If I understand your questions correctly.

1) In the separate books/financial statements (if prepared) yes you would need to account for the lease. As JRSB notes a sublease is still just a lease (IFRS16.3). There are specific references scattered throughout IFRS 16 to subleases, but basically, you have to account for everything (both being the lessee and lessor). Note IFRS 16.B7 says you can't use the low-value asset exemption for any item you plan to sublease. Also IFRS 16.B58 focusses on classification of a sublease.

2) Once you start talking about consolidated financial statements, yes you need to eliminate the inter-company transaction related to the head lease (IFRS 10.B86).

As far as I am aware, that is the extent of the references. No where in the standards does it tell you how to do it and as far as I can see the best the big four are going to tell you is "it's complex". See for example: https://home.kpmg/content/dam/kpmg/xx/p ... epager.pdf
JRSB
Trusted Expert
Posts: 1309
Joined: 01 Mar 2020, 01:10
Location: UK

Re: IFRS-16 (ROU)

Post by JRSB »

Missed that it was sublet (again). Presumably the intermediate group lessee is ignored as it's a lease of the group owning the asset to the external party. I like the 'complex elimination journal'. Perhaps it's not complex to take out those entries identified, and the complex bit is reflecting the net difference on each side.
User avatar
Marek Muc
Site Admin
Posts: 3228
Joined: 15 Oct 2018, 17:21
Contact:

Re: IFRS-16 (ROU)

Post by Marek Muc »

some additional summary re. intra-group in the knowledge base below as we've discussed this already

https://ifrscommunity.com/knowledge-bas ... oup-leases

I've just added this KPMG chart linked to by exIFRS

PS. subleases:
https://ifrscommunity.com/knowledge-bas ... -subleases
Jonny
Posts: 90
Joined: 22 May 2020, 11:09

Re: IFRS-16 (ROU)

Post by Jonny »

Marek Muc wrote: 29 Dec 2020, 20:29 I've just added this KPMG chart linked to by exIFRS
The link does not work in the Knowledge Base
User avatar
Marek Muc
Site Admin
Posts: 3228
Joined: 15 Oct 2018, 17:21
Contact:

Re: IFRS-16 (ROU)

Post by Marek Muc »

Oops, it links to my local drive :lol: I will fix it tomorrow, thanks!
sam
Posts: 32
Joined: 25 Jul 2019, 06:13

Re: IFRS-16 (ROU)

Post by sam »

Thanks for your valuable inputs. I will apply the same in my case.

After reading above, i have following additional questions:

Continuing the prior scenerio:

1) Yes, in that case, our company is in sub-lease situation (we are renting out it to external third party). This is understood that we will record ROU and related lease liabilities. But how i will treat rental income received from external third party outside the group?

2) What happened if by the end of lease term with inter-company lessor (within the same group), the underlying leased assets ownership transferred to the our company?
User avatar
exIFRS
Trusted Expert
Posts: 234
Joined: 01 Mar 2020, 08:44
Location: London

Re: IFRS-16 (ROU)

Post by exIFRS »

1) As per IFRS16.B58 you classify the sub-lease as either an operating or finance lease (based on the ROU arising from the head lease, and considering the requirements of IFRS16.61-66.

From the perspective of the separate financial statements, if you classify as a finance lease:

A) Derecognise the right-of-use asset relating to the head lease that you transfer to the sublessee and recognise the net investment in the sublease;
B) Recognise any difference between the right-of-use asset and the net investment in the sublease in profit or loss; and
C) Retain the lease liability relating to the head lease in its statement of financial position
D) During the term of the sublease, you recognise both finance income on the sublease and interest expense on the head lease.

If you classify as an operating lease:

A) Retain the lease liability and the right-of-use asset relating to the head lease in its statement of financial position.
B) recognise a depreciation charge for the right-of-use asset and interest on the lease liability; and
C) recognise lease income from the sublease.

2) I guess you need to treat the head-lease as modified (terminated), and sort through untangling it. I don't think it would impact the sub-lease. The transfer does not modify the lease with the sub-lessee I presume, and though theoretically I guess you could argue that you might want to change the classification of the lease (from finance to operating potentially?) IFRS16.66 states that:
Lease classification is made at the inception date and is reassessed only if there is a lease modification. Changes in estimates (for example, changes in estimates of the economic life or of the residual value of the underlying asset), or changes in circumstances (for example, default by the lessee), do not give rise to a new classification of a lease for accounting purposes.
sam
Posts: 32
Joined: 25 Jul 2019, 06:13

Re: IFRS-16 (ROU)

Post by sam »

Thanks for the excellent response and analysis.

The following chart is relevant:

Group Company A (landlord)------Group Company B (tenant) -----Third party (sub-tenant)

Between Group Company A and Group Company B, there is inter-company lease agreement based on the mutually agreed terms and conditions. By the end of lease term, leased assets ownership transferred to Group Company B in accordance with agreement This clause of transfer of ownership at the end of lease term is included in agreement since inception.

TREATMENT 1:

Group company A shall record the rental income received from Group company B while depreciating the leased assets in its standalone FS.

Group Company B shall record ROU and related lease liability in its standalone FS.

What accounting entry Group Company B will made when by the end of lease term, when leased assets ownership transferred to Group Company B in accordance with agreement This clause of transfer of ownership at the end of lease term is included in agreement since inception? (Keeping in view that by end of lease term, in standalone FS of Group Company B ROU and lease liability stands at zero while Group Company A PPE net book value would be zero because Group Company A is charging rent equal to the actual depreciation to Group Company B)

How elimination entries will happened on consolidation level in case of treatment 1?

TREATMENT 2:

Group company A shall derecognize leased assets in its standalone FS as ownership is transferred to Group Company B by the end of lease term thus treating as finance lease. And record Finance lease receivable in its standalone FS

Group Company B shall record PPE assets and related depreciation in its standalone FS.

How elimination entries will happened on consolidation level in case of treatment 2?

--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Now, we will discuss the relationship between Group Company B and third party sub tenant.

Group Company B shall record rental income received from third party in its standalone FS only while no effect on consolidation. Considering the lease between two parties as operating lease.

Please advise. Sorry for the lengthy post. Thanks for the generous help! :)
sam
Posts: 32
Joined: 25 Jul 2019, 06:13

Re: IFRS-16 (ROU)

Post by sam »

@dear group members your expert opinion needed. Thanks :)
User avatar
Marek Muc
Site Admin
Posts: 3228
Joined: 15 Oct 2018, 17:21
Contact:

Re: IFRS-16 (ROU)

Post by Marek Muc »

your previous post in very lengthy - what is the question?
User avatar
Marek Muc
Site Admin
Posts: 3228
Joined: 15 Oct 2018, 17:21
Contact:

Re: IFRS-16 (ROU)

Post by Marek Muc »

OK I see that you started a new topic so I'm locking this one
Locked