IFRS 16 - Sublease - Unguaranteed residual value - how to write off?

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Maksharip
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Joined: 25 Jul 2021, 18:33

IFRS 16 - Sublease - Unguaranteed residual value - how to write off?

Post by Maksharip »

Hello,

In short, what should the sublessor do with the unguaranteed residual value (Lease receivables) at the end of the sublease, if it is not going to continue any lease/sublease operations?

Little bit more details:
The company subleases an office building as financing lease. At the end of the lease term after all payments are done, there is the unguaranteed residual value in the books (Lease receivables). The company is not going to lease the building anymore, and therefore is not going to sublease.
How should we derecognize the unguaranteed residual value (Lease receivables)?

Here is good example from lessor perspective.
At the end the lessor has USD 25 000 as Lease Receivables, which corresponds to the residual value of the equipment.
But the lessor in this case most likely will recognize them as fixed assets or maybe sell for USD 25 000, but what a sublessor should do with this amount in it's book?
https://ifrscommunity.com/knowledge-bas ... _lessor_01


Thank you very much!
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Marek Muc
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Re: IFRS 16 - Sublease - Unguaranteed residual value - how to write off?

Post by Marek Muc »

I assume that in your case the unguaranteed residual value represented the remaining lease term for the head lease after the sublease ends, right? And now you assess that you won't use the office for remaining lease term and also won't be able to sublease it, right? Then I would recognise it as an impairment of RoU.
Maksharip
Posts: 5
Joined: 25 Jul 2021, 18:33

Re: IFRS 16 - Sublease - Unguaranteed residual value - how to write off?

Post by Maksharip »

Hi Marek,

Thanks for your reply!

Just to clarify:
Head lease and sublease end at the same date. We don't use an office and have to sublease it to minimize the costs :roll: :D
So, I had to calculate a fair value of the building and a unguaranteed residual value myself for the sublease schedule.

But before you recognise it as an impairment of RoU, you would reclass the unguaranteed residual value from Lease Receivable to RoU, right?
And it looks like there are no other options, except hitting PL, but I don't like that we have to recognise almost 1 mln USD loss :)
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Marek Muc
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Re: IFRS 16 - Sublease - Unguaranteed residual value - how to write off?

Post by Marek Muc »

Maksharip wrote: 26 Jul 2021, 14:20 Head lease and sublease end at the same date.
Hm, so what did the residual value represent then?
Maksharip
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Joined: 25 Jul 2021, 18:33

Re: IFRS 16 - Sublease - Unguaranteed residual value - how to write off?

Post by Maksharip »

So, the steps I did:
1. When sublease starts I need to derecognise RoU and recognise Net Investment in the lease (and the difference hits PL). - second snip below
2. I need need to calculate Net Investment in the Lease(Lease receivables). I follow the formula: "A lessor initially measures a finance lease receivable at the present value of the future lease payments plus any unguaranteed residual value accruing to the lessor, discounted at the interest rate implicit in the lease." - first snip below

After all lease payments are done, there is the unguaranteed residual value in my books.
I thought that I need to include the unguaranteed residual value in my calculation, otherwise the building that costs around 1.3 mln USD, I say costs only 200k USD (it is lease payments during 2 years).

But do you think that I shouldn't include unguaranteed residual value in my calculation, since I am not going to own the building at the end?
And my actual net investment in the lease is only 200k USD?

Thank you!

update: If I remove the unguaranteed residual value from Net Investment in the lease calculation, my difference in step 1 increases on 1 mln. So it looks like it hits PL any way, but it can hit at the beginning of sublease, or at the end of the sublease.
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Marek Muc
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Re: IFRS 16 - Sublease - Unguaranteed residual value - how to write off?

Post by Marek Muc »

I read your reply, but I still don't see the answer to my question: what did the residual value represent when you recognised it in the net investment in the lease?

If you say the the head lease and the sublease ended on the same day, there was no residual value at all.

I'm not sure I follow the numbers, what were monthly lease payments for the head lease and how much did you charge for the sublease?
Maksharip
Posts: 5
Joined: 25 Jul 2021, 18:33

Re: IFRS 16 - Sublease - Unguaranteed residual value - how to write off?

Post by Maksharip »

Hi

I looked at the unguaranteed residual value as a sailing price of the building at the end of sublease, and I thought, since the standard says that the formula of Net investment in the lease includes unguaranteed residual value, I should estimate the unguaranteed residual value for my sublease calculation.

For sublease we charge around 8.5k USD per month, and the headlease payments are around 11k USD per month.

But now I understand that this approach is wrong. As you said there is no residual value for sublessor. So, I shouldn't include it in the calculation.

Appreciate your help, Marek!
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