IFRS16 - Lease Incentives

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Lasa1
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IFRS16 - Lease Incentives

Post by Lasa1 »

Hi
On April 1st, Company ABC moved to a new building and entered in a lease agreement.
ABC performed some works specifically needed for its activity and lessor reimbursed part of it at the commencement of the lease. Reimbursement was treated as a lease incentive.
Now, one month later, the lessor will make a 2nd reimbursement for the same purpose and will be also treated as a lease incentive. This reimbursement won’t impact neither the monthly lease payments nor the discount rate.
Based on the above, I understand that accounting entry for this 2nd reimbursement is Dt Cash Ct Right-Of-Use.
At the commencement of the lease, I calculated the Liability NPV, the financial expenses and the monthly depreciation of future months. At that time, I was not aware of this second reimbursement. Now I understand that:
1. The monthly depreciation of ROU for future months needs to be recalculated.
2. No need to recalculate the Liability NPV or the financial expenses for future months.
Could you please confirm?
Thanks
Leo
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Re: IFRS16 - Lease Incentives

Post by Leo »

Hi,

I haven't found an illustration in IFRS, but in US GAAP, you can compare the payment of incentives after the commencement date and the one before, and you'll see that the liabilities aren't quite the same :

https://leasequery.com/blog/lease-incen ... g-example/

But I guess that IFRS might be what you've suggested.
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Marek Muc
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Re: IFRS16 - Lease Incentives

Post by Marek Muc »

If you received all those lease incentives, then you won't see any impact on lease liability now. There would be some really minor differences in terms of timing of interest expense if you had accounted for the second payment at the beginning, but I wouldn't care about it.
Lasa1
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Re: IFRS16 - Lease Incentives

Post by Lasa1 »

Thank You Marek, Leo. Still not cleared..let me give some more background (note that figures and terms are for illustration purposes).
Lease agreement states that Lessor will reimburse 0.008 euros per meter to the Lessee on leasehold improvements.
Before the commencement of the lease, the total cost on the lease improvements were unknown and Lessor made a first cash payment of 30 euros. It was agreed to treat it as a sale incentive and reducing the Right-Of- Use.
Now final calculation has been done and the final figure for this sales incentive should be 80 euros, so the Lessor will make an additional cash payment of 50 euros in Mai or June. I understand I need to reduce my ROU by 50 and recalculate its depreciation… but still do not see how this will impact my lease liability.
I tried to update in red my schedule with the 2nd sale incentive. Is this correct?
Note 1. Sorry to insist, I am coming back because this 2nd reimbursement is material and so need to do the right accounting.
Note 2.Sorry for sending pdfs, I tried excel but not working
Thanks AGAIN.
Attachments
Original Schedule.pdf
Schedule prepared before being aware of 2nd reimbursement
(319.3 KiB) Downloaded 226 times
Updated Schedule.pdf
Schedule incl. the 2nd reimbursement
(316.83 KiB) Downloaded 200 times
Leo
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Re: IFRS16 - Lease Incentives

Post by Leo »

Thank you for those files. I'm sorry, may I ask why your lease obligation isn't 0 at the end? And why there is a such gap in lease obligation at the end ?
Lasa1
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Re: IFRS16 - Lease Incentives

Post by Lasa1 »

Thank You Leo. The schedules sent were wrong. I did the calculation as if payment was in arrears.
I sent them again. The updated file is how I understand we should have prepare the schedule if we would have known about the 2nd reimbursment ( expected 1st of June in the file).
Attachments
OriginalSchedule.pdf
Original File
(318.76 KiB) Downloaded 206 times
UpdatedSchedule.pdf
Incl. 2nd reimbursment
(317.56 KiB) Downloaded 203 times
Lasa1
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Re: IFRS16 - Lease Incentives

Post by Lasa1 »

Hi,
I might have created some confusion by sending wrong files on my post on Mai 16,so I will try to clarify my question:
On April 1st, Company ABC moved to a new building and entered in a lease agreement.
ABC performed some works specifically needed for its activity and as per the contract, Lessor will reimburse part of the cost of leasehold improvements. At the beginning of the lease, the total amount of the lease incentive was unknown, and the lessor made a 1st cash reimbursement which was reducing the Right of Use.
Now, one month later, the final amount of the lease incentive is known and Lessee will receive a 2nd reimbursement from the Lessor probably in June. As a consequence of this 2nd reimbursement, I will need to recalculate the Right Of Use.

Question is: Do I need to recalculate as well the liability? I think so but I am not sure how. I give it a try in file “updated schedule” attached to my post 17.05. Is this the correct way?

Marec, you said that there would be some minor differences, but since this 2nd reimbursement is very material I still need to prepare the “updated schedule” to show the management the comparison between initially schedule prepared (before knowing the amount of this 2nd reimbursement) and the updated one that includes the 2nd reimbursement.
Thanks a lot
Attachments
OriginalSchedule.pdf
Initial Measurement
(318.76 KiB) Downloaded 205 times
UpdatedSchedule.pdf
Updated Measurement
(317.56 KiB) Downloaded 214 times
Leo
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Re: IFRS16 - Lease Incentives

Post by Leo »

Here is what I would do, but before, just a few remarks.

The monthly discount rate I would use is 2%/12=0.001666667 and since the rent is paid in advance, not in arrear, I wouldn't put any interest expense at the 1rst period. If you cancel the interest expense of the first period, you'll see that you'll end up with a perfect 0 at the end of the contract term.

Like you did, I would calculate the original version without the 50 LC of incentives, and another version with 50 LC of incentives. Than I would compare both versions. Like Marek said, the liability after the deduction of 50 LC in both version will be almost the same. I would simply adjust the ROU by doing the following entry at 1rst June 2022:

dt : Cash 50
cr : ROU 44
cr : P&L (Lease expenses) 6

You should end up, at 30 June 2022 with a liability of 2 062 LC and a ROU of 2 036 LC.

Fyi : the accounting method I used is ASC842, not IFRS. In IFRS, I would probably do the same, which results to comparing ROU at 30th of June in the original version in IFRS with the one in the amended version, the delta goes to P&L.
Attachments
2022-05-18_15h24_27.png
2022-05-18_15h24_19.png
Lasa1
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Re: IFRS16 - Lease Incentives

Post by Lasa1 »

Thanks a lot! It is clear now
Lasa1
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Re: IFRS16 - Lease Incentives

Post by Lasa1 »

Hello,
I am coming back to the question on lease incentives received after the commencement of the lease.
Is there any paragraph in IFRS16 or any other IFRS standard that I could use to support the accounting treatment provided by Leo?

Thanks
Regards
Cecilia
Leo
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Re: IFRS16 - Lease Incentives

Post by Leo »

did the auditors scold you ?
JRSB
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Re: IFRS16 - Lease Incentives

Post by JRSB »

:lol:
Lasa1
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Re: IFRS16 - Lease Incentives

Post by Lasa1 »

yes.... auditors asked... and I am not able to find guidance for this example.
Leo
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Re: IFRS16 - Lease Incentives

Post by Leo »

so what did they suggest ? can you ask them ?
Lasa1
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Re: IFRS16 - Lease Incentives

Post by Lasa1 »

They asked us to provide them with the documentation we used / read to support our accounting proposal.
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Marek Muc
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Re: IFRS16 - Lease Incentives

Post by Marek Muc »

a link to this topic should suffice ;)
Leo
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Re: IFRS16 - Lease Incentives

Post by Leo »

it doesn't seem like it, but, this is a disruptive and revolutionary proposition.
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Marek Muc
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Re: IFRS16 - Lease Incentives

Post by Marek Muc »

I think that our community can be considered to be an equivalent of 'other accounting literature and accepted industry practices' as referred to in IAS 8.12 ;)
JRSB
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Re: IFRS16 - Lease Incentives

Post by JRSB »

It would be great to see that tested, perhaps in an FRC investigation at some point. :ugeek:
Lasa1
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Re: IFRS16 - Lease Incentives

Post by Lasa1 »

Agree that this community literature should be accepted! :)
And I also have a second though :
IFRS 16 states the lease liability at the lease commencement date includes all unpaid fixed payments less any leases incentives receivable para (27).
We did not include it, so this could be treated as an error / misstatement and so we could say that as per IAS 8 It is generally accepted that errors should be corrected via the same financial statement lines through which the error originated.

Or redirect to KPMG document https://home.kpmg/content/dam/kpmg/xx/p ... s-2018.pdf (picture attached). It is not "exactly" a lease modification but provides a sense of how to adjust
Does it make sense?
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KPMG
KPMG
Leo
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Re: IFRS16 - Lease Incentives

Post by Leo »

it's good for me !
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