All,
I am working on a solution for Finance Subleases per IFRS 16. Are the below presumptions reasonable?
· When a Finance Sublease is terminated, I opine, the carrying value of Netinvestment (NIV) is used to re-recognize the ‘ROU’ balance on the Head Lease. Do you agree? This is in line with re-recognition of asset in FA when an asset on Finance Lease is terminated.
· I am presuming properties or assets on Head Lease are defined in such a way that a sublease is always for 100%. For example, if 3 floors are subleased to 3 different parties, then Head Lease must have a definition of 3 distinct properties so that each sublessee is getting 100% of the Asset on their Sublease. Only exception to this rule is when Sublease is not for entire duration of Head Lease Asset. For example though all 3 properties are subleased 100% to a single sublessee, maybe the sublease is for 18 months, while Head Lease is for 36 months and in this case we will consider Sublease only for 50% of the Head Lease ROU. Is this a fair assumption to make?
· Assets on Sublease are added in whole. For example, if Sublease gets 200 additional sft, Head Lease also must have got 200 additional sft as a new ROU asset. Hence on Head Lease, new ROU is added and immediately derecognized with a Gain/Loss calculated. Similarly, on contraction of area on Sublease, the asset moves back to Head Lease in entirety. I can relinquish a complete asset on Sublease which goes back to Head Lease. On sublease contraction there is a derecognition of NIV which is same as ROU addition on Head Lease and thereby no loss or gain calculation
· All other changes to Head Lease or Sublease, leads to independent calculations on these two documents(Head Lease and Sublease). Like change of payments, Lease extension, Lease Contraction etc will lead to Liability remeasurement on Head Lease and Gain/Loss calculation on Sublease. On Head Lease, since the whole ROU is offset, we will remeasure the liability and take it to Gain/Loss account.
· Finally, in case of any of the above amendments, if the Interest Rate on Finance Sublease is changing, then we will use the new interest rate from rate index and recalculate the NIV and reamortize it using new rate.