I have a query about IFRS 16 for which I'd be grateful for a response (or even a direction to the right resources for additional research).
Quick background
Company A has taken a lease for an office space for which it applies IFRS 16 as a lessee. The ROU Asset and lease liability were duly recognized and accounting entries were passed per IFRS 16.
During the lease term, Company A has sub-let the office to Company X. The contractual sub-lease term lasts until the end of the head lease. As an intermediate lessor, Company A must de-recognize the ROU asset and recognize the "Net investment in the lease", in line with IFRS 16.IE8 Example 20 (the sub-lease is a finance lease as per IFRS 16). However, Company A has identified two components for which the treatment is unclear.
1. Company X has paid a non-refundable deposit which, in essence, comprises the rent payable for the first and last months of the lease. In other words, the deposit amount so paid will be adjusted against the first month of the lease (say, October 2023) and the last month of the lease (either March 2025 or whenever Company X decides to terminate the sub-lease arrangement).
2. Company A availed the services of a real estate broker for finalizing the sub-lease arrangement. The broker received the non-refundable deposit (referred to above) from Company X, adjusted its commission charges for its services, and remitted the balance to Company A.
Queries:
1. How does Company A treat the non-refundable deposit received from Company X?
2. Will the commission charges be considered as "initial direct costs" for Company A and therefore be adjusted while arriving at the "Net investment in lease"?
3. If the answer to 2 is yes, would the commission be adjusted against the rent amount for the first month? Or should it be adjusted by way of changing the interest rate implicit in the lease (currently, Company A is using the same interest rate for both the sublease and the main lease)?
4. Would there be a difference in the accounting treatment if the net amount was received from the broker in the first month of the lease, but not before the lease commencement date?
I tried researching these, and I came up with a few answers:
1. The full amount of the non-refundable deposit would be treated as prepaid rent received from Company X. This will be included in the "Net investment in the lease", but as a receipt in the first month (and therefore would not be discounted using the interest rate implicit in the lease).
2. Yes, commission charges will be considered as "initial direct costs" and should be adjusted to arrive at "Net investment in lease".
3. Company A can adjust the commission charges against the lease rental received / receivable for the first month, and need not adjust the interest rate implicit in the lease.
4. Arguable that there is no difference in accounting treatment since the net amount was received from the broker in the lease commencement month.
Could you please confirm if my analysis is correct? If not, I would greatly appreciate the correct guidance (and possibly answers) to the queries.
Apologies for the long post - wanted to ensure all the facts and brief analysis are captured here. Thank you so much in advance for your responses and advice.
Cheers!
