IFRS - Purchase of Lease and End of Lease Purchase

[Vigath]

Hi Everyone,

I am needing some assistance looking at IFRS treatment of the following situation.

We purchased equipment from a vendor (subcontract) that is exiting a market.

We purchased both Owned and Leased equipment (IFRS 16).
We paid a premium on the leased equipment (over and above the lease value).
The Lease has a discounted purchase price of $100, the asset is approximately $200k each (new)
Most of the leases expire in 6-9 months 1 of which is about 15 months.
These are typically 8-10 year assets with a lease period of 4-5 years (vendor elected for accelerated lease)

My question is, how do we deal with the premiums paid for these lease contracts? Also how do we transfer these units into assets at end of lease buyout when the asset is work easily 60-80k with a $100 buyout?

Thank you.

[Ketan Marwah]

Hi,

My question is, how do we deal with the premiums paid for these lease contracts? Also how do we transfer these units into assets at end of lease buyout when the asset is work easily 60-80k with a $100 buyout?

When the short-term exemption is applied, lease payments are recognized as an expense over the lease term on a straight-line basis or another systematic method (IFRS 16.6). The election for short-term leases should be made by class of underlying asset to which the right of use is related (IFRS 16.8) so don't bother about lease by lease assessment. When you buy the asset then bring them onto the balance sheet as you would normally do for any owned asset.

[Vigath]

Hi,

Thank you, for your reply.

What value should I assign them when I bring them on to the balance sheet?

In our situation, a purchase of $1,000,000 of assets. say $500,000 is to purchase the lease takeover as previous lease elected to accelerate the payments and we agree they have equity in these units. $499,000 is the remaining amount of the lease with $1,000 in buyout.

Without IFRS we would Capitalize the $1,000,000 in assets and book $499,000 in lease liabilities and $1,000 in liabilities for the buyout. I can depreciate the assets over 6 years and zero the lease liability within 15 months.

How I am reading IFRS 16, in this situation is I have to expense/depreciate $999,000 worth of assets within 15 months for an asset with a 6 year life, and I am not sure if that is the correct treatment of this situation.

[Ketan Marwah]

Hi,

Firstly ignore my previous post as I did not realize that you had a purchase option embedded in the leasing contract. Short term exemptions are not available for leases with purchase options.
Secondly, may I ask you to elaborate on the arrangement for taking over the leased assets meaning are you leasing the right to use the asset from the vendor (indicating a sublease from him to you) OR have you entered into a contract directly with the owner (lease between owner and you). I just want to be clear in the fact pattern to see if there is something more to what you have already shared.

Simply put though from the information shared so far,

$500K - Lease payments made at or before the commencement date are excluded from the lease liability. However, they are incorporated into the measurement of right-of-use assets.
+ $500K - Lease liability including purchase option also included in the ROU calculation

=========================
= $1M ROU asset (depreciable amount of $999k to be depreciated over remaining life of asset which I assume is 6 years). The day when you make the purchase then you replace ROU assets with an owned asset (only a classification change).

Amortize lease payments over 15M.

[Vigath]

Hi,

Thank you for your quick reply.

For the second question, in our situation we are paying the $500,000 to the Vendor and the remaining lease value will be to the "owner" (most contracts have the same "owner" with adjustment to interest and fees, so new contracts between us and "owner", I think one of the "owners" we are still in discussions with, TBD if it will still remain a lease)

Yes what you listed is what we want as a goal and would better reflect the asset values the day we purchase it as our asset.

[Ketan Marwah]

Hi,

Then what you pay to vendor will be the initial direct cost for procuring the lease. The answer stands as is (account it the same way), just that it wouldn’t be a prepayment of lease but an initial direct cost for the lease arrangement.

[Marek Muc]

I agree with Ketan. Anything you're paying to take over the lease gets added to the RoU asset, but it's not included in the lease liability if it's paid before the lease commencement date.