IFRS 16 and IAS 19

[kvanessabm2]

How to recognize when a Company rent an apartment for a long term (the Company is the tenant) and gives this apartment for use to his employee, how to recognize it under IFRS 16 and IAS 19?

[Ketan Marwah]

Hi,

I am afraid you would have to look at a few more things such as whether each apartment is permanently assigned to a particular employee, and there is no substantive substitution right, so is there an identified asset. The agreement between the employer and the employee includes an employee benefit under IAS 19. It is not clear whether the employer also needs to consider whether there is a sublease of the apartment to the employee under IFRS 16. Therefore, the employer has an accounting policy choice between the following options:

• Viewing the apartment as part of the overall compensation package. IAS 19, as the more relevant standard, is applicable and the employer does not apply IFRS 16 (that is, it does not consider whether there is a sublease of the apartment to the employee under IFRS 16).

• Viewing the scope of IFRS 16 and IAS 19 as not being mutually exclusive. The employer therefore applies IFRS 16 to determine whether there is a sublease under IFRS 16 in addition to an IAS 19 employee benefit.

The policy chosen should be consistently applied and disclosed. If this choice represents a critical accounting judgement, the entity should consider the IAS 1 disclosure requirements.

[Marek Muc]

Assuming the conditions for a sub-lease are not satisfied and RoU for the apartment isn’t derecognised, and the employee lives in the apartment rent-free, first we need to account for the depreciation of the RoU asset:

DR: Depreciation Expense
CR: Accumulated RoU depreciation

The key issue then is whether to reclassify this depreciation expense as an employee benefit. While I believe this is possible, IAS 19 doesn't explicitly require it. Therefore, it remains a matter of accounting policy decision in my opinion.

[Marek Muc]

I've now come up with a better approach to represent this employee benefit. I'd keep the RoU depreciation as it is, and instead recognise an estimated rental income based on market rates. This would look like:

Dr Employee benefits
Cr Rental income

Again, this isn't explicitly required by IAS 19, so it remains an entity's accounting policy choice.

[Ketan Marwah]

Hi,

The second response from Marek is certainly better (I wouldn't agree with the first one in fact) because in the first one there is no employee benefit that gets recognized. The agreement between the employer and the employee includes an employee benefit under IAS 19. Since it is unclear whether the employer also needs to consider whether there is a sublease of the car to the employee under IFRS 16 therefore the employer has the two accounting policy choices as illustrated by me earlier. What is common in those two choices is the recognition of employee benefit.

[Marek Muc]

I'm struggling to understand your explanation of the two methods to be honest. Let's say the RoU depreciation for the head lease (the one between the employer and an external party) is CU 100 monthly, which is the same as market rent between a landlord and an unrelated tenant. Could you provide some high-level accounting entries for both scenarios that you outlined?

Mine are:
1/ No implied employee benefit recognised on top of RoU depreciation:

DR: Depreciation expense 100
CR: Accumulated RoU depreciation 100

2/ Implied employee benefit expense and rental income:

DR: Depreciation expense 100
CR: Accumulated RoU depreciation 100
&
DR: Employee benefit expense 100
CR: Rental income 100

[Ketan Marwah]

Hi,

Here how I see this. I have highlighted the text in red color where my journals are a bit different than yours. Just FYI, the options that I illustrated are not entirely my brainwork but something that PwC also endorses for a FAQ 15.3.1 – Could an arrangement to use a company car which is in the scope of IAS 19 also be in the scope of IFRS 16? I have tried to model the journals for the suggested accounting options.

• Viewing the car as part of the overall compensation package. IAS 19, as the more relevant standard, is applicable and the employer does not apply IFRS 16 (that is, it does not consider whether there is a sublease of the car to the employee under IFRS 16).

1/ No implied employee benefit recognized over and above RoU depreciation:

DR: Depreciation expense 100
CR: Accumulated RoU depreciation 100
&
DR: Employee expense 100
CR: Depreciation expense 100

2/ Implied employee benefit expense and rental income:

DR: Depreciation expense 100
CR: Accumulated RoU depreciation 100
&
DR: Employee expense 120
CR: Depreciation expense 100
CR: Rental Income 20

• Viewing the scope of IFRS 16 and IAS 19 as not being mutually exclusive. The employer therefore applies IFRS 16 to determine whether there is a sublease under IFRS 16 in addition to an IAS 19 employee benefit.

If there is no Sublease (Or an operating sublease) then refer the previous scenario. If sublease (finance lease) exists then:
DR: Net Investment in LR xxx
CR: ROU xxx
&
DR: Employee expense 120/100
CR: Net Investment in LR 100/100
CR: Rental Income 20/0

[Marek Muc]

Thanks Ketan! Initially, I too considered crediting the depreciation expense. However, I'm not entirely convinced about this approach. Under IFRS 16, we're required to recognise RoU depreciation expense. If we follow your suggestion, we'd end up with a RoU asset lacking its corresponding depreciation expense. From what I gather, you're not in favour of omitting the recognition of any implied employee benefit expense, correct? Could you clarify if PWC has explicitly mentioned that implied employee expenses must always be recognised? If possible, could you quote a specific section or passage where this is stated?

[Ketan Marwah]

You are welcome Marek. I am not entirely sure if a subsequent reclass between depreciation & employee expense would indicate a departure from IFRS 16 principles OR a more specific standard taking precedence over a general standard applicable to the situation (I assume the former as reflected in my journals). Giving PwC it's due credit & with the sole intent of an academic exchange - I have attached the referred FAQ to this thread. What I noted in common between the two suggested options was the consideration of IAS 19.

[Marek Muc]

I'd say IFRS 16 and IAS 19 have a similar level of specificity.
Thanks for sharing the excerpt. I find this PWC's guidance rather broad and unclear tbh.