Lease & Derivative Accounting

[CPA Kevin Matt]

Hello Community,

Hope everyone is doing great. I wanted a bit of a sparring on lease cum derivative accounting and what better place to ask for it other than this wonderful community so here I go with my different scenarios:

- Lease an asset to a third party for 5 years and an option to sell (put option) at market value to the lessee at the end of the lease term. It is an operating lease for the lessor. How should the put option be treated in Lessor's books?

My take: Derivative accounting would apply here for the put option. Even if this would have been a finance lease, I would not have separated the embedded derivatives as the non-derivative host is not a financial asset within the scope of IFRS 9.

- Alternatively, lease the asset to a third part for 5 years with purchase rights at the end of the lease period. However, lessor can opt to not let the counter party exercise the purchase rights by paying a nominal penalty. How would this be treated in the Lessor's books?

My take: Penalty payment is an executory contract i.e. if and when the lessor pays the penalty, it would be treated as a charge on the PnL.

- Could an operating lease to third party have any (instant) impairment considerations attached to it (let us say agreed lease rate is not recovering the asset book value)?

My take: As this is an operating lease therefore the underlying asset remains in the lessor’s statement of financial position. Operating lease alone should not trigger an impairment for the underlying asset.

[Ketan Marwah]

Hi Kevin,

Often, lease contracts include extension, termination or purchase options. Such options would not qualify as embedded derivatives where their only underlying is the price of renting or purchasing the leased asset. Such an underlying is a non-financial variable which is specific to a party to the contract and, accordingly, the option fails the definition of a derivative. A change in the fair value of a non-financial asset is specific to the owner if the fair value reflects not only changes in market prices for such assets (a financial variable) but also the condition of the specific non-financial asset held (a non-financial variable). You may refer IFRS 9 para B4.3.8(f), IFRS 9 para BA.5. Impairment of lease receivables would have to be tested under IFRS 9.