Presentation & Disclosure – lease accounting standard

Presentation

A lessee should either present in the balance sheet, or disclose in the notes:

  1. right-of-use assets separately from other assets. If a lessee does not present right-of-use assets separately in the balance sheet, the lessee should:
  2. include right-of-use assets within the same line item as that within which the corresponding underlying assets would be presented if they were owned; and
  3. disclose which line items in the balance sheet include those right-of-use assets.
  4. lease liabilities separately from other liabilities. If a lessee does not present lease liabilities separately in the balance sheet, the lessee should disclose which line items in the balance sheet include those liabilities.

The above requirement does not apply to right-of-use assets that meet the definition of investment property, which should be presented in the balance sheet as investment property.

In the statement of profit and loss, a lessee should present interest expense on the lease liability separately from the depreciation charge for the right-of-use asset. Interest expense on the lease liability is a component of finance costs,, requires to be presented separately in the statement of profit and loss.

  • In the statement of cash flows, a lessee should classify:
  • cash payments for the principal portion of the lease liability within financing activities;
  • cash payments for the interest portion of the lease liability within financing activities applying the requirements in Ind AS 7, Statement of Cash Flows, for interest paid; and
  • short-term lease payments, payments for leases of low-value assets and variable lease payments not included in the measurement of the lease liability within operating activities.

Disclosure

  • Disclose information in the notes that, together with the information provided in the balance sheet, statement of profit and loss and statement of cash flows,
  • Disclosure to give a basis for users of financial statements to assess the effect that leases have on the financial position, financial performance and cash flows of the lessee.
  • Disclose information about its leases for which it is a lessee in a single note or separate section in its financial statements.
  • However, a lessee need not duplicate information that is already presented elsewhere in the financial statements, provided that the information is incorporated by cross-reference in the single note or separate section about leases.

Disclose the following amounts for the reporting period:

  1. depreciation charge for right-of-use assets by class of underlying asset;
  2. interest expense on lease liabilities;
  3. the expense relating to short-term leases accounted for applying paragraph 6. This expense need not include the expense relating to leases with a lease term of one month or less;
  4. the expense relating to leases of low-value assets. This expense should not include the expense relating to short-term leases of low-value assets
  5. the expense relating to variable lease payments not included in the measurement of lease liabilities;
  6. income from subleasing right-of-use assets;
  7. total cash outflow for leases;
  8. additions to right-of-use assets;
  9. gains or losses arising from sale and leaseback transactions; and
  10. the carrying amount of right-of-use assets at the end of the reporting period by class of underlying asset.
  • The above disclosures should be provided in a tabular format, unless another format is more appropriate.
  • The amounts disclosed should include costs that a lessee has included in the carrying amount of another asset during the reporting period.
  • Disclose the amount of its lease commitments for short-term leases if the portfolio of short-term leases to which it is committed at the end of the reporting period is dissimilar to the portfolio of short-term leases to which the short-term lease expense disclosed

Right-of-use assets

If right-of-use assets meet the definition of investment property, a lessee should apply the disclosure requirements in Ind AS 40.

  • If a lessee measures right-of-use assets at revalued amounts applying Ind AS 16, the lessee should disclose the relevant information required for those right-of-use assets.

Maturity analysis

  • A lessee should disclose a maturity analysis of lease liabilities, separately from the maturity analyses of other financial liabilities.

Quantitative & Qualitative information

  • A lessee should disclose additional qualitative and quantitative information about its leasing activities.
  • This additional information may include, but is not limited to, information that helps users of financial statements to assess:
  • the nature of the lessee’s leasing activities;
  • future cash outflows to which the lessee is potentially exposed that are not reflected in the measurement of lease liabilities. This includes exposure arising from:
  • variable lease payments (as described in paragraph B49);
  • extension options and termination options (as described in paragraph B50);
  • residual value guarantees (as described in paragraph B51); and
  • leases not yet commenced to which the lessee is committed.
  • restrictions or covenants imposed by leases; and
  • sale and leaseback transactions
  • A lessee that accounts for short-term leases or leases of low-value assets should disclose that fact.

Consideration for additional information

  • In determining whether additional information about leasing activities is necessary a lessee should consider:
  • whether that information is relevant to users of financial statements. A lessee should provide additional information only if that information is expected to be relevant to users of financial statements. In this context, this is likely to be the case if it helps those users to understand:
  1. the flexibility provided by leases. Leases may provide flexibility if, for example, a lessee can reduce its exposure by exercising termination options or renewing leases with favourable terms and conditions.
  2. restrictions imposed by leases. Leases may impose restrictions, for example, by requiring the lessee to maintain particular financial ratios.
  3. sensitivity of reported information to key variables. Reported information may be sensitive to, for example, future variable lease payments.
  4. exposure to other risks arising from leases.
  5. deviations from industry practice. Such deviations may include, for example, unusual or unique lease terms and conditions that affect a lessee’s lease portfolio.
  • whether that information is apparent from information either presented in the primary financial statements or disclosed in the notes. A lessee need not duplicate information that is already presented elsewhere in the financial statements.

Variable lease payments disclosure

Additional information relating to variable lease payments that, could include information that helps users of financial statements to assess, for example:

  1. the lessee’s reasons for using variable lease payments and the prevalence of those payments;
  2. the relative magnitude of variable lease payments to fixed payments;
  3. key variables upon which variable lease payments depend and how payments are expected to vary in response to changes in those key variables; and
  4. other operational and financial effects of variable lease payments.

Additional information relating to extension options or termination options could include information that helps users of financial statements to assess, for example:

  1. the lessee’s reasons for using extension options or termination options and the prevalence of those options;
  2. the relative magnitude of optional lease payments to lease payments;
  3. the prevalence of the exercise of options that were not included in the measurement of lease liabilities; and
  4. other operational and financial effects of those options.

Residual value guarantees

Additional information relating to residual value guarantees could include information that helps users of financial statements to assess, for example:

  1. the lessee’s reasons for providing residual value guarantees and the prevalence of those guarantees;
  2. the magnitude of a lessee’s exposure to residual value risk;
  3. the nature of underlying assets for which those guarantees are provided; and
  4. other operational and financial effects of those guarantees.

Sale and leaseback

Additional information relating to sale and leaseback transactions could include information that helps users of financial statements to assess, for example:

  1. the lessee’s reasons for sale and leaseback transactions and the prevalence of those transactions;
  2. key terms and conditions of individual sale and leaseback transactions;
  3. payments not included in the measurement of lease liabilities; and
  4. the cash flow effect of sale and leaseback transactions in the reporting period.

Costs of the lessee for construction/design of underlying asset

  • An entity may negotiate a lease before the underlying asset is available for use by the lessee.
  • For some leases, the underlying asset may need to be constructed or redesigned for use by the lessee. Depending on the terms and conditions of the contract, a lessee may be required to make payments relating to the construction or design of the asset.
  • If a lessee incurs costs relating to the construction or design of an underlying asset, the lessee should account for those costs applying other applicable Standards, such as Ind AS 16.
  • Costs relating to the construction or design of an underlying asset do not include payments made by the lessee for the right to use the underlying asset.
  • Payments for the right to use an underlying asset are payments for a lease, regardless of the timing of those payments.

Legal title to the underlying asset

  • A lessee may obtain legal title to an underlying asset before that legal title is transferred to the lessor and the asset is leased to the lessee.
  • Obtaining legal title does not in itself determine how to account for the transaction.
  • If the lessee controls (or obtains control of) the underlying asset before that asset is transferred to the lessor, the transaction is a sale and leaseback transaction
  • However, if the lessee does not obtain control of the underlying asset before the asset is transferred to the lessor, the transaction is not a sale and leaseback transaction.
  • For example, this may be the case if a manufacturer, a lessor and a lessee negotiate a transaction for the purchase of an asset from the manufacturer by the lessor, which is in turn leased to the lessee.
  • The lessee may obtain legal title to the underlying asset before legal title transfers to the lessor. In this case, if the lessee obtains legal title to the underlying asset but does not obtain control of the asset before it is transferred to the lessor, the transaction is not accounted for as a sale and leaseback transaction, but as a lease.

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