Comprehensive Guide to Lease Accounting Standards

1. Leases © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

2. Why a lease project? • Existing lease accounting doesn’t meet users’ needs • Accounting depends on classification • Users adjust financial statements to recognise assets and liabilities arising in operating leases • Complexity • Difficult to define dividing line between finance and operating © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

3. Scope • Exclude: • Leases of intangible or biological assets • Leases to explore for or use natural resources • Contracts representing the purchase or sale of the underlying asset • Include long-term leases of land • Incorporate IFRIC 4 to differentiate service contracts from leases • Short-term leases • Lessee: recognise gross asset and gross liability • Lessor: use accrual accounting © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

4. Lessee right-of-use model • Lessee has acquired a right to use the underlying asset and is paying for that right with its rental payments © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

5. Lessee - measurement *Re-valuation of entire class of PP&E is required if right-of-use is re-valued © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

6. Lessor – Hybrid model • A performance obligation approach for leases where lessor retains exposure to significant risks or benefits associated with the underlying asset either: • during the expected term of the current lease contract; or • subsequent to the term of the current lease contract • A derecognition approach for all other leases • Counterparty credit risk is not considered © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

7. Performance obligation Lease contract creates a new right while underlying asset continues to be recognised © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

8. Performance obligation - measurement © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

9. Derecognition Lessor transfers a portion of underlying asset in exchange for a right to receive payments over the lease term © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

10. Derecognition -measurement © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

11. Options to extend lease term Include longest possible lease term that is more likely than not to occur In lessee’s obligation to pay rentals In lessor’s receivable Reassess at each reporting date, with adjustments to: Right-of-use asset for lessees P.O. or residual asset depending on lessor approach Purchase options Account for only when they are exercised © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

12. Contingent rentals Include expected outcome in measuring lease asset and liabilities, reassess at each reporting date Examples: Usage: rentals based on usage (eg mileage) Performance: rentals based on a % of revenues Index: rentals based on changes in the housing index When included? Lessees must always include Lessors only include if reliably measurable Residual value guarantees Treat the same as contingent rentals © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

13. Disclosures • To enable users to evaluate the nature, amount, timing, and uncertainty of cash flows arising from lease contracts and how the entity manages those cash flows • Includes: • Nature of lease arrangements • Accounting policy for models used (lessor) • Maturity analyses • Revenue recognition information • Discount rates • Roll-forward of right of use asset (lessee) • Roll-forward of receivable / performance obligation or residual asset for lessor © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

14. Transition • All leases • simplified retrospective approach • present value of remaining lease payments • First time adoption • Same treatment as transition • No relief for simple finance leases-account for in the same way as other leases on first time adoption © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

15. Lessor – Investment property • If investment property at cost, apply new lessor accounting requirements • The IASB - If investment property at fair value in accordance with IAS 40, do not apply new lessor accounting requirements • The FASB - Consider whether to permit or require fair value under US GAAP © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

16. Other issues • Account for transactions as sale/leasebacks if it is determined that the underlying asset has been sold: - at the end of the contract control of the underlying asset will be transferred, and - all but a trivial amount of the risks and benefits associated with the underlying asset have been transferred to the buyer/lessor • Adjust assets, liabilities, gains and losses recognised to reflect market rentals © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

17. Other issues • Subleases • Account for assets/liabilities in accordance with the related lessee and lessor models • Present separately the obligation to pay rentals to the head lessor • Disclose the nature and amount of significant subleases • Show the leased asset, lease receivable and performance obligation with “linked” presentation under the performance obligation approach • Present all assets and liabilities gross under the derecognition approach © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

18. What next? Discussion paper March 2009 Comment period & boards deliberations Exposure Draft Q3 Comment period & boards’ deliberations Standard planned Q2 2011 © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

19. IASB contacts Outreach: • Barbara Davidson (Technical Manager): bdavidson@ifrs.org Project team: • Rachel Knubley (Technical Principal): rknubley@ifrs.org • Li Li Lian  (Technical Manager): llian@ifrs.org  • Aida Vatrenjak (Assistant Technical Manager): avatrenjak@ifrs.org • Sunhee Kim (Technical Associate): skim@ifrs.org  © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

20. Questions or comments? Expressions of individual views by members of the IASB and its staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation. © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org