ACT Audit OfficeNew Accounting Standards Training

5 June 2019

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reserved

This presentation is intended for instruction. It is general information only, and is not specific

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as accounting standards.

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Agenda

9:30 – 10:15 Financial Instruments

10:15 – 11:00 Revenue

11:00 – 11:15 Break

11:15 – 12:45 Revenue

12:45 – 1:45 Lunch

1:45 – 3:15 Wrap up of revenue (if needed)

Leases

3:15 – 3:30 Break

3:30 – 4:30 Leases

Understanding AASB 9 Financial Instruments

Classification changesA

AS

B 1

39 Fair value through

profit and loss

Held-to-maturity investments

Loans and receivables

Available-for-sale

AA

SB

9

Amortised cost

Fair value through profit or loss

Fair value through OCI – debt instruments

Fair value through OCI – equity instruments

AASB 9 Financial Instruments

Classification of assets

Amortised cost if

held within a business model whose

objective is to hold assets to

collect contractual cash flows

contractual terms give rise to

cash flows that are solely

payments of principal and interest

+

Fair value through P&L otherwise

Fair Value through OCI – debt instruments

Fair Value through OCI – equity instruments

AASB 9 Financial Instruments

Business model test

business model whose objective is

to hold assets to collect contractual cash flows

• Business model:

– determined by key management personnel

– not an instrument-by-instrument approach

– does not relate to a choice but rather is a matter of fact that can

be observed by the way an entity is managed and information is

provided to its management

– a single entity may have more than one business model

• Test failed, if:

– frequent sales

– performance evaluated on fair value basis

AASB 9 Financial Instruments

Cash flow characteristics test

contractual terms give rise to cash flows that are solely

payments of principal and interest

• Interest defined as

– consideration for time value of money and credit risk

• Assessment made in in the currency in which the financial asset is

denominated

• Test failed, if a contractual term changes the timing or amount of

payments of principal or interest, unless it

– is a variable interest rate that is consideration for the time value

of money and the credit risk

– is a prepayment or extension option that meets certain

conditions

Classification summary

Contractual cash flow test

satisfied?

Is the business model to

collect contractual cash

flows AND for sale?

Choose to hold at FVTPL

(to avoid accounting

mismatch)?

Business model test

satisfied?

Choose to designate

equity instruments as

FVOCI?

Amortised cost Fair value through P&LFair value through

OCI

No

YesNo Yes

No

Yes

No

Yes

Yes

No

Choose to hold at

FVTPL (to avoid

accounting mismatch)?

No

Yes

Classification of financial liabilities

Financial liability Basis

Financial liabilities at fair value through

profit and loss (e.g. derivatives)

Fair value

Financial liabilities that arise when a

transfer of assets does not qualify for

derecognition/continuing involvement

approach applies

Consideration received

Reflects obligations retained

Financial guarantee contacts Higher of amount of loss allowance and

amount initially recognised less

cumulative recognised under AASB 15

Commitments to provide loan at below

market interest rates

As above

Contingent consideration under AASB 3 FV with changes recognised in P&L

All financial liabilities subsequently measured at amortised cost, except for:

Impairment

• Incurred loss model Vs expected credit loss model

Any ideas of the difference?

Overview of the impairment

requirements

12

Change in credit risk since initial recognition

Interest revenue

Gross basis

‘Performing’ ‘Under-performing’ ‘Non-performing’

Impairment recognition

12-month

expected credit losses

Lifetime

expected credit losses

Stage 1 Stage 2 Stage 3

Lifetime

expected credit losses

When significant increase in credit risk occurs

Gross basis Net basis

© IFRS Foundation

Overview of models

General approach

“3 buckets”

Recognise 12 months or lifetime expected credit loss depending on whether there is a significant

increase in credit risk

Simplified approach

Lifetime expected credit losses from Day 1.

Available for:

- trade receivables

- contract assets

- lease receivables

Measurement of expected credit

losses (ECL)

ECL are a probability-weighted estimate of credit losses (ie the present value of all cash

shortfalls) over the expected life of the financial instrument:

• Maximum period is the maximum contractual period of exposure to credit risk

o Include cash flows expected from collateral and other credit enhancements that are part of

contractual terms

• Unbiased and probability-weighted outcome: must consider possibility that credit loss will/will

not occur

Past events Current conditions Future economic conditions

• Time value of money – discount at effective interest rate or an approximation thereof

+ +

Particular measurement methods are not prescribed

ECL shall be measured in a way that reflects:

• Reasonable and supportable information: available without undue cost or effort at the reporting

date, reflecting:

© IFRS Foundation

Determining significant increases in

credit risk

• Assumption low credit risk at reporting date?

• Has credit risk increased significantly?

• Use change in risk of a default over expected life

• Compare default risk at reporting date with initial

recognition

• Consider reasonable and supportable information

indicates a significant increase in credit risk

– Not available use past due

– Available use it

– Rebuttable presumption re 30 days past due

IASB example: Practical expedient

Provision matrix

• Company M, a manufacturer, has a portfolio of trade receivables of $30 million in 20X1 and

operates only in one geographical region.

• The customer base consists of a large number of small clients.

• Trade receivables are categorised by common risk characteristics reflecting customers’ abilities to

pay all amounts due in accordance with the contractual terms.

• The trade receivables do not have a significant financing component.

• Loss allowance = lifetime time expected credit losses.

• A provision matrix is used to determine the expected credit losses for the portfolio, based on its

historical observed default rates over the expected life of the trade receivables and is adjusted for

forward-looking estimates.

– In this case, it is forecast that economic conditions will deteriorate over the next year.

* Refer to Example 12 in paragraph IE74-IE77 of

IFRS 9 Financial Instruments

Practical expedient

Provision matrix (continued)

Current 1–30 days

past due

31–60 days

past due

61–90 days

past due

More than 90 days

past due

Default rate 0.3% 1.6% 3.6% 6.6% 10.6%

* Refer to Example 12 in paragraph IE74 of IFRS 9

Financial Instruments

Company M estimates the following provision matrix:

Gross carrying amount Default rate Lifetime ECL allowance

$ $

A B AxB

Current 15,000,000 0.3% 45,000

1–30 days past due 7,500,000 1.6% 120,000

31–60 days past due 4,000,000 3.6% 144,000

61–90 days past due 2,500,000 6.6% 165,000

More than 90 days past due 1,000,000 10.6% 106,000

30,000,000 580,000

Hints

• When using simplified approach need to ‘group’ your

receivables into similar risks:

– Type of customers

– Geographical region

– Age

– Currency

– Customer rating.

• Default rates:

– Derive the default rates from your historical credit loss

experience

– Adjust them for forward looking information.

• Disputed invoices – should the invoice have been raised

in the first place. Not necessarily an impairment.

Inter-agency receivables

• Inter-agency loans and receivables between ACT Government

agencies are expected to have low credit risks.

• Treasury’s policy is that directorates, territory authorities and

territory-owned corporations consolidated into the WOG financial

statements will not measure any loss allowance for

receivables collectible from other ACT Government

agencies consolidated into the WOG financial statements.

• Inter-agency receivables should be assessed individually and

confirmed with the relevant agency to ensure agreement

between the agencies on the underlying amount of the

receivable.

Transition disclosures

Ongoing disclosures

AASB 1058 / AASB 15

Brainstorming: What are the key impacts at your

clients for revenue?

What about AASB 1004?

• Income guidance in AASB 1004 is being replaced by

AASB 1058 Income of Not-for-Profit Entities.

• AASB 1004 will still include guidance on:

Two standards for Not-for-Profit revenue

AASB 1058

Consideration to acquire an asset is

significantly less than the fair value

of the asset principally to enable an entity to further

its objectives

Revenue likely to be recognised on

day 1

AASB 15

In substance, contract is with a

customer

Agreement is enforceable AND

Performance obligations are

sufficiently specific

Revenue may be able to be spread

What does enforceable mean?

• “Separate party is able to enforce is through legal or

equivalent means.”

• “Equivalent means” – presence of a mechanism outside

the legal system that establishes the right of a separate

party to oblige the entity to act in a particular way or be

subject to consequence is required.

Terms which would result in

enforceability

• Refund in cash or kind if non-performance;

• Customer has a right to enforce specific performance or

claim damages;

• Customer has the right to take a financial interest in

assets purchased or constructed with funds provided;

• Parties are required to agree on alternative uses of the

resources provided;

• Administrative process exists to enforce agreements.

Other considerations for

enforceability?

• Australian law

• Legal form – what about Memorandum of

Understanding, Heads of Agreement, Letters of Intent

• Enforcement mechanisms – Ministerial direction

• Doesn’t depend on history – need the ability to enforce

• Must relate to current funds – not future funds.

Sufficiently specific performance

obligations

• Promise has to be sufficiently specific to be able to

determine when the obligation is satisfied.

• Judgement will be required taking into account

conditions specified in the arrangement, whether explicit

or implicit.

• Consider:

– Nature of type of goods and services

– Cost or value of the goods or services

– Quantity of the goods or services and

– The period over which the goods or services must be

transferred.

Timeframe for promises

• Timeframe alone is not enough

• Need to have a time frame to know when the promise

has been satisfied.

Timing of income recognition

Does the entity have a liability

or other performance obligation

in relation to the asset

received?

Immediate recognition of

income (AASB 1058)

Income may be able to be

deferred as obligation is

performed (AASB 15)

No

Yes

Focus on AASB 15

What transactions are within the

scope of AASB 15?

Scope exemptions:

• Lessor income – AASB 117 / AASB 16

• Financial instruments and other rights and obligations

within the scope of AASB 9, AASB 139, AASB 10,

AASB 11, AASB 127, AASB 128

• Insurance contracts – AASB 4 / AASB 17

• Non-monetary exchanges between entities within the

same business to facilitate sales

Applies to all revenue from contracts with

customers

Overall principle – what?

Recognise revenue in a way that

shows the transfer of

goods/services promised to

customers in an amount reflecting

the expected consideration in

return for those goods or services.

1. Identify the contract with

the customer

5. Recognise revenue as

the performance

4. Allocate the transaction

price to the performance

obligations

2. Identify the performance

obligations

3. Determine the transaction

price

The 5 steps to revenue

recognition

Customer must be able to benefit from the good / service either on its own or with other readily

available resources

The good / service is separately

identifiable from other goods / services in the

contract

Performance obligation - To be

distinct

Principal or agent

If another party is involved in providing goods or services to a customer → determine if

entity’s promise is a performance obligation:

to provide the specified goods or services itself

to arrange for the other party to provide those goods or

services

Entity is principal → recognise revenue in the gross amount of

consideration to which it expects to be entitled

Entity is agent → recognise revenue in the amount of fee

or commission to which it expects to be entitled

Indicators that an entity controls the specified

goods and service (and is a principal)

• The entity is primarily responsible for fulfilling the

promise to provide the good or service

• The entity has inventory risk before the goods or service

have been transferred to a customer or after transfer of

control

• The entity has discretion in establishing the price for the

specified goods or services

What is control?

Control is the ability to direct the use of,

and obtain substantially all of, the

remaining benefits associated with the

asset. Also an ability to prevent other

entities from directing the use of, and

obtaining the benefits from, an asset

Transfer of control over time or at

a point in time

Control is transferred

over time

Yes

Yes

No

Control is transferred at a point in time

Does customer control the

assets as it is created or

enhanced?

Does customer receive and

consume the benefits as the

entity performs?

Does the asset have an

alternative use to the entity?

No

No

Yes

Does entity have the enforceable right to

receive payment for work to date and

expect to fulfil the contract as promised?

No

Yes

Contract costs

Costs to obtain a contract

• Costs which would not have been incurred if the contract has not

been won

• Recognised as an asset if they are expected to be recovered

• If expected period is less than 12 months then expense as a

practical expedient

Costs to fulfill a contract

• If these costs are within the scope of other standards (e.g. AASB

102, AASB 116 or AASB 138) - treatment is in accordance with

appropriate standard

• If not, then you should capitalise them only if certain criteria are met

Costs to fulfil a contract

Are the costs incurred within the scope of

another standard?

Are the costs expected to be recovered?

Do the costs generate or enhance

resources that will be used to satisfy

performance obligations?

Do the costs relate directly to a contract?

No

Yes

Yes

Yes

Yes

No

No

No

Capitalise costs

(subject to amortisation and impairment)

Expense costs as incurred

Account for costs in

accordance with relevant

standard

Licences

What is a licence (AASB 15)?A licence establishes a customer’s rights to the intellectual property of an entity.

Licences of intellectual property may include, but are not limited to, licences of any of the following:

a. Software and technology

b. Motion pictures, music and other forms of medial and entertainment

c. Franchises and

d. Patents, trademarks and copyrights.

Where the contract includes a promises to grant a licence in addition to other promised goods or services, the separate performance obligations need to be identified where the licence is distinct.

Revenue recognition – licences (AASB 15)

Is the licence distinct?

Account for licence as a separate performance

obligation

Right to access the IP as it exists

through the period?

Control passes over time

Right to use the IP as it exists at a point

in time?

Control passes at a point in time

Account for licence and other promised

goods or services as a single performance

obligation

Apply general AASB 15 guidance re:

transfer of control

Yes No

AASB 2018 – 4 Australian Implementation

Guidance for NFP Public Sector Licensors

• Aim to reduce diversity since treatment under AASB 15

is not clear as refers to IP licences only.

• Amendments, guidance and illustrative examples to:

– Distinguish licences from taxes

– Determine the nature of licences

– Understand performance obligations.

• Includes practical expedients for short-term or low-value

licences.

Which standard for licences?

AASB 15

• Licences of IP

• Non-IP licencesthat do not contain a lease.

AASB 16

• Licences that are in substance leases or contain leases –excluding licences of IP.

Recognition exemptions

• Elect not to apply the requirements of AASB 15 to:

– Short-term licences (class of licence) and

– Licences for which the transaction price is of low value (licence

by licence).

• If choose to apply the exemption then recognise revenue

either upfront or straight line basis (or other systematic

basis).

• No exemption available for licence with variable

consideration.

AASB 1058 Income of Not-for-Profit Entities

Two standards for NFP income

AASB 1058

• Consideration to acquire an asset is significantly less than the fair value of the asset principally to enable an entity to further its objectives

AASB 15

• In substance, contract is with a customer

• Agreement is enforceable

• Performance obligations are sufficiently specific

Three party relationship

• Customer – party that promises consideration in

exchange for goods or services

• Customer may direct goods or services to be provided to

third party beneficiaries on their behalf.

Government NFP service

providerCommunity

at large

Steps in AASB 1058

Recognise asset at fair

value

• Cash - recognise as a financial asset under AASB 9 Financial Instruments

• Leased assets – recognise a right-of-use asset under AASB 16 Leases

• Property, plant and equipment (PPE) - recognise under AASB 116 Property, Plant and Equipment, and

• Intangible assets – recognise under AASB 138 Intangible Assets

Recognise credit on balance sheet

• Contribution by owners (AASB 1004)

• Revenue or contract liability (AASB 15)

• Lease liability (AASB 16)

• Financial instrument (AASB 9)

• Provision (AASB 137).

Excess is recognised as income

• One exception for assets controlled by the entity

Acquisition or construction of an

asset controlled by the entity

• Not a contract with a customer since no transfer of goods / services

• Liability to be recognised for fair value of asset transferred (cash) less related amounts.

• Need to be an asset that would be recognised on the books.

• Income recognised as asset constructed.

Does not require the entity to

transfer a financial asset, good or service to the

transferor

Obliges the entity to refund amounts

if the financial asset is not applied in accordance with

the terms of the transfer

Requires the entity to use the financial asset to acquire or

construct non-financial asset to

identified specifications

What does this look like in the financials?

On receipt of funds to construct an asset:

Dr: Cash

Cr: Performance obligation liability

As asset is constructed:

Dr: Capital WIP

Dr: Performance obligation liability

Cr: Cash

Cr: Income

On completion of asset:

Dr: Asset

Cr: Capital WIP

Peppercorn (below market value)

leases

• AASB 2018 – 8 Amendments to Australian Accounting Standards – Right-of-Use Assets of Not-for-Profit Entitiesissued in December 2018

• Provides a temporary option for not-for-profit lessees to elect to measure a class (or classes) of right-of-use (ROU) assets arising under ‘concessionary leases’ at initial recognition, either:

– At cost, which incorporates the amount of the initial measurement of the lease liability, or

– At fair value

• Concessionary leases in this context are leases that have significantly below-market terms and conditions principally to enable the entity to further its objectives

• Permanent option will be considered at a later date

What do entities have to do in relation

to peppercorns?

• Identify the peppercorns / concessionary leases in place at 1 July 2019

• Collect information for additional disclosures - information that helps users of financial statements to assess:

a. the entity’s dependence on leases that have significantly below market terms and conditions principally to enable the entity to further its objectives; and

b. the nature and terms of the leases, including:i. the lease payments

ii. the lease term

iii. a description of the underlying assets and

iv. restrictions on the use of the underlying assets specific to the entity

• Disclosures are provided individually for each material peppercorn / concessionary lease or in aggregate for leases involving right -of-use assets of a similar nature

Volunteer

services

Let’s review the National Partnership agreements

- Rebate scheme

- Child care

- Health infrastructure

Transition

Treasury policy on revenue

What will the financial statements

look like – Not-for-Profits?

Approach

Modified approach

Current year (2019 / 2020)

Mostly AASB 15

Comparative (2018 / 2019)

AASB 111 / AASB 118 /

AASB 1004

Opening balance sheet

1 July 2019

Assuming a June year end

With the modified approach –

Entities need to also present the

current year figures using the ‘old’

standards

Specific audit considerations -

revenue?

• Do you understand the major revenue streams of your

clients?

• Has the relevant standard been considered – AASB 15

or AASB 1058?

• Judgements around performance obligations – one or

multiple?

– Do the identified performance obligations meet the definition of a

performance obligation per AASB 15?

– Is principal v agency relevant?

Presentation

and

Disclosure

Contract assets and liabilities

Contract asset

Entities right to payment in

exchange for goods or services that has been transferred to customer when that right is conditional on something other than the passage of

time

Receivable

Entities right to payment that is unconditional

Contract liability

An entity’s obligation to

transfer goods or services to a

customer for which the company has received payment from the customer

If entity recognises revenue prior to receipt of

consideration

If entity receives

consideration prior to

satisfying performance

obligation

Disclosure principle

• Disclose sufficient information to enable users of

financial statements to understand the nature, amount,

timing and uncertainty of revenue and cash flows arising

from contracts with customers

• Disclose qualitative and quantitative information

Contracts

with

Customers

Significant

judgements

Assets

recognised

Specific disclosures in relation

to…

• Disaggregation of revenue – categories reflecting nature,

amount, timing and uncertainty of revenue

• Contract balances – contract assets and liabilities

• Transaction price allocated to unsatisfied performance

obligations

• Significant judgements

• Performance obligations

• Determining transaction price and the amounts allocated

to the performance obligations

• Contract cost assets.

Revenue: Disaggregation disclosures

• Disaggregation of revenue

– Entity-specific and / or industry specific factors

– Categories that show nature, amount, timing, and uncertainty of

revenue and cash flows affected by economic factors

– Sufficient information about relationship of disaggregated revenue

and revenue of each reportable segment (only if AASB 8 applies)

Type of good or service

GeographyType of contract

Short-term or Long-

term contracts

Timing of transfer

Sales channels

Performance obligations disclosures – for example…

NFP DISCLOSURES

• No additional AASB 15 disclosures for NFP

• AASB 1058 disclosure principle:

• “To disclose sufficient information to enable users of financial statements to understand the effects of volunteer services and othertransactions where an entity acquires an asset for consideration that is significantly less than fair value principally to enable the entity to further its objectives on the financial position, financial performance and cash flows of the entity.

• Paragraphs 24–41 specify requirements relating to thisobjective.”

EXTRACTS OF AASB 1058

DISCLOSURES

What else????

AASB 16 Leases

Which pronouncements are being

replaced?

AASB 117 Leases

Interpretation 4 Determining whether an arrangements contains a

lease

Interpretation 115 Operating Leases –

Incentives

Interpretation 127 Evaluating the Substances of

Transactions Involving the Legal Form of a

Lease

AASB 16 effective for annual reporting periods

beginning on or after 1 January 2019

Scope of AASB 16Applies to all leases for the lessor and lessee except:

Scope exclusion Relevant standard

Leases to explore for or use minerals, oil, natural

gas and similar non-regenerative resources

None specified – likely

standards are AASB 6 or

AASB 138

Leases of biological assets within the scope of

AASB 141 Agriculture held by a lessee

AASB 141 Agriculture

Service concession arrangements in the scope of

Interpretation 12

Interpretation 12 Service

Concession Arrangements

Licences of intellectual property granted by a

lessor within the scope of AASB 15

AASB 15 Revenue from

Contracts with Customers

Rights held by a lessee under licensing

agreements within the scope of AASB 138 for such

items as motion picture films, video recordings,

plays, manuscripts, patents and copyrights

AASB 138 Intangible Assets

Treasury Territory Policy prohibits application of AASB 16

to intangible assets

Headlines – what is changing?

Changes to lessor accounting

No significant changes – substantially carry forward of AASB 117

requirements – operating v finance lease classification

Some additional disclosures

Changes to lessee accounting

Former operating leases capitalised. Most leases will be accounted for

using a similar approach to the finance leases of today

Balance sheet – increase in leased assets and financial liabilities

Income statement – decrease in operating expenses, increases in finance

costs

Statement of cash flows – decrease in operating cashflows, increase in

financing cash flows

No impact on the lessee’s economic position or commitments to pay cash

What is a lease?

A lease is a contract or part of a contract that

conveys the right to control the use of an

identified asset for a period of time in

exchange for consideration.

Application of the lease

definition

Is there an identified asset?

• Is the asset explicitly specified in the contract?

• Is asset implicitly specified when made available to the customer?

• Does the supplier have a substantive right to substitute another asset?

• Does the lease relate to a portion of capacity?

Application of the lease

definition Does the customer has the right to

substantially all the economic benefits?

• Consider direct and indirect benefits, e.g. using, holding or sub-leasing

• Consider only economic benefits within the defined scope of a customers right to use the asset

• Benefits arising from ownership of the asset (e.g. tax benefits) are not considered

• A right that solely protects the suppliers interest in the underlying asset is not considered.

Does the customer have the right to direct the use of the identified

asset?

• Normally present if the customer has the right to decide how and for purpose the asset is used

• If relevant decisions about use of the asset are predetermined, the customer has control if it:

• has the right to operate the asset or

• designed the asset (or aspects) of it) in a way that predetermines its use

Contract is or contains a

lease

Contract does not contain

a lease

Does the lessee obtain

substantially all economic

benefits from the use of the

asset?

Does the lessee direct the use of

the asset?

Is there an identified asset?

No

No

No

Yes

Yes

Yes

Yes

Yes

Two exceptions from recording leases

Account for leases similar to current operating leases – with lease

payments recognised as an expense on a straight-line basis over

lease term

TREASURY TERRITORY POLICY REQUIRE THE USE OF

BOTH THESE EXCEPTIONS, WHERE APPLICABLE

Short term leases

Low value assets

Short-term lease exception

Short-term if it has a lease term of 12 months or less at

the commencement date.

– If lease includes a purchase option then it is not

short-term.

Lease term excludes any option period unless the

lessee is reasonably certain to exercise the option (or

reasonably certain not to exercise an option to

terminate the lease).

Accounting policy choice must be made consistently

for each class of underlying asset.

Low value assets

• Assess the value of the asset when new

• Basis of conclusion refers to US$5,000 – not a ‘bright-

line’ rule

• Low value IT equipment, office equipment and furniture

• Accounting policy choice on lease-by-lease basis

• Treasury Territory Policy uses $10,000

Lease term

Non-cancellable

period of the lease

Optional renewal

periods (if reasonably

certain)

Periods after an optional termination

date if reasonably

certain not to terminate

early

Lease term starts when the lessor makes the underlying

asset available for use by the lessee – commencement date

Consider enforceability of leases.

to do lease accounting

AASB 16 Fundamental Principle

All leases on

statement of

financial

position

(balance sheet)

Two exceptions

Income statement

Interest and depreciation

expense

Impairment of right-of-use

asset

Variable lease payment not

dependent on an index

Balance sheet

Right to use asset (tangible)

Lease liability

Example new lease – after adoption of

AASB 16

Example

Statement of cash flows impact

• Remove cash flows relating to rent

expense

• Include principal component of

lease payments

Operating cash

flows

Financing cash

flows

Interest component of the lease payments can be included in

either operating or financing cash flows

Separating lease and non-lease

components

• Where the contract contains a lease and an agreement

to purchase or sell other goods or services (non-lease

components) then the non-lease components are

identified and accounted for separately. The

consideration is allocated between the lease and non-

lease components on the basis of their stand-alone

selling prices

– E.g. lease for property typically includes maintenance and

security and use of common areas

• Practical expedient – choose not to separate on a class

of asset basis – Agencies can choose.

Measurement of lease liability

Lease liability

Fixed

payments

less lease

incentives

Penalty for

termination

if reflected

in lease

term

Lease

payments

during option

periods (if

reasonably

certain)

Variable

lease

payments

dependent

on a rate or

indexExercise

price of

purchase

option (if

reasonably

certain)

Residual

value

guarantees

Discount rate

• Present value of the lease payments is calculated using

the interest rate implicit in the lease

• i.e. rate that causes the present value of the lease payments and

unguaranteed residual to equal the sum of the fair value of the

underlying asset and any initial direct costs of the lessor.

• If not readily determined then use lessee incremental

borrowing rate.

Where the interest rate is not implicit in the lease,

Treasury will work with the Asset Liability Management

Team within Treasury to determine the incremental rates

for use by ACT Government agencies.

Initial measurement of the right of use

asset

Right of use asset

Dismantling, removal and restoration

costs

Prepayments less lease incentives

Initial direct costs

Lease liability

Subsequent measurement of right-

of-use asset

Cost less accumulated depreciation and accumulated impairment. Depreciation in accordance with AASB 116.

Cost model

Right of use asset is measured at fair value through profit and loss

AASB 140 fair value model

Option to revalue all right of use assets that relates to that class of property, plant and equipment

AASB 116 fair value model

Treasury to provide guidance on subsequent

measurement

Reassessment of an extension

option • An entity enters into a 5 year lease for a site on 1 January 20X1.

• Annual rent is $5,000 payable in advance

• Contract contains an option for the entity to extend the lease for

a further 5 years at an annual rent of $6,000.

• At commencement date, management concludes that exercise

of the option is not reasonably certain based on relevant facts

and circumstances:

• Property is located in an area where previously the entity

hasn’t had a presence

• Leasehold improvements have an expected useful life of 5

years

• The rentals during the extension period are not expected to

be below market.

Reassessment of an extension

option continued • Management concludes that the lease term is 5 years. The

discount rate is 4%.

Dr: Right of use asset 23,150

Cr: Lease liability 18,150

Cr: Cash 5,000

• On 31/12/20X3, it is evident that the location has been

successful and management determines that this is a

significant change of circumstances that makes exercise of

the option reasonably certain.

• The lease term is reassessed to be 10 years of which 7 years

remain. The discount rate is 3% (due to a drop in the

incremental borrowing rate).

Reassessment of extension option

continued The lease liability is re-measured at 31/12/20X3 – the new liability is the present value of:

$5,000 * 2 (due 1/1/20X4 and 1/1/20X5) $36,533

$6,000 * 5 (due 1/1/X6 – 1/1/X10)

• Lease liability before reassessment = $9,808.

Dr: Right of use asset 26,725

($36,533 - $9,808)

Cr: Lease liability 26,725

Lease modification

• “A change in the scope of a lease or the consideration

for a lease, that was not part of the original terms and

conditions of the lease”

• For example – adding or removing the right to use an

underlying asset or extending or shortening the

contractual lease term.

• Lessees and lessors of finance leases are required to

account for a lease modification depending on conditions

in place.

Accounting for lease modifications - lessee

Subleases

• Original lessee generally continues to account

for the original lease (head lease) as a lessee

and accounts for the sublease as the lessor

(intermediate lessor).

• Landlord considers lease classification based

on right-to-use asset rather than underlying

asset when classifying as operating or finance

• When the head lease is a short term lease,

the sublease is classified as an operating

lease.

– Otherwise the sublease is classified as either a

finance or operating lease depending on the

terms.

• An intermediate lessor who subleases cannot

account for the head lease as a lease of low

value assets.

Lessor

Original lessee /

Intermediate

lessor

Lessee /

sublessee

Classification of a sublease

• Entity F (original lessee / intermediate lessor) leases a new building for 5 years.

• The building has an economic life of 30 years. One year into the lease Entity F subleases the building for the remaining 4 years.

• The sublease is classified with reference to the right-of-use asset in the head lease (and not the underlying building)

• When assessing the useful life criterion – the sublease term of 4 years is compared with the 4 years right-of-use asset remaining in the head lease rather than the remaining 29 years useful life of the building.

Head Lessor

Head lessee / sub-lessor

Sub-lessee

Head lease classified as

either operating or

finance

Recognise ROU for lessee

and then classify sub-lease

as operating or finance

lease. Either retain ROU

or show finance lease

receivable

ROU recognised

• How have we confirmed completeness of the leases population?

• Identification of non-lease components and allocation of lease

payments?

• Determination of makegood provisions?

• Evidence to support the lease term?

Specific audit issues - Leases

Review:

- the lease spreadsheet

- the lease offer

Transition

Transition method

Modified retrospective – do not restate comparatives. Cumulative

effect of adopting AASB 16 is recognised as an adjustment to

equity on date of initial application.

- No parallel reporting

- Comparison between discounted operating leases at 30 June 2019 and

lease liabilities at 1 July 2019

- Other optional practical expedients

Practical expedients

Definition of

a lease

Not required to assess whether an agreement

contains a lease – mandated in Treasury

Territory Policy where entity has previously

assessed the agreement under existing

standards

Low value

assets

Not required to make adjustments on transition

for lease in which the underlying asset is of low

value

Investment

property

accounted

for using fair

value

No adjustments for leases which were

previously accounted for as investment property

using fair value model in AASB 140 – applied

prospectively

Practical expedients

Leases ending

within 12 months

of transition

No adjustments on transition but extensions treated like new

lease - Mandated

Simplified right of

use measurement

Lease by lease choice - either:

1. ROU measured historically –

what would the carrying

amount be on transition if the

ROU had been recorded at

the start of the lease

Mandated for land and

buildings where historical

information is readily

available.

2. ROU = lease liability – no

historical data needed

Mandated for land and

buildings where historical

information is not readily

available and all other

leases.

Discount rates –

portfolio basis

Same discount rate applied across leases with reasonably

similar characteristics – NOT to be used – Treasury will advise

rate.

Practical expedients

Onerous leases Adjust ROU on transition by the onerous lease

provision rather than performing an impairment

test - Mandated

Initial direct costs Not required to factor costs into ROU on

transition, therefore no need to work out what

these costs were - Mandated

Finance leases ROU / lease liability balances are the same as

existing finance lease balances – Mandated.

Use of hindsight In relation to extension / termination options –

Mandated.

Overall comments

• Obtain the clients analysis of the impact of the new

standards – “no impact” still requires an analysis

• Are you considering the whole agreement?

– Have position papers taken into account all relevant facts and

circumstances?

– Have you considered why the agreement was entered into?

• What agreements / contracts are in place? How many

are you going to look at?

– How did you determine that number?

• Who else at the client do you need to talk to? – get

outside the finance department.

• What system changes have the client introduced?

Further information

Carmen Ridley cridley@afrs.com.au

www.gaap.com.au

0438 029 867

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