Overview of IFRSOverview of IFRS

Presented by:Presented by:

CA. Rishi Khator

FCA, CPA, CIFRS

E-Mail – rk@chunderkhator.com

ScopeAll leases Other than ---

�For minerals, oil, natural gas, and similarregenerative resources and licensingagreements for films, videos, plays,manuscripts, patents, copyrights, andmanuscripts, patents, copyrights, andsimilar items. [IAS 17.2]

�Property held by lessees that is accountedfor as investment property for which thelessee uses the fair value model set out inIAS 40.

Cont….

� Investment property provided by lessorsunder operating leases (see IAS 40).

�Biological assets held by lessees underfinance leases (see IAS 41).finance leases (see IAS 41).

�Biological assets provided by lessors underoperating leases (see IAS 41).

Definitions 1. A lease is an agreement whereby the lessor conveys to the

lessee in return for a payment or series of payments the right to

use an asset for an agreed period of time.

2. A finance lease is a lease that transfers substantially all the risks

and rewards incident to ownership of an asset.

3. An operating lease is a lease other than a finance lease.3. An operating lease is a lease other than a finance lease.

4. A non-cancellable lease is a lease that is cancellable only:

(a) upon the occurrence of some remote contingency; or

(b) with the permission of the lessor; or

(c) if the lessee enters into a new lease for the same or an

equivalent asset with the same lessor; or

(d) upon payment by the lessee of an additional amount such

that, at inception, continuation of the lease is reasonably

certain.

4. The inception of the lease is the earlier of the dateof the lease agreement and the date of acommitment by the parties to the principalprovisions of the lease.

5. The lease term is the non-cancellable period forwhich the lessee has agreed to take on lease the assetwhich the lessee has agreed to take on lease the assettogether with any further periods for which thelessee has the option to continue the lease of theasset, with or without further payment, whichoption at the inception of the lease it is reasonablycertain that the lessee will exercise.

6. Minimum lease payments are the payments overthe lease term that the lessee is, or can be required,to make excluding contingent rent, costs for servicesand taxes to be paid by and reimbursed to the lessor,together with:

(a) in the case of the lessee, any residual valueguaranteed by or on behalf of the lessee; orguaranteed by or on behalf of the lessee; or

(b) in the case of the lessor, any residual valueguaranteed to the lessor:

(i) by or on behalf of the lessee; or

(ii) by an independent third party financially capableof meeting this guarantee.

7. However, if the lessee has an option to purchase the asset at a price which is expected to be sufficiently lower than the fair value at the date the option becomes exercisable that, at the inception of the lease, is reasonably certain to be exercised, the minimum lease payments comprise minimum payments payable over the lease term and the payments payable over the lease term and the payment required to exercise this purchase option.

8. Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm’s length transaction.

9. Economic life is either:

(a) the period over which an asset is expected to be economically usable by one or more users; or

(b) the number of production or similar units expected to be obtained from the asset by one or more users.

10. Useful life of a leased asset is either:

(a) the period over which the leased asset is expected to be used by the lessee; or

(b) the number of production or similar units expected to be obtained from the use of the asset by the lessee.

11. Residual value of a leased asset is the estimated fair value of the asset at the end of the lease term.

12. Guaranteed residual value is:

(a) in the case of the lessee, that part of the residual value which is guaranteed by the lessee or by a party on behalf of the lessee (the amount of the party on behalf of the lessee (the amount of the guarantee being the maximum amount that could, in any event, become payable); and

(b) in the case of the lessor, that part of the residual value which is guaranteed by or on behalf of the lessee, or by an independent third party who is financially capable of discharging the obligations under the guarantee.

13. Unguaranteed residual value of a leased asset is the amount by which the residual value of the asset exceeds its guaranteed residual value.

14. Gross investment in the lease is the aggregate of the minimum lease payments under a finance lease from the standpoint of the lessor and any unguaranteed residual value accruing to the lessor.residual value accruing to the lessor.

15. Unearned finance income is the difference between:

(a) the gross investment in the lease; and

(b) the present value of

(i) the minimum lease payments under a finance lease

(ii) any unguaranteed residual value accruing to the lessor, at the interest rate implicit in the lease.

16. Net investment in the lease is the gross investment in the lease less unearned finance income.

17. The interest rate implicit in the lease is the discount 17. The interest rate implicit in the lease is the discount rate that, at the inception of the lease, causes the aggregate present value of

(a) the minimum lease payments under a finance lease from the standpoint of the lessor; and

(b) any unguaranteed residual value accruing to the lessor, to be equal to the fair value of the leased asset.

18. The lessee’s incremental borrowing rate ofinterest is the rate of interest the lessee would haveto pay on a similar lease or, if that is notdeterminable, the rate that, at the inception of thelease, the lessee would incur to borrow over a similarterm, and with a similar security, the funds necessaryto purchase the asset.to purchase the asset.

19. Contingent rent is that portion of the leasepayments that is not fixed in amount but is based ona factor other than just the passage of time (e.g.,percentage of sales, amount of usage, price indices,market rates of interest).

Service Concession Arrangements Defined

(IFRIC-12)

1. An arrangement whereby a government or other public sector

body contracts with a private operator to develop (or upgrade),

operate and maintain

2. Grantor's infrastructure assets such as roads, bridges, tunnels, 2. Grantor's infrastructure assets such as roads, bridges, tunnels,

airports, energy distribution networks, prisons or hospitals.

3. The grantor controls or regulates what services the operator

must provide using the assets, to whom, and at what price, and

also controls any significant residual interest in the assets at the

end of the term of the arrangement.

Objective of IFRIC 12

• How certain aspects of existing IASB

literature are to be applied to service

concession arrangements.

Types of Service Concession Arrangements

• IFRIC 12 draws a distinction

between two types of service

concession arrangement.concession arrangement.

Type 11. Operator receives a financial asset,

2. An unconditional contractual right to receive a specified or

determinable amount of cash or another financial asset from

the government in return

3. For constructing or upgrading a public sector asset, and then

operating and maintaining the asset for a specified period of

time.

4. Includes guarantees by the government to pay for any shortfall

between amounts received from users of the public service and

specified or determinable amounts.

Type 21. Operator receives an intangible asset

2. A right to charge for use of a public sector asset

3. It constructs or upgrades and then must operate and 3. It constructs or upgrades and then must operate and

maintain for a specified period of time.

4. A right to charge users is not an unconditional right

to receive cash because the amounts are contingent on

the extent to which the public uses the service.

General

1. IFRIC 12 allows for the possibility that both types of

arrangement may exist within a single contract:

2. To the extent that the government has given an unconditional

guarantee of payment for the construction of the public sector guarantee of payment for the construction of the public sector

asset, The operator has a financial asset;

3. To the extent that the operator has to rely on the public using

the service in order to obtain payment, the operator has an

intangible asset.

Accounting – Financial asset model

1. The operator recognises a financial asset to the extent that it has

an unconditional contractual right to receive cash or another

financial asset from or at the direction of the grantor for the

construction services.

2. The operator has an unconditional right to receive cash if the

grantor contractually guarantees to pay the operatorgrantor contractually guarantees to pay the operator

(a) specified or determinable amounts or

(b) the shortfall, if any, between amounts received from users

of the public service and specified or determinable amounts,

even if payment is contingent on the operator ensuring that the

infrastructure meets specified quality or efficiency requirements.

3. The operator measures the financial asset at fair value.

Accounting – Intangible asset model

1. The operator recognises an intangible asset to the

extent that it receives a right (a licence) to charge users

of the public service.

2. A right to charge users of the public service is not an

unconditional right to receive cash because the unconditional right to receive cash because the

amounts are contingent on the extent that the public

uses the service.

3. The operator measures the intangible asset at fair

value.

Accounting Operating revenue

• The operator of a service concession

arrangement recognises and measures

revenue in accordance with IASs 11 and

18 for the services it performs.18 for the services it performs.

Accounting by the Government (Grantor)

1. IFRIC 12 does not address accounting for the

government side of service concession

arrangements.

2. However, the International Public Sector

Accounting Standards Board (IPSASB) hasAccounting Standards Board (IPSASB) has

started its own project on service concession

arrangements, which will give serious

consideration to accounting by grantors.

3. The principles applied in IFRIC 12 will be

considered as part of the project.

Effective Date

� IFRIC 12 is effective for annual periodsbeginning on or after 1 January 2008.Earlier application is permitted.

LEASES

(IAS-17)October 1980 Exposure Draft E19 Accounting for

Leases

September 1982 IAS 17 Accounting for Leases

1 January 1984 Effective Date of IAS 17 (1982)

1994 IAS 17 (1982) was reformatted1994 IAS 17 (1982) was reformatted

April 1997 Exposure Draft E56, Leases

December 1997 IAS 17 Leases

1 January 1999Effective Date of IAS 17 (1997), Leases

18 December 2003Revised version of IAS 17 issued by the IASB

The summary of IAS 17 below reflects

those revisions

1 January 2005 Effective date of IAS 17 (Revised 2003)

16 April 2009 IAS 17 amended for 16 April 2009 IAS 17 amended for Annual Improvements to IFRSs 2009

1 January 2010 Effective date of the April 2009 revisions to IAS 17

RELATED INTERPRETATIONS� IFRIC 4 Determining whether an

arrangement contain lease

� IFRIC 12 Service Concession Arrangements

� SIC 15 Operating Leases - Incentives

� SIC 27 Evaluating the Substance ofTransactions in the Legal Form of a Lease

SUMMARY OF IAS 17Objective of IAS 17

Prescribe, for lessees and lessors, in respect offinance and operating leases.

� Appropriate accounting policies

� Disclosures

Classification of Leases

�A lease is classified as a finance lease if ittransfers substantially all the risks andrewards incident to ownership.

�All other leases are classified as operatingleases.

�Classification is made at the inception of thelease. [IAS 17.4]

Situations that would normally lead to a lease beingclassified as a finance lease include the following: [IAS17.10]

� the lease transfers ownership of the asset to the lesseeby the end of the lease term;

� the lessee has the option to purchase the asset at a� the lessee has the option to purchase the asset at aprice which is expected to be sufficiently lower thanfair value at the date the option becomes exercisableand at the inception of the lease, it is reasonablycertain that the option will be exercised;

� the lease term is for the major part of the economic lifeof the asset, even if title is not transferred;

� at the inception of the lease, the present value ofthe minimum lease payments amounts to at leastsubstantially all of the fair value of the leasedasset; and

� the lease assets are of a specialised nature suchthat only the lessee can use them without majorthat only the lessee can use them without majormodifications being made.

� If the lessee is entitled to cancel the lease, thelessor's losses associated with the cancellation areborne by the lessee;

�gains or losses from fluctuations in the fairvalue of the residual fall to the lessee (forexample, by means of a rebate of leasepayments); and

� the lessee has the ability to continue to lease� the lessee has the ability to continue to leasefor a secondary period at a rent that issubstantially lower than market rent.

Land and Building� Elements would normally be considered separately.

� The minimum lease payments are allocated between theland and buildings elements in proportion to their relativefair values.

� The land element is normally classified as an operatinglease unless title passes to the lessee at the end of the leaseterm.term.

� The buildings element is classified as an operating orfinance lease by applying the classification above in IAS 17.[IAS 17.15]

� However, separate measurement of the land and buildingselements is not required if the lessee's interest in both landand buildings is classified as an investment property andthe fair value model is adopted.

Accounting by LesseesThe following principles should be applied in the financial statements of lessees:

Finance Lease� At commencement of the lease term should be

recorded as an asset and a liability at the lower of the fair value of the asset and the present value of the fair value of the asset and the present value of the minimum lease payments

� Discounted at the interest rate implicit in the lease, if practicable, or else at the enterprise's incremental borrowing rate

� (Like EMI) Finance lease payments should beapportioned between the finance charge and thereduction of the outstanding liability

� The finance charge to be allocated so as to producea constant periodic rate of interest on theremaining balance of the liability

� The depreciation policy for assets held under� The depreciation policy for assets held underfinance leases should be consistent with that forowned assets.

� If there is no reasonable certainty that the lesseewill obtain ownership at the end of the lease - theasset should be depreciated over the shorter of thelease term or the life of the asset

Operating Lease�Lease payments recognised as an

expense in the income statement overthe lease term

�On a straight-line basis, unless anothersystematic basis is more representativeof the time pattern of the user'sbenefit.

Incentives – SIC 15 (July 1999) For

operating Lease� Incentives (e.g. rent free period or

contribution to relocation cost) for theagreement of a new or renewed

�Be recognised by the lessee as a reduction ofthe rental expense over the lease term,

Accounting by Lessors

The following principles should be applied in the financial statements of lessors:

Finance Lease� At commencement record a finance lease in the

balance sheet as a receivable, balance sheet as a receivable,

� At an amount equal to the net investment in the lease; [IAS 17.36]

� Recognise finance income based on a pattern reflecting a constant periodic rate of return on the lessor's net investment outstanding in respect of the finance lease;

Operating Lease

� Assets held be presented in the balancesheet of the lessor according to the natureof the asset.

� Lease income should be recognised overthe lease term on a straight-line basis,unless another systematic basis is morerepresentative

Incentives – SIC 15 (July 1999) For operating Lease

�Incentives for the agreement of a new or renewed or renewed

�Recognised as a reduction of the rental income over the lease term

Manufacturers or dealer lessors

� Include selling profit or loss in the sameperiod as they would for an outright sale.

�Artificially low rates of interest are charged,selling profit should be restricted to thatwhich would apply if a commercial rate ofinterest were charged. [IAS 17.42]

Initial Direct Cost

� Incurred by lessors in negotiating leasesmust be recognised over the lease term.

� They may no longer be charged to expensewhen incurred.when incurred.

� This treatment does not apply tomanufacturer or dealer lessors where suchcost recognition is as an expense when theselling profit is recognised.

QUESTIONS AND ANSWERS FROM 1-5

Sale and Leaseback Transactions

Finance Lease

� For a sale and leaseback transaction that results ina finance lease, any excess of proceeds over thecarrying amount is deferred and amortised overcarrying amount is deferred and amortised overthe lease term.

Operating lease � At fair value - the profit or loss should recognised

immediately;

� Sale price < fair value - profit or loss should berecognised immediately, except if a loss iscompensated for by future rentals at below marketprice,price,

� Sale price > fair value - the excess over fair value shouldbe deferred and amortised over the period of use; and

� Fair value < Carrying amount - a loss equal to thedifference should be recognised immediately

� E.g. FV – Rs.100, CA – Rs.90, SP Rs.110

Please refer Case Study – 1

Disclosure: Lessees - Finance Lease

[IAS 17.31]

� Carrying amount of asset;

� Reconciliation between total minimum lease payments and their present value;

� Amounts of minimum lease payments at � Amounts of minimum lease payments at balance sheet date and the present value thereof, for:

� the next year;

� years 2 through 5 combined;

� beyond five years;

� Contingent rent recognised as an expense;

� total future minimum sublease incomeunder noncancellable subleases; and

� general description of significant leasingarrangements, including contingent rentprovisions, renewal or purchase options,and restrictions imposed on dividends,borrowings, or further leasing.

Disclosure: Lessees - Operating Lease

[IAS 17.35] � amounts of minimum lease payments at balance

sheet date under noncancellable operating leases for:

� the next year;

� years 2 through 5 combined; � years 2 through 5 combined;

� beyond five years;

� total future minimum sublease income under noncancellable subleases;

� lease and sublease payments recognised in income for the period;

� contingent rent recognised as an expense; and

�general description of significant leasing arrangements, including contingent rent arrangements, including contingent rent provisions, renewal or purchase options, and restrictions imposed on dividends, borrowings, or further leasing

Disclosure: Lessors - Finance Lease

[IAS 17.47]

� reconciliation between gross investment in the lease and the present value of minimum lease payments;

� gross investment and present value of � gross investment and present value of minimum lease payments receivable for:

� the next year;

� years 2 through 5 combined;

� beyond five years;

� unearned finance income;

� unguaranteed residual values;

� accumulated allowance for uncollectible lease payments receivable;

� contingent rent recognised in income; and

� general description of significant leasing arrangements.

Disclosure: Lessors - Operating Lease

[IAS 17.56] � amounts of minimum lease payments at balance

sheet date under noncancellable operating leases in the aggregate and for:

� the next year;

� years 2 through 5 combined; � years 2 through 5 combined;

� beyond five years;

� contingent rent recognised as in income; and

� general description of significant leasing arrangements.

IFRIC-4

�An entity can enter into an arrangement,comprising a transaction or a series ofrelated transactions that does not take thelegal form of a lease but conveys a right touse an asset in return for a payment or seriesuse an asset in return for a payment or seriesof payments. Examples of arrangements inwhich one entity (the supplier) may conveysuch a right to use an asset to another entity(the purchaser), often together with relatedservices, include:

Cont.

� outsourcing arrangements

� arrangements in the telecommunicationsindustry, in which suppliers of networkcapacity enter into contracts to providecapacity enter into contracts to providepurchasers with right to capacity

� take-or-pay and similar contracts, in whichpurchasers must make specified paymentsregardless of whether they take delivery of thecontracted products or services.

Scope Of IFRIC 4

This interpretation does not apply to arrangements that are:

� or contain, leases excluded from the scope of IAS 17 (AC 105) Leases

� public-to-private service concession arrangements within the scope of IFRIC 12 (AC 445) Service within the scope of IFRIC 12 (AC 445) Service Concession Arrangements.

Issues� How to determine whether an arrangement is, or

contains, a lease as defined in IAS 17 (AC 105) Leases

� When the assessment or a reassessment of whether an arrangement is, or contains, a lease whether an arrangement is, or contains, a lease should be made

� If an arrangement is, or contains, a lease, how the payments for the lease should be separated from payments for any other elements in the arrangement.

SIC-27

� SIC 27 addresses issues that may arise when an arrangement between an enterprise and an investor involves the legal form of a lease.

� Accounting for arrangements between an enterprise and an investor should reflect the substance of the and an investor should reflect the substance of the arrangement.

� All aspects of the arrangement should be evaluated to determine its substance,

ARE A SERIES OF

TRANSACTIONS

LINKED?

ISTHE ARRANGEMENT

IN SUBSTANCE A

LEASE UNDER IAS 17

(AC 105)?

ISSUES

WHERE ARRANGEMENT IN SUBSTANCE NOT A LEASE:

_ do separate investment account and lease payment

obligations that might exist represent assets and liabilities of

the entity?

_ how does the entity account for other obligations resulting

from the arrangement?

_ how does the entity account for a fee it might receive from an

investor.

Classification of leases of land Latest

Development

� Prior to amendment, IAS 17 Leasesgenerally required a lease of land with anindefinite useful life to be classified as anoperating lease.

� This was inconsistent with the generalprinciples of the Standard,

� Following the amendment, leases of landare classified as either ‘finance’ or‘operating’ using the general principles ofIAS 17.

�The amendment is particularly significantfor jurisdictions where property rights areobtained under long-term leases and thesubstance of those leases differs little frombuying a property.

�Entities will need to reassess existing leases.

�Effective Jan.1, 2010