Strategic Business Reporting (SBR) September 2023 to June 2024 IFRS5 NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS Objective The objectives of this IFRS is to specify the accounting for assets held for sale, and the presentation and disclosure of discontinued operations. In particular, the IFRS requires: {a) assets that meet the criteria to be classified as held for sale to be measured at the lower of carrying amount and fair value less costs to sell, and depreciation on such assets to cease; and {b) assets that meet the criteria to be classified as held for sale to be presented separately in the statement of financial position and the results of discontinued operations to be presented separately in the statement of profit or loss. NON-CURRENT ASSETS HELD FOR SALE Classification of non-current assets (or disposal groups) as held for sal A non-current asset (or disposal group) should be classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. n eriteri Recogni IFRS 5 requires the following conditions to be met before an asset or disposal group can be classified as ‘held for sale’ (2) The asset must be available for immediately sale in its present condition (b) Its sale must be hly probable. For the sale to be highly probable, the following must apply. (2) Management must be committed to a plan to sell the asset, (b) There must be active programme to locate a buyer. (c) The asset must be marked for sale at a price that is reasonable in relation to its current fair value. (4) The sale is expected to take place within one year from the date of classification (e) itis untikely that the plan will be significantly changed or will be withdrawn Lectured by Myo Thein Naing Page | 74Strategic Business Reporting (SBR) September 2023 to June 2024 Example (1) On 1 December 20X3, a company became committed to a plan to sell a manufacturing facility and has already found a potential buyer. The company does not intend to discontinue the operations currently carried out in the facility, At 31 December 20X3 there is a backlog of uncompleted customer orders. The company will not be able to transfer the facility to the buyer until after it ceases to operate the facility and has eliminated the backlog of uncompleted customer orders. This is not expected to occur until spring 20X4 Required ‘Can the manufacturing facility be classified as ‘held for sale’ at 31 December 20X3? Answer The facility will not be transferred until the backlog of orders is completed; this demonstrates that the facility is not available for immediate sale in its present condition. The facility cannot be classified as ‘held for sale’ at 31 December 20X3. It must be treated in the same way as other items of property, plant and equipment: it should continue to be depreciated and should not be separately disclosed. Measurement of non-current assets (or disposal groups) classified as held for sale ‘Anon-current asset (or disposal group) that is held for sale should be measured at the lower of its carrying amount and fair value less costs to sell > An impairment loss should be recognised where fair value less costs to sell is lower than carrying amount. An impairment loss on held for sale asset under IFRS 5 is charged to profit or loss. > — Non-current assets held for sale should not be depreciated, even if they are still being used by the entity. Gd« Measurement Before cssifation _) [__ Alter classtcation sits measurement }¥ Inline with applicable IFRS V7 Lower of CA and FV-costs to sell Vin line with applicable 1FRS Adjusted CA ~ FV less costs to sell eo: trapairmsert JY im P/L (or OCI if applicable) V” Always in P/L Lectured by Myo Thein Naing Page | 75Strategic Business Reporting (SBR) September 2023 to June 2024 Ifa NCA is measured using a revaluation model and it meets the criteria to be classified as being held for sale, it should be revalued to fair value immediately before it is classified as held for sale. It is then revalued again at the lower of the carrying amount and fair value less costs to sell. The difference is the selling costs and these should be charged against profits in the period. Presentation of a non-current asset or disposal group classified as held for sale Non-current assets and disposal groups classified as held for sale should be presented separately from other assets in the statement of financial position. The liabilities of a disposal group should be presented separately from other liabilities in the statement of financial position (2) Assets and liabilities held for sale should not be offset. (b) The major classes of assets and liabilities held for sale should be separately disclosed either in the statement of financial position or in the notes. Additional disclosures In the period in which a non-current asset (or disposal group) has been either classified as held for sale or sold the following should be disclosed + A description of the non-current asset (or disposal group) + Any gain or loss recognised when the item was classified as held for sale + Adescription of the facts and circumstances of the disposal Where an asset previously classified as held for sale is no longer held for sale, the entity should disclose a description of the facts and circumstances leading to the decision and its effect on results. Held for sale criteria no longer met A non-current asset (or disposal group) that is no longer classified as held for sale (for ‘example, because the sale has not taken place within one year) is measured at the lower of: (2) Its carrying amount before it was classified as held for sale, adjusted for any depreciation that would have been charged had the asset not been held for sale (b) Its recoverable amount at the date of the decision not to sell Lectured by Myo Thein Naing Page | 76Strategic Business Reporting (SBR) September 2023 to June 2024 DISCONTINUED OPERATIONS A discontinued operation is a component of an entity that has either been disposed of, or is classified as held for sale, and: (a) _ represents a separate major line of business or geographical area of operations, or (b) _ is part of a single co-ordinate plan to dispose of a separate major line of business or ‘geographical area of operations, or (©) isa subsidiary acquired exclusively with a view to resale Presentation in the statement of profit or loss ‘An entity should present and disclose information that enables users of the financial statements to evaluate the financial effects of discontinued operations and disposals of non- current assets or disposal groups. ‘An entity should disclose a single amount in the statement of comprehensive income comprising the total of: (a) The post-tax profit or loss of discontinued operations, and (b) The post-tax gain or loss recognised on the measurement to fair value less costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operation ‘An entity should also disclose an analysis of the above single amount into: The analysis must disclose: (a) The revenue, expenses and pre-tax profit or loss of discontinued operations (b) The related income tax expense (c) The gain or loss recognised on the measurement to fair value less costs to sell or on the disposal of the assets of the discontinued operation (4) The related income tax expense This may be presented either in the statement of profit or loss and other comprehensive income or in the notes. The entity should disclose the net cash flows attributable to the operating, investing and financing activities of discontinued operations. These disclosures may be presented either on the face of the statement of cash flows or in the notes. Gains and losses on the remeasurement of a disposal group that is not a discontinued operation but is held for sale should be included in profit or loss from continuing operations. Lectured by Myo Thein Naing Page 177Strategic Business Reporting (SBR) September 2023 to June 2024 Example: Closure On 20 October 20X3 the directors of a parent company made a public announcement of plans to close a steel works. The closure means that the group will no longer carry out this type of operation, which until recently has represented about 10% of its total revenue. The works will be gradually shut down over a period of several months, with complete closure expected in July 20X4. At 31 December output had been significantly reduced and some redundancies had already taken place. The cash flows, revenues and expenses relating to the steel works can be clearly distinguished from those of the subsidiary's other operations. How should the closure be treated in the financial statements for the year ended 31 December 20X3? Answer Because the steel works is being closed, rather than sold, it cannot be classified as ‘held for sale’. In addition, the steel works is not a discontinued operation. Although at 31 December 20X3 the group was firmly committed to the closure, this has not yet taken place nor can its assets be classified as held for sale, therefore the steel works must be included in continuing operations. Information about the planned closure could be disclosed in the notes to the financial statements. IFRS 16 LEASES Lectured by Myo Thein Naing Page | 78Strategic Business Reporting (SBR) September 2023 to June 2024 Overview IFRS 16 was issued in January 2016 and applies to annual reporting periods beginning on or after 1 January 2019, IFRS 16 replaces the previous leases Standard, IAS 17 Leases, and related Interpretations, The standard provides a single lessee accounting model, requiring lessees to recognize assets and liabilties for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16's approach to lessor accounting substantially unchanged from its predecessor, |AS 17. Objective IFRS 16 establishes the principles for the recognition, measurement, presentation and disclosure of leases, with the objective of ensuring that lessees and lessors provide relevant information that faithfully represents those transactions. This information gives a basis for users of financial statements to assess the effect that eases have on the financial position, financial performance and cash flows of an entity. Recognition mption In order to reduce compliance costs for preparers, IFRS 16 introduces two optional exemptions that are worthy of some initial consideration. (a) Short-term leases, ie. the lease term is 12 months or less, and (b) Leases for which the underlying asset is of low value (e.g. laptops, small personal computers, mobile phones, portable printers, small items of furniture, etc.) XXX optional exemptions 4 ene tor 5 year [ORIN nding eset of low value when new => Lease payments on a straight-line (or another systematic) basis Simplified treatment The lessee shall recognize the lease payments in profit or loss on a straight line basis. No lease liability or right-of-use asset would therefore be recognised. Lectured by Myo Thein Naing Page 179Strategic Business Reporting (SBR) September 2023 to June 2024 At inception of a contract, an entity shall assess whether the contract is, or contains, a lease. A contract is, or contains, a lease ifthe contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. LESSEE Recognition At the commencement date, a lessee shall recognize a right-of-use asset and a lease liability. AT THE COMMENCEMENT Lease Liability Measurement Initial measurement {a) _ Initial measurement of the right-of-use asset At the commencement date, a lessee shall measure the right-or-use asset at cost. The cost of the right-of-use asset shall comprise: = the amount of the initial measurement of lease liability; — any lease payments made at or before the commencement date, less any lease incentives received; = any initial direct costs incurred by the lessee an estimate costs of dismantling or removing the underlying asset as per the conditions of the lease. (b) Initial measurement of the lease liability ‘At the commencement date, a lessee shall measure the lease liability at the present value of the lease payments that are not paid at that date. The lease payments shall be discounted using the interest rate implicit in the lease, if that rate can be readily determined. If that rate cannot be readily determined, the lessee shall Use the lessee's incremental borrowing rate (the rate at which it could borrow funds to purchase a similar asset) Lectured by Myo Thein Naing Page | 80Strategic Business Reporting (SBR) September 2023 to June 2024 ‘Subsequent measurement {a) Subsequent measurement of the right-of-use asset After the commencement date, the rightof-use asset is measured using the cost model This means that it is measured al its initial cost less accumulated depreciation and impairment losses. Depreciation is calculated as follows: ‘+ If ownership of the asset transfers to the lessee at the end of the lease term, then depreciation should be charged over the asset's remaining useful life © Otherwise, depreciation is charged over the shorter of the useful life and the lease term {b) Subsequent measurement of the lease liability After the commencement date, a lessee shall measure the lease liabilty by: {()) increasing the carrying amount to reflect interest on the lease liability; Dr Finance costs (P/L) Cr Lease liability (ii) reducing the carrying amount to reflect the lease payments made; Dr Lease liability Cr Cash (ii) remeasuring the carrying amount to reflect any reassessment or lease modifications Disclosure A lessee shall disclose the following amounts for the reporting period depreciation charge for rightof-use assets by class of underlying asset; interest expense on lease liabilities; income from subleasing right-of-use assets; total cash outflow for leases; additions to right-of-use assets; the carrying amount of right-of-use assets at the end of the reporting period by class of underiying asset. Test your understanding: Lessee Accounting Lectured by Myo Thein Naing Page | 81Strategic Business Reporting (SBR) September 2023 to June 2024 A lessee enters into a five-year lease of a building (underlying asset) which has a remaining useful life of 10 years. Lease payments are $50,000 per annum, payable in arrears at the end of each year. The lessee incurs initial direct costs of $20,000 and receives lease incentives of $5,000. There is no transfer of the asset at the end of the lease and no purchase option available. The interest rate implicit in the lease is 5%. The annuity factor for year 1-5 at 5% discount rate is 4,329. Required Explain the accounting treatment for the above lease in the first accounting period Lectured by Myo Thein Naing Page | 82Strategic Business Reporting (SBR) September 2023 to June 2024 Separating components of a contract Lectured by Myo Thein Naing Page | 83Strategic Business Reporting (SBR) September 2023 to June 2024 In the case of contracts with both ease component & non-lease component, entity must account for the lease component of the contract separately form the non-lease component. Example Alpha leases a delivery van from Beta for three years at $12,000 per year. This payment includes servicing costs such as maintenance, repairs or cleaning, Alpha could lease the same model of van for $11,000 per year and would need to pay $2,000 a year of servicing, (i.e stand-alone price) Required ‘Show the accounting treatment for the above transaction. Reassessing the lease liability Lectured by Myo Thein Naing Page | 84Strategic Business Reporting (SBR) September 2023 to June 2024 If changes to lease payments occur then the lease liability must be re-calculated and its carrying amount adjusted. A corresponding adjustment is posted against the carrying amount of the right- of-use asset. IFRS 16 says that the lease liability should be re-calculated using a revised discount rate of: + The lease term changes + The entity's assessment of an option to purchase the underlying asset changes. The revised discount rate should be the interest rate implicit in the lease for the remainder of the lease term. If this cannot be readily determined, the lessee's incremental borrowing rate at the date the reassessment should be used. Test you understanding (Kaplan TSPG159) On 1 January 20X1, Kingfisher enters into a four-year lease of property with annual lease Payments of $1 million, payable at the beginning of each year. According to the contract, lease payments will increase every year on the basis of the increase in the Consumer Price Index for the preceding 12 months. The Consumer Price Index at the commencement date is 125. The interest rate implicit in the lease is not readily determinable. Kingfisher’s incremental borrowing rate is 5% per year. At the beginning of the second ear of the lease the Consumer Price Index is 140. Required Discuss how the lease will be accounted for: = During the first year of the contract — On the first day of the second year of the contract. Lectured by Myo Thein Naing Page | 85Strategic Business Reporting (SBR) September 2023 to June 2024 Lectured by Myo Thein Naing Page | 86Strategic Business Reporting (SBR) September 2023 to June 2024 Lectured by Myo Thein Naing Page | 87Strategic Business Reporting (SBR) September 2023 to June 2024 LESSOR A lessor shall classify each of its leases as either an operating lease or a finance lease. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an underlying asset. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership of an underlying asset, Finance lease or operating lease? Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract. Examples of situations that individually or in combination would normally lead to a lease being classified as a finance lease are: {a) the lease transfers ownership of the underlying asset to the lessee by the end of the lease term; {b) the lessee has the option to purchase the underlying asset at a price that is expected to be sufficiently lower that the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception date, that the option will be exercised; (c) the lease term is for the major part of the economic life of the underlying asset even if tile is not transferred. (d) at the inception date, the present value of the lease payments amounts to at least substantially all of the fair value of the underlying asset; and (e) the underlying asset is of such a specialised nature that only the lessee can use it without major modifications. Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease are: the lessor’s losses associated with the cancellation (a) if the lessee can cancel the lea: are bome by the lessee; {b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee, and (c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent. Lectured by Myo Thein Naing Page | 88Strategic Business Reporting (SBR) September 2023 to June 2024 FINANCE LEASES Recognition and measurement ‘At the commencement date, a lessor shall recognize assets held under a finance lease in its statement of financial position and present them as a receivable at an amount equal to the net investment in the lease. ‘Subsequent measurement The subsequent treatment of the finance lease is as follows: + The carrying amount of the lease receivable is increase by finance income earned, which is also credited to the SOPL. + The carrying amount of the lease receivable is reduced by cash receipts. OPERATING LEASES Recognition and measurement A lessor shall recognize lease payments from operating leases as income on either a straight- line basis or another systematic basis. The lessor shall apply another systematic basis if that basis is more representative of the pattern in which benefit from the use of the underlying asset is diminished. Disclosui A lessor shall disclose the following amounts for the reporting period (2) for finance leases: = selling profit or loss = finance income on the net investment in the lease; and — income relating to variable lease payments not included in the measurement of the net investment in the lease {b) for operating leases, lease income, separately disclosing income relating to variable lease payments that do not depend on an index or a rate. Lectured by Myo Thein Naing Page | 89Strategic Business Reporting (SBR) September 2023 to June 2024 IFRS 16 LEASES LESSOR ACCOUNTING FINANCE LEASE + Recognise net investment in the lease = Present value of future expected lease payments + Derecognise carrying amount of underlying asset + Recognise gain or loss of the difference between net investment & carrying amount Journal entries at start of lease contract are: Dr Net investment ~ Lease receivables Cr —_Non-current assets Cr Gain on disposal (P/L) When lease payment Is recelved: Dr Cash Cr __ Interest revenue/finance income Cr Lease receivables OPERATING LEASE + Lessor continues to recognsie and depreciate the leased asset in SOFP Journal entries when lessor receipt of lease rental: Dr Cash Cr Lease rental income Lectured by Myo Thein Naing Page | 90Strategic Business Reporting (SBR) September 2023 to June 2024 SALE AND LEASEBACK TRANSACTIONS Sale and leaseback transactions take place where an entity (the seller-lessee) transfers an asset to another entity (the buyer-lessor) and leases that asset back from the buyer-lessor. wate GDS LEASE W! Assessing whether the transfer of the asset is a sale To determine whether the transfer of an asset is accounted for as a sale an entity applies the requirements of IFRS 15 for determining when a performance obligation is satisfied. (a) Transfer is a sale (ie treated as a ‘part-disposal’) The seller/lessee measures the RoU asset arising from the leaseback at the proportion of the previous carrying amount of the asset that relates to the RoU retained by the seller/lessee. The initial cost of RoU asset is measured as: Carrying amount x PV of lease liability FV of asset The seller/lessee only recognizes the amount of gain or loss on the sale that relates to the rights transferred to the buyer, which is measured as: Total gain on disposal = Sales proceeds ~ Carrying amount Gain on right retained = Total gain x PV of lease lability FV of asset Gain on right transferred Total gain - Gain on right retained Lectured by Myo Thein Naing Page 191Strategic Business Reporting (SBR) September 2023 to June 2024 Test your understanding Max Co entered into a sale & leaseback on 1 April 20X7. It sold a building with a carrying amount of $300,000 for $400,000 (equal to FV) and lease it back over a five-year period The transaction constitutes a sale in accordance with IFRS 15 Revenue from Contracts with Customers. The lease provided for five annual payment in arrears of $90,000 and the rate of interest implicit in the lease is 5%. The annuity factor for year 1 to § is 4.329, Required What are the amounts to be recognised in FS at 31 March 20X8 in respect of the above transaction? Lectured by Myo Thein Naing Page | 92Strategic Business Reporting (SBR) September 2023 to June 2024 Transactions not at fair value If the sales proceeds or lease payments are not at FV, IFRS 16 requires that: + Below market terms (e.g, Sales proceeds < FV) are treated as a prepayment of lease payments. ‘+ Above market terms (e.g. Sales proceeds » FV) are treated as addit financing. Lectured by Myo Thein Naing Page | 93Strategic Business Reporting (SBR) September 2023 to June 2024 Example On 1 January 20X1, Blue sells an item of machinery to Red for $3 milion. Its fair value was $2.8 million, The asset had a carrying amount of $1.2 million prior to the sale. This sale represents the satisfaction of performance obligation, in accordance with IFRS 15 Revenue from Contracts with Customers. Blue enters into a contract with Red for the right to use the asset for the next five years. Annual payments of $500,000 are due at the end of each year. The interest rate implicit in the lease is 10%. The present value of the annual lease payments is $1.9 milion Required Explain how the transaction will be accounted for on 1 January 20X1 by both Blue and Red, Lectured by Myo Thein Naing Page | 94Strategic Business Reporting (SBR) September 2023 to June 2024 Lectured by Myo Thein Naing Page | 95.Strategic Business Reporting (SBR) September 2023 to June 2024 {b) Transfer of the asset is nota sale Ifthe transfer of an asset by the seller-lessee does not satisfy the requirements of IFRS 15 to be accounted for as a sale of the asset ‘+ the seller-lessee shall continue to recognize the transferred asset and shall recognize a financial liability equal to the transfer proceeds. It shall account for the financial liability applying IFRS 9 ‘+ the buyer-tessor shall not recognize the transferred asset and shall recognize a financial asset equal to the transfer proceeds. It shall account for the financial asset applying IFRS 9. Main features Lessee accounting IFRS 16 introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value, A lessee is required to recognize a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments A lessee measures right-of-use assets similarly to other non-financial assets (such as property, plant and equipment) and lease liabilities similarly to other financial liabilities. As a consequence, a lessee recognizes depreciation of the right-of-use asset and interest on the lease liability, and also classifies cash repayments of the lease liability into a principal portion and an interest portion and presents them in the statement of cash flows applying IAS 7 Statement of Cash Flows. Assets and liabilities arising from a lease are initially measured on a present value basis. The measurement includes non-cancellable lease payments (including inflation-linked payments), and also includes payments to be made in optional periods if the lessee is reasonably certain to exercise an option to extend the lease, or not to exercise an option to terminate the lease. IFRS 16 contains disclosure requirements for lessees. Lessees will need to apply judgement in deciding upon the information to disclose to meet the objective of providing 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. Lessor accounting IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, a lessor continues to classify its lease as operating leases or finance leases, and to account for those two types of leases differently. IFRS 16 also requires enhanced disclosures to be provided by lessors that will improve information disclosed about a lessor’s risk exposure, particularly to residual value risk. Lectured by Myo Thein Naing Page | 96