Ifrs16 Leases Webinar Presentation Slides March 2016

IFRS 16
Leases Overview
March 2016
Todays’
presenters
Patricia Stebbens Michael Voogt Michelle Gibbs
Partner Director Director

Department of Department of Accounting Advisory
Professional Practice Professional Practice Services
(03) 9288 6261 (02) 9455 9744 (02) 9455 9028
pstebbens@kpmg.co mvoogt@kpmg.com. mfgibbs@kpmg.com
m.au au .au
© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG
International. Liability limited by a scheme approved under Professional Standards Legislation.
Why anewleasing
sCurrently
tandard? analysts adjust
financial statements for
off- balance sheet leases
Under IFRS 16, companies

will bring these leases on
balance sheet, using a
common methodology
Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG 3
Age
nda
1. Major impacts for lessees
2. New definition
3. New accounting
4. Multiple transition options
5. Next steps & how we can help
6. Key points to remember
Maoj r impacts
for lessees
Lessees face major
changeonsbalance sheet
Leases
Balance sheet P&L

Asset Lease expense
= ‘Right-of-use’ of underlying asset Depreciation
Liability + Interest
= Obligation to make lease payments = Front-loaded total lease
expense
Impact on baa
l nce
sheet
Companies with operating
leases will appear to be
more asset-rich, but also
more heavily indebted
Asset Liability
Impact on
profit/loss
Total lease expense will
be front-loaded even
when cash rentals are
constant
Depreciation Interest
Cash rental payments
Impact on financial
ratios Profit/loss Balance sheet Ratios
EBITDA Total assets Gearing
EPS Net assets Interest cover

(in early years) Asset turnover
New
definition
Lease
def
The i
n i
t
newi
o n
on/off-balance sheet test
for lessees – a key judgement area
Lease
classification ON OFF
test
New standard Lease Service
Finance Operating
Old standard
lease lease
Lease
definition
Contract, or part of a contract, that
conveys the right to use an asset for a
period of time in exchange for
consideration
(IFRS 16, Appendix A)
Lease definition – Identified
No
asset Is there an identified asset?
The new definition  Identify asset can be specified explicitly

or implicitly
increases focus on  No identified asset if supplier has
who controls the substantive right to substitute asset
asset and may • Practical ability (right & availability)
change which • Benefits economically from
exercising right to subscribe asset
contracts are  Identified asset is physically distinct
leases
Contract does not contain a lease
Lease definition –
Control
No
Is there an identified asset?
Yes
No
Customer has right to substantially all the economic benefits?
 Primary output and any by-products

 Benefits from use – not ownership of asset
Contract does not contain a lease
Soal r farm
exampe
Company C l Company D
20 yr purchase electricity Construction tax credits
Renewable energy credits
Control
No
Is there an identified asset?
Yes
No
Customer has right to substantially all the economic
benefits?
Yes
Who directs how and for what purpose the asset is used?
 Consider decision making rights that are most relevant to changing how
and for what purpose
 Examples include : type of output, when, where and whether to produce
 Protective rights of the supplier do not prevent the customer from
having
right to direct the use Contract does not contain a lease
Control
Who directs how and for what purpose the asset is used?
Customer Predetermined Supplier
Customer
Yes No
 Operates the asset or
 Has designed the
asset?
Contract contains a lease Contract does not contain a lease
Powerpurchase
exampe
• l
Company C acquires all the output from
cogeneration power plant owned by Company D
• What if:
i. Company C directs how and for what purpose?
ii. Company D directs how and for what purpose?
New
accounting
Lease recognition
exemptions
Two major optional
exemptions make
the standard easier Short term Leases of low
to apply leases value items
≤ 12 months ≤ USD 5,000

for example
Measurn i g the lease
liability
Present value of
Lease liability
= Present value of
lease rentals +
expected
payments at
end of lease
Lease
payments+
Fixed payments includes in-substance fixed payments / incentives
Variable lease payments only for index or rate / rate at commencement
+
Residual value guarantees at amount lessee expects to pay
+
Purchase option exercise price if lessee reasonably certain to exercise
+ if lease term reflects termination by lessee

Payments for
terminating
Variable lease
payments
Which variable lease payments are included in the lease liability?
Payments based on an Payments based on

index or rate turnover or usage
Measurn
i g the right-of-use
asset Lease liability
Initial direct costs

+
Right-of-use
asset = + - Incentives rec’d
Prepayments
Restore/dismantle
+
Lessor
accLessor
ountinaccounting
g Lease classification
test
remains similar to
current practice… Finance leases and
operating leases
but lacks consistency Consistent

with new lessee accounting model for
lessors and lessees
accounting model
Lessor
acc• ounting
Wider changes have an impact
Definition of lease
• Lease payment guidance
• Sale and lease back guidance
• Sub-lease guidance
• Modification accounting
• Disclosure requirements
Changes in contract terms and business practices
Sael -and-
e
l aseback Is there
a
IFRS 16 essentially kills Ye sale? No
sale-and-leaseback as s
an off-balance sheet
On-balance
financing structure On-balance
sheet financing,
sheet lease at
potentially at fair
cost
value (IFRS 9)
Multiple transition
options
Appyl ing the newlease
definition
Cost Comparability
Apply the new definition to all

contracts
OR
Grandfather existing contracts
and apply the new definition
only to new contracts
Applying the new
sapply
A ta ndthe
arcan
lessee dstandard…
choose to
Cost Comparability
Retrospectively to all
accounting periods
OR
As a ‘big bang’ at the date of

initial application
Effective
date Effective date Annual report
1 January 2019 31 December 2019
2016 2017 2018 2019 Mar June Sep Dec
Early adoption permitted Interim report

if IFRS 15 is adopted
Next steps and how
we can help
Thn
i gs to think about
now Which contracts are leases?
Which transition options to

choose?
Some questions to assess
the impact on your Database of all leases?
company’s financial Systems and processes in place?

statements
What about ratios and covenants?
Commercial opportunities
IMPACT ASSESSMENT
Broader business
impacts
Systems
Leasing
database
System solution
ERP Finance
integration Transition
Treasury options
Covenants Data collection
Credit rating Tax
Regulatory
KPIs
capital (banks)
I
F
R
Investor
S relations
Analyst queries
1 KPI’s (e.g. EPS)
leaseback 6 Credit rating
Employee
Accountin
benefits
gManagement
change
Strategy
remuneration
Lease vs buy
KPI’s
Lease
structuring
© 2016 KPMG, an Australian partnership
Sale and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”),
and a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG 34
How can we
hep
i.l?
Assess
Impact assessment:
 Impact on key business metrics and KPI’s,
such as debt covenants and EBITDA
Design
i. Support decision making around

key accounting judgements
Implement
i. Training of finance
and commercial
staff
ii. Technical advice on interpretation and
 Estimated lease liability application of standard ii. Application of new
 Impact on timing of expense accounting policy
iii. Support development of updated accounting across group
 Data requirements policy
 Identify commercial opportunities iii. Implement system
iv. Support commercial negotiations with solution
ii. Options analysis of key judgements: landlords to minimise any detrimental impact
 Transition options on key metrics. (e.g. shorter lease terms / iv. Implementation
more breaks / more variable rents) support - on go
 Whether arrangements are in scope forward leases,
 Discount rates v. Support design of system solution – remedies to existing
lease management system / database / leases, commercial
 Lease term ERP integration input
iii. Assessment of property database – is it vi. Optionality to regear, sublet, dispose or
sufficiently detailed, robust and fit for purpose. merge properties and advice on
acquisition strategy going forward
Keypoints to
remember
Keypoints to
remember
 New leases standard will impact
most companies.
 Process of assessing impact
should start now.
 Additional training and guidance
on its way.
Thank
you
kpmg.com/socialmedia kpmg.com/app
© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered
trademarks or trademarks of KPMG International. Liability limited by a scheme approved under
Professional Standards Legislation.
The KPMG name, logo and “cutting through complexity” are registered trademarks or
trademarks of KPMG International.
The information contained herein is of a general nature and is not intended to address the
circumstances of any particular individual or entity. Although we endeavour to provide accurate
and timely information, there can be no guarantee that such information is accurate as of the
date it is received or that it will continue to be accurate in the future. No one should act on such
information without appropriate professional advice after a thorough examination of the
particular situation.

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IFRS 16

Patricia Stebbens Michael Voogt Michelle Gibbs

Partner Director Director

Under IFRS 16, companies

Balance sheet P&L

EBITDA Total assets Gearing

EPS Net assets Interest cover

New standard Lease Service

The new definition  Identify asset can be specified explicitly

Contract does not contain a lease

 Primary output and any by-products

Contract does not contain a lease

20 yr purchase electricity Construction tax credits

Renewable energy credits

Customer Predetermined Supplier

Contract contains a lease Contract does not contain a lease

≤ 12 months ≤ USD 5,000

Variable lease payments only for index or rate / rate at commencement

+ if lease term reflects termination by lessee

Payments based on an Payments based on

Initial direct costs

but lacks consistency Consistent

Apply the new definition to all

As a ‘big bang’ at the date of

2016 2017 2018 2019 Mar June Sep Dec

Early adoption permitted Interim report

Which transition options to

company’s financial Systems and processes in place?

i. Support decision making around

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