In mid-2020, the IFRS Interpretations Committee (IFRS IC) received a question on how to measure a lease liability and right-of-use (ROU) asset on a sale-and-leaseback transaction with fully variable payments.
You might be wondering what sparked this question in the first place. Well, IFRS 16 prohibits the inclusion of variable lease payments (except for those dependent on an index or rate) in the lease liability (and therefore in the ROU asset).
However, at the same time, IFRS 16 prescribes specific guidance on accounting for sale-and-leaseback, which will essentially always lead to recognition of some of the ROU asset and related lease liability. As we can see, the two principles do not exactly coincide.
The IFRS IC finally decided that the guidance on sale-and-leaseback must be followed. However, as it results in recognition of lease liability consisting of variable lease payments for which the subsequent measurement of lease liability was unclear, the IASB decided to address the issue by amending the standard.
Where are we now?
Not long ago, the IASB released an exposure draft which is open for comments until 31 March 2021. The main purpose is to address the gap between sale-and-leaseback accounting and general rules for lease liability recognition for leases with variable lease payments.
The general idea here is to estimate the expected variable lease payments over the lease term. These expected payments will be included in the lease liability and subsequently amortized using that estimated projection of payments. Any difference between the actual payments and the estimated payments would then be recognized as variable lease payments in profit or loss. The estimates are not revised after initial recognition unless there is a change in a lease term or lease modification.
When it comes to the ROU asset, the amount recognized is determined by comparing the present value of the expected lease payments to the fair value of the asset sold.
Proposed amendments will be treated retrospectively unless hindsight is involved, in which case there would be a transition relief and the expected payment would only be determined on the transition date.
The impact
Is your entity affected by sale-and-leaseback transitions? If so, seller-lessees, it’s time to sit up and take notice!
Firstly, this approach is very different from the current general guidance for measurement of lease liabilities as payments are never estimated. And secondly, this guidance would apply to sale-and-leaseback transactions with any form of variable lease payments, including payments depending on an index or rate (inflation, CPI etc.).
In short, this new proposed guidance on sale-and-leaseback with variable lease payments effectively introduces brand-new guidance to general lease accounting rules.
Need guidance? Our KPMG experts are here to help you navigate this transition. Get in touch!
This article has been written by Katerina Buresova.
