Leases First Impressions 2016

IFRS 16
Leases
A more transparent balance sheet
First Impressions
IFRS
January 2016
kpmg.com/ifrs
Contents
A more transparent balance sheet 1 7 Disclosures 45
7.1 General disclosure objective 45
1 IFRS 16 at a glance 2
7.2 Disclosures for lessees 46
1.1 Key facts 2
7.3 Disclosures for lessors 47
1.2 Key impacts 3
8 Effective date and transition 49
2 Overview 4
8.1 Effective date 49
3 Lease definition 5 8.2 Lease definition on transition 50
3.1 Overview 5 8.3 Lessee approach to transition 51
3.2 Identified asset 6 8.3.1 Modified retrospective approach –
3.3 Economic benefits 7 Measurement 51
3.4 Directing the right to use 9 8.3.2 Modified retrospective approach –
3.5 Protective rights 11 Practical expedients for operating leases 52
3.6 Practical expedients 12 8.4 Lessor approach to transition 53
3.7 Lease and non-lease components 14 8.5 Sub-leases on transition 53
8.6 Sale-and-leaseback on transition 54
4 Lessee accounting 17
4.1 Lessee accounting model 17 9 Your next steps 55
4.2 Initial measurement of the lease liability 18
Appendix: Comparison with US GAAP 58
4.2.1 Overview 18
4.2.2 Lease term 19 About this publication 61
4.2.3 Lease payments 21
Keeping you informed 62
4.2.4 Discount rate 24
4.3 Initial measurement of the right-of-use asset 25
4.4 Subsequent measurement of the lease liability 27
4.4.1 Measurement basis 27
4.4.2 Reassessment of the lease liability 27
4.5 Subsequent measurement of the right-of-use
asset 29
4.5.1 Measurement basis 29
4.5.2 Depreciation of the right-of-use asset 30
4.5.3 Impairment of the right-of-use asset 31
4.6 Presentation 32
5 Lessor accounting 34
6 Other lease topics 37
6.1 Sale-and-leaseback transactions 37
6.2 Sub-leases 40
6.3 Investment property 41
6.4 Lease modifications 42
6.4.1 Lessee 42
6.4.2 Lessor – Modifications to a finance lease 43
6.4.3 Lessor – Modifications to an operating lease 43
A more transparent balance
sheet
The IASB’s new leases standard requires companies to
bring most leases on-balance sheet, recognising new
assets and liabilities.
In January 2016, the IASB issued IFRS 16 Leases – realising its long-standing
goal of bringing leases on-balance sheet for lessees. All companies that lease
major assets for use in their business will see an increase in reported assets and
liabilities. This will affect a wide variety of sectors, from airlines that lease aircraft
to retailers that lease stores. The larger the lease portfolio, the greater the impact
on key reporting metrics.
Companies are currently required to disclose details of their off-balance sheet
leases and many analysts use this information to adjust published financial
statements. The key change will be the increase in transparency and comparability.
For the first time, analysts will be able to see a company’s own assessment of
its lease liabilities, calculated using a prescribed methodology that all companies
reporting under IFRS will be required to follow.
The impacts are not limited to the balance sheet. There are also changes in
accounting over the life of the lease. In particular, companies will now recognise
a front-loaded pattern of expense for most leases, even when they pay constant
annual rentals. And the standard introduces a stark dividing line between leases
and service contracts – leases will be brought on-balance sheet, whereas service
contracts will remain off-balance sheet.
The new standard takes effect in January 2019. Before that, companies will need
to gather significant additional data about their leases, and make new estimates
and calculations. The new requirements are less complex and less costly to
apply than the IASB’s earlier proposals. However, there will still be a compliance
cost. For some companies, a key challenge will be gathering the required data.
For others, more judgemental issues will dominate – e.g. identifying which
transactions contain leases.
This publication provides an overview of the new standard and how it will affect
financial statements. It includes examples and insights to help you assess the
potential impact on your business and to assess your readiness for 2019.
Kimber Bascom
Ramon Jubels
Sylvie Leger
Brian O’Donovan
KPMG’s global IFRS leases leadership team
KPMG International Standards Group
© 2016 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
2 | First Impressions: IFRS 16 Leases
1 IFRS 16 at a glance
1.1 Key facts
Topic IFRS 16 US GAAP standard
Lessee – Single lease accounting – Dual lease accounting model

accounting model
– Lease classification test
model
– No lease classification test based on IAS 17 Leases
classification criteria
– All leases on-balance sheet:
- lessee recognises a right-
of-use (ROU) asset and - finance leases treated as
lease liability the purchase of an asset
on a financed basis
- treated as the purchase
of an asset on a financed - operating leases generally
basis feature straight-line
Impact on lessee balance sheet recognition of total lease
expense
Lessor – Dual lease accounting model for lessors

accounting
– Lease classification test based on IAS 17 classification criteria
model
– Finance lease accounting model based on IAS 17 finance
lease accounting, with recognition of net investment in lease
comprising lease receivable and residual asset
– Operating lease accounting model based on IAS 17 operating
lease accounting
Asset Liability Practical – Optional lessee exemption for short-term leases – i.e. leases
Companies with operating leases will expedients for which the lease term as determined under the new
appear to be more asset-rich, but also and standard is 12 months or less
more heavily indebted targeted
– Portfolio-level accounting permitted if it does not differ
reliefs
materially from applying the requirements to individual leases
Impact on lessee profit or loss
– Optional lessee exemption – No exemption for leases of
for leases of low-value items low-value items
– i.e. assets with a value of
USD 5,000 or less when
they are new – even if they
are material in aggregate
Effective – Accounting periods – Fiscal years beginning after

date beginning on or after 15 December 2018
1 January 2019
– Early adoption is permitted,
Depreciation Interest – Early adoption is permitted even before adoption of the
Cash rental payments if IFRS 15 Revenue from US version of the revenue
Contracts with Customers is standard
Total lease expense will be front-loaded also adopted
even when cash rentals are constant
First Impressions: IFRS 16 Leases 3
1 IFRS 16 at a glance
1.2 Key impacts

Identifying all lease agreements and extracting lease data. Lessees will now
recognise most leases on-balance sheet. This may require a substantial effort to
identify all lease agreements and extract all relevant lease data necessary to apply
the standard. To apply the simplified model for short-term leases and leases of low-
value items, a company will need to identify the lease and extract key lease terms.
(See Section 3.)
Changes in key financial metrics. Key financial metrics will be affected by
the recognition of new assets and liabilities, and differences in the timing and
classification of lease income/expense. This could impact debt covenants, tax
balances and a company’s ability to pay dividends. (See 4.1.)
New estimates and judgements. The standard introduces new estimates
and judgemental thresholds that affect the identification, classification and
measurement of lease transactions. Senior staff will need to be involved in these
decisions – both at lease commencement and at reporting dates as a result of the
continuous reassessment requirements. (See Sections 3 and 4.)
Balance sheet volatility. The new standard introduces volatility to assets and
liabilities for lessees, due to the requirements to reassess certain key estimates
and judgements at each reporting date. This may impact a company’s ability to
accurately predict and forecast results. (See 4.4.2.)
Changes in contract terms and business practices. To minimise the impact of
the standard, some companies may wish to reconsider certain contract terms and
business practices – e.g. changes in the structuring or pricing of a transaction,
including lease length and renewal options. The standard is therefore likely to
affect departments beyond financial reporting – including treasury, tax, legal,
procurement, real estate, budgeting, sales, internal audit and IT.
New systems and processes. Systems and process changes may be required
to capture the data necessary to comply with the new requirements, including
creating an inventory of all leases on transition. The complexity, judgement and
continuous reassessment requirements may require additional resources and
controls focused on monitoring lease activity throughout the life of leases.
Some impacts cannot yet be quantified. Companies won’t have the full picture
until other accounting and regulatory bodies have responded. For example, the
new accounting could prompt changes in the tax treatment of leases. And a key
question for the financial sector is how the prudential regulators will treat the new
M MANAG assets and liabilities for regulatory capital purposes. (See 4.3.)
RA ax Sys
EM
Transition considerations. A key early decision is how to make the transition to
g, T
OG
te the new standard. For many companies, the choice of transition method and which
tin orting Proc m
EN
PR
and Roun
p practical expedients to apply will have a major impact on the cost of implementing
s a ses
es
e
T
Acc
nd
the standard and the comparability of trend data in the years after transition. (See
Accounting Section 8.)
Change
Communication with stakeholders will require careful consideration. Investors
and other stakeholders will want to understand the standard’s impact on the
business. Areas of interest may include the effect on financial results, the costs of
implementation and any proposed changes to business practices.
You’ll get a feel for the challenge ahead by asking a few simple questions.
(See Section 9.)
2 Overview
The following diagram illustrates how key elements of the standard are explained
throughout this publication. The corresponding section numbers are in brackets.
Determine when to apply the standard

Identify the lease (3.1–5)
Choose whether to apply the practical expedients (3.6)
Separate lease and non-lease components (3.7)
Apply the lease accounting models
Lessees Lessors
Overview of lessee accounting (4.1) Lessor accounting model (Section 5)
Initial measurement (4.2–3)
Subsequent measurement (4.4–5)
Presentation (4.6)
Apply other relevant guidance

Sale and leaseback (6.1)
Sub-leases (6.2)
Investment property (6.3)
Lease modifications (6.4)
Prepare the necessary disclosures (Section 7)
Prepare for transition

Choose your transition options (Section 8)
Assess your readiness (Section 9)

3 Lease definition
3 Lease definition
Lease definition is the new on/off-balance sheet test for lessees –
and a key area of judgement in applying the standard.
3.1 Overview
IFRS 16.9 A company assesses at inception of a contract whether that contract is, or
contains, a lease. A contract is, or contains, a lease if the contract conveys the
right to control the use of an identified asset for a period of time in exchange
for consideration.
The key elements of the definition are therefore as follows.
No
Identified asset? (3.2)
Yes
Lessee obtains the No

Contract does
economic benefits? (3.3)
not contain a lease
Yes
No
Lessee directs the use? (3.4)
Yes
Contract is or contains a lease

However, a lessee is not required to apply the lessee accounting model to leases
that qualify for certain practical expedients (see 3.6).
KPMG insight – Lease definition is the new on/off-balance sheet

test
IFRS 16 eliminates the current operating/finance lease dual accounting model

for lessees. Instead, there is a single, on-balance sheet accounting model,
similar to current finance lease accounting. The question of whether a contract
contains a lease determines whether the arrangement is recognised on- or off-
balance sheet (as a service contract).
KPMG insight – Lease definition is superficially similar to the

current definition, but some details change
On a first read, the lease definition seems consistent with current guidance.
However, IFRS 16 contains additional application guidance and illustrative
examples on how to apply the definition – and there are differences from
current practice.
A number of arrangements that are currently accounted for as leases may
fall outside the new definition. For example, an arrangement may be a lease
under current guidance because the lessee obtains all of an asset’s output but
does not pay a fixed or market price for each unit of output. Under IFRS 16, it
is also necessary to consider whether the lessee has control over the use of
the underlying asset. Such an arrangement would be a lease only if the lessee
controls the use of the underlying asset.
3.2 Identified asset

IFRS 16.B13–B20 A contract contains a lease only if it relates to an identified asset. An asset can be
either explicitly specified in a contract or implicitly specified at the time it is made
available for use by the lessee.
However, even if an asset is specified, a lessee does not control the use of an
identified asset if the lessor has a substantive right to substitute the asset for an
alternative asset during the lease term. A lessor’s substitution right is ‘substantive’
if the lessor:
– has the practical ability to substitute the asset; and
– would benefit economically from exercising its right to substitute the asset.
A company assesses whether substitution rights are substantive at inception of
the contract. At that time, a company considers all of the facts and circumstances
– but not future events that are not likely to occur.
A capacity portion of an asset can be an identified asset if it is physically distinct –
e.g. a floor of a building. In addition, a capacity portion that is not physically distinct
is also an identified asset if it represents substantially all of the capacity of the
entire asset. For example, a capacity portion of a fibre-optic cable:
– is an identified asset if it represents substantially all of the capacity of the cable;
and
– is not an identified asset if it represents only part of the capacity of the cable.
Example 1 – Substantive substitution right
Lessee L enters into a five-year contract with a freight carrier (Lessor M)

to transport a specified quantity of goods. M uses rail cars of a particular
specification, and has a large pool of similar rail cars that can be used to fulfil
the requirements of the contract. The rail cars and engines are stored at M’s
premises when they are not being used to transport goods. Costs associated
with substituting the rail cars are minimal for M.
3 Lease definition
In this case, because the rail cars are stored at M’s premises, it has a large
pool of similar rail cars and substitution costs are minimal, the benefits to M
of substituting the rail cars would exceed the costs of substituting the cars.
Therefore, M’s substitution rights are substantive and the arrangement does
not contain a lease.
KPMG insight – Substitution rights will be a key area of focus
Substitution rights are likely to be a key area of focus in applying the lease
definition. For example, some element of substitution is often permitted in
leases of fleets of vehicles, or portfolios of photocopiers and similar equipment.
However, if the underlying asset is with the customer, then the costs of
substitution may exceed the benefits, such that the substitution rights are
not substantive.
In addition, some real estate leases permit the lessor to relocate the lessee
to alternative premises in some circumstances. This may permit the lessor to
relocate a lessee to another floor in an office building to accommodate a new
tenant, or permit a lessor of a retail park to relocate a lessee to another site in
the park to manage footfall.
A key question in such cases is assessing whether the lessor would benefit
economically from the substitution, given that the assessment excludes
consideration of events that were not likely to occur at inception.
3.3 Economic benefits

IFRS 16.B9, B21–B23 To determine whether a contract conveys the right to control the use of an
identified asset, a company assesses whether the customer has the rights to:
– obtain substantially all of the economic benefits from use of the identified asset
throughout the period of use; and
– direct the use of the identified asset (see 3.4).
The economic benefits from using an asset include its primary output, by-products
and other economic benefits from using the asset that could be realised from a
commercial transaction with a third party (e.g. sub-leasing the asset).
These economic benefits need to be in the defined scope of a lessee’s right to
use an asset – e.g. if a contract limits the use of a vehicle to only one particular
territory during the period of use, then a company considers only the economic
benefits from use of the vehicle within that territory, and not beyond.
Example 2 – Primary products and by-products
IFRS 16.IE2 Utility Company C enters into a 20-year contract with Power Company D to
purchase all of the electricity produced by a new solar farm. D owns the solar
farm and will receive tax credits relating to the construction and ownership of
the solar farm, and C will receive renewable energy credits that accrue from use
of the solar farm.
C has the right to obtain substantially all of the economic benefits from use of
the solar farm over the 20-year period because it obtains:
– the electricity produced by the farm over the lease term – i.e. the primary
product from use of the asset; and
– the renewable energy credits – i.e. the by-product from use of the asset.
Although D receives economic benefits from the solar farm in the form of tax
credits, these economic benefits relate to the ownership of the solar farm.
The tax credits do not relate to use of the solar farm and therefore are not
considered in this assessment.
KPMG insight – Specific guidance on renewable energy credits and

tax benefits
Many jurisdictions have introduced tax and other benefits to stimulate

investment in renewable energy technologies – e.g. wind power and solar
power. Complex legal structures have been developed to enable multiple
investors to invest in these technologies and receive specific benefits – e.g.
different parties may be interested in obtaining the power, the renewable
energy credits and the income tax benefits. The determination of which outputs
should be considered in assessing whether these arrangements contain leases
has been hotly debated.
IFRS 16 is more specific in this area than current guidance and has the potential
to reduce diversity in assessing whether an arrangement contains a lease.
However, questions may still remain, given the variety of arrangements seen
in practice.
KPMG insight – A customer may obtain substantially all of the

benefits from use even if lease payments are variable
IFRS 16.B23 The existence of variable lease payments derived from the use of an asset – e.g.
a percentage of sales from use of a retail space – does not prevent a customer
from having the right to obtain substantially all of the economic benefits from
use of the asset. In such cases, although the customer passes on certain
benefits to the supplier, the customer receives the cash flows arising from use
of the asset.
IFRS 16 is explicit on this point, to reduce the risk that companies would seek
to avoid lease accounting by introducing variable payments into an arrangement
that would otherwise be a lease.
3 Lease definition
3.4 Directing the right to use

IFRS 16.B24–B27 A lessee has the right to direct the use of an identified asset in either of the
following situations:
– if the lessee has the right to direct how and for what purpose the asset is used
throughout the period of use; or
– if the relevant decisions about how and for what purpose the asset is used are
predetermined and:
- the lessee has the right to operate the asset (or to direct others to operate
the asset in a manner that it determines) throughout the period of use,
without the lessor having the right to change those operating instructions; or
- the lessee designed the asset in a way that predetermines how and for what
purpose the asset will be used throughout the period of use.
Who takes the ‘how and what purpose’ decisions?
Customer Predetermined Supplier
Contract is or Further analysis Contract does not

contains a lease* is required contain a lease
* If other criteria are met.
In making this assessment, a company considers the decision-making rights

that are most relevant to changing how and for what purpose the asset is used –
‘relevant’ in the sense that they affect the economic benefits derived from the use.
Examples of relevant decision-making rights that, depending on the
circumstances, grant the right to change how and for what purpose the asset is
used include:
– rights to change the type of output that is produced by the asset (e.g. deciding
whether to use a shipping container to transport goods or for storage);
– rights to change when the output is produced (e.g. deciding when a power plant
will be used);
– rights to change where the output is produced (e.g. deciding on the destination
of a truck or a ship); and
– rights to change whether the output is produced, and the quantity of that
output (e.g. deciding whether to produce energy from a power plant and how
much energy).
Examples of decision-making rights that do not grant the right to change how and
for what purpose the asset is used include: rights to operate an asset or rights
to maintain an asset. However, such decision-making rights drive the analysis
if the relevant decisions about how and for what purpose an asset is used
are predetermined.
Example 3 – Right to direct the use
IFRS 16.IE2 Customer R enters into a contract with Company S, a ship owner, for the
transport of cargo from A Coruña to Hartlepool on an identified ship. The
contract details the cargo to be transported on the ship and the dates of pick-up
and delivery. The cargo will occupy substantially all of the capacity of the ship. S
operates and maintains the ship and is responsible for the safe passage of the
cargo on board the ship. R is prohibited from hiring another operator for the ship
during the term of the contract or operating the ship itself.
R does not have the right to control the use of the ship because it does not
have the right to direct its use. R does not have the right to direct how and for
what purpose the ship is used. How and for what purpose the ship is used –
i.e. the journey from A Coruña to Hartlepool transporting specified cargo – is
predetermined in the contract. R does not have the right to operate the ship and
did not design the ship in a way that predetermined how and for what purpose
it would be used. R has the same rights regarding the use of the ship as if it
were only one of many customers transporting cargo on the ship. Therefore, the
contract does not contain a lease.
Example 4 – Right to direct the use
IFRS 16.IE2 Customer T enters into a five-year contract with Company U, a ship owner,
for the use of an identified ship. T decides whether and what cargo will be
transported, and when and to which ports the ship will sail throughout the
period of use, subject to restrictions specified in the contract. These restrictions
prevent T from sailing the ship into waters at a high risk of piracy or carrying
explosive materials as cargo. U operates and maintains the ship, and is
responsible for safe passage.
T has the right to direct the use of the ship. The contractual restrictions are
protective rights that protect U’s investment in the ship and its personnel
(see 3.5). In the scope of its right of use, T determines how and for what
purpose the ship is used throughout the five-year period because it decides
whether, where and when the ship sails, as well as the cargo that it will
transport. T has the right to change these decisions throughout the period
of use. Therefore, the contract contains a lease.
3 Lease definition
KPMG insight – An increased focus on control
IFRS 16 increases the focus on which party controls the use of an identified
asset. Under current guidance, an arrangement may be a lease when the
customer obtains substantially all of the output or other utility of the asset even
if the customer does not control the use of the asset. Under IFRS 16, a lease
can exist if, and only if, the customer has the right to both control the use of
an identified asset and obtain substantially all of the economic benefits from
the use of that asset. This is in contrast to a further aspect of current guidance
under which an arrangement is a lease when the customer has the right to
control the use of an identified asset and obtains more than an insignificant
amount of the output or other utility of the asset.
This is likely to mean that some agreements that are currently treated
as leases may fall outside the new lease accounting – e.g. some power
purchase agreements.
KPMG insight – The assessment of whether an arrangement

contains a lease may depend on who controls apparently minor
decision-making rights
If the ‘how and for what purpose’ decisions are predetermined, then the
assessment of whether an arrangement contains a lease may depend on which
party has the right to operate the asset. That is, relatively minor day-to-day
operational decisions may determine the assessment.
This suggests that if the parties predetermine the most important decisions,
then they can opt in or out of lease accounting by choosing which party
controls day-to-day operations. However, this applies only if the most
important decisions are predetermined – i.e. the customer would need to
forgo considerable operational flexibility to take advantage of this apparent
structuring opportunity.
3.5 Protective rights

IFRS 16.B30 A contract may include certain terms and conditions designed to protect the
lessor’s interest in the identified asset, to protect its personnel or to ensure the
lessor’s compliance with laws or regulations. Such protective rights typically define
the scope of the lessee’s right to use an asset but do not, in isolation, prevent the
lessee from having the right to direct the use of the asset within that scope.
For example, a contract may:
– specify the maximum amount of use of an asset or where or when the lessee
can use the asset;
– require a lessee to follow particular operating practices; or
– require a lessee to inform the supplier of changes in how an asset will be used.
Example 5 – Protective rights
IFRS 16.IE2 Lessee L enters into a two-year contract with Lessor M, an aircraft owner, for
the use of an identified aircraft. The contract details the interior and exterior
specifications for the aircraft. There are contractual and legal restrictions in
the contract on where the aircraft can fly. Subject to these restrictions, L
determines where and when the aircraft will fly, and which passengers and
cargo will be transported on the aircraft. M is responsible for operating the
aircraft, using its own crew.
The restrictions on where the aircraft can fly define the scope of L’s right to
use the aircraft. In the scope of its right of use, L determines how and for
what purpose the aircraft is used throughout the two-year period of use
because it decides whether, where and when the aircraft travels, as well as
the passengers and cargo that it will transport. L has the right to change these
decisions throughout the period of use.
The contractual and legal restrictions on where the aircraft can fly are protective
rights and do not prevent L from having the right to direct the use of the asset.
KPMG insight – A threefold classification of decision-making rights
IFRS 16 effectively requires a threefold classification of decision-making rights

into ‘how and for what purpose’ decisions, operating decisions and protective
rights. The different categories of rights feature in the analysis in different ways.
– ‘How and for what purpose’ decisions: These determine whether the
arrangement contains a lease, unless they are predetermined.
– Operating decisions: These are ignored, unless the ‘how and for what
purpose’ decisions are predetermined, in which case there is a lease if the
customer makes the operating decisions.
– Protective rights: These typically define the scope of the lessee’s right to use
an asset but do not, in isolation, preclude a conclusion that there is a lease.
Assessing the categories into which decisions fall is likely to be a key area of
judgement in practice.
3.6 Practical expedients

IFRS 16.5–8 A lessee can elect not to apply the lessee accounting model to:
Short term leases Leases of

low-value items
< 12 months < USD 5,000
for example
3 Lease definition
– leases with a lease term of 12 months or less (i.e. short-term leases; see 4.2.2);
and
– leases for which the underlying asset is of low value when it is new (even if the
effect is material in aggregate).
The election for short-term leases is made by class of underlying asset, whereas
the election for leases of low-value assets can be made on a lease-by-lease basis.
If a lessee elects either of these recognition exemptions, then it recognises the
related lease payments as an expense on either a straight-line basis over the lease
term or another systematic basis if that basis is more representative of the pattern
of the lessee’s benefit.
If a lessee elects the short-term lease recognition exemption and there are
any changes to the lease term – e.g. the lessee exercises an option that it had
previously determined it was not reasonably certain to exercise – or the lease is
modified, then the lessee accounts for the lease as a new lease.
Example 6 – Applying the short-term leases exemption
IFRS 16.B34 Lessee L enters into a 10-year lease of a machine to be used in manufacturing
parts for a plane that it expects to remain popular with consumers until it
completes development and testing of an improved model. The cost to install
the machine in L’s manufacturing facility is not significant. L and Lessor M each
have the right to terminate the lease without a penalty on each anniversary of
the lease commencement date.
The lease term consists of a one-year non-cancellable period because both
L and M have a substantive termination right – both can terminate the lease
without penalty – and the cost to install the machine in L’s manufacturing
facility is not significant. As a result, the lease qualifies for the short-term
lease exemption.
Example 7 – Applying the leases of low value exemption
IFRS 16.IE3 Lessee B is in the pharmaceutical manufacturing and distribution industry and
has the following leases:
– leases of real estate: both office building and warehouse;
– leases of office furniture;
– leases of company cars, both for sales personnel and for senior management
and of varying quality, specification and value;
– leases of trucks and vans used for delivery; and
– leases of IT equipment such as laptops.
B determines that the leases of office furniture and laptops qualify for the
recognition exemption on the basis that the underlying assets, when they are
new, are individually of low value. B elects to apply the exemption to these
leases. As a result, it applies the recognition and measurement requirements in
IFRS 16 to its leases of real estate, company cars, trucks and vans.
KPMG insight – Significant relief for preparers but a potentially

material impact on the financial statements
Applying the new definition is likely to be one of the biggest practice issues
under IFRS 16. However, the significant practical expedients ease the pressure
on the application of the lease definition and reduce compliance costs for
preparers. The exemptions permit a lessee to account for qualifying leases in
the same manner as existing operating leases and to disclose only the income
statement expense relating to these leases, rather than provide detailed
disclosures under IAS 17.
IFRS 16.BC100 The exemption for leases of low-value items intends to capture leases that are
high in volume but low in value – e.g. leases of small IT equipment (laptops,
mobile phones, simple printers), leases of office furniture etc. IFRS 16 does not
define ‘low-value’, but in its basis for conclusions refers to assets with a value
of USD 5,000 or less when they are new. This may mean that an entity that
leases many such items may avoid recognition of a lease liability that would be,
in aggregate, material – e.g. a professional services firm that leases personal IT
equipment for its staff.
KPMG insight – Difference from US GAAP for leases of low‑value

items
US GAAP preparers will not benefit from the exemption for leases of low-value
items. However, if these leases are classified as operating leases under the FASB
approach – generally resulting in straight-line recognition of income and expense
– then this GAAP difference will typically be limited to the balance sheet.
3.7 Lease and non-lease components

IFRS 16.12 If a contract is, or contains, a lease, then the company accounts for each separate
lease component, separately from non-lease components.
Step 1: Identify the component(s)

IFRS 16.B32–B33 A company considers the right to use an underlying asset as a separate lease
component if it meets the following criteria:
– the lessee can benefit from using that underlying asset either on its own or
together with other resources that are readily available; and
– the asset is neither highly dependent on, nor highly inter-related with, the other
assets in the contract.
Charges for administrative tasks or other costs incurred associated with the lease
that do not transfer a good or service to the lessee do not give rise to a separate
component. However, they are part of the total consideration that a company
allocates to the identified components.
3 Lease definition
Step 2: Account for the component(s)

Lessee perspective
IFRS 16.13–16 If a contract contains a lease component and one or more additional lease or
non‑lease components, then the lessee allocates the consideration in the contract
to each lease component on the basis of:
– the relative stand-alone price of each lease component; and
– the aggregate stand-alone price of the non-lease components.
The lessee determines the relative stand-alone prices of lease and non-lease
components based on the price that a lessor would charge a company for a similar
component separately.
If an observable stand-alone price is not readily available, then the lessee
estimates the stand-alone price of the components by maximising the use of
observable information.
As a practical expedient a lessee can elect, by class of underlying asset, not to
separate lease components from any associated non-lease components. A lessee
that takes this election accounts for the lease component and the associated non-
lease components as a single lease component.
Unless a lessee applies the practical expedient, it accounts for non-lease
components in accordance with other applicable standards.
Lessor perspective
IFRS 16.17 If a contract contains a lease component and one or more additional lease or
non‑lease components, then the lessor allocates the consideration in the contract
in accordance with the requirements of IFRS 15 – i.e. according to the stand-alone
selling prices of the goods and services included in each component.
The following table summarises the process for accounting for lease and non-lease
components from both the lessee and lessor perspectives.
Lessee Lessor
When there is an Unless the practical Always separate and

observable stand- expedient is elected (see allocate following the
alone price for each below), separate and IFRS 15 approach – i.e.
component allocate based on the on a relative stand-alone
relative stand-alone price selling price basis
of components
When there is not Maximise the use of

an observable stand- observable information
alone price for some
or all components
Taxes, insurance on Activities (or costs of the lessor) that do not transfer
the property and a good or service to the lessee are not components
administrative costs in a contract
Practical expedient: Combine lease and N/A

accounting policy any associated non-
election by class of lease components and
underlying asset account for them as
lease components
Example 8 – Accounting for lease and non-lease components
Lessee L enters into a five-year lease contract with Lessor M to use an

operating oil rig. The contract includes maintenance services provided by M. M
obtains its own insurance for the oil rig. Annual payments are 2,000 (300 relate
to maintenance services and 50 to insurance costs). L is able to determine that
similar maintenance services and insurance costs are offered by third parties
for 400 and 50 a year, respectively. L is unable to find an observable stand-
alone rental amount for a similar oil rig because none is leased without related
maintenance services provided by the lessor.
In this case:
– the observable stand-alone price for maintenance services is 400;
– there is no observable stand-alone price for the lease; and
– the insurance cost does not transfer a good or service to the lessee and
therefore is not a separate lease component.
Therefore, L allocates 1,600 (2,000 - 400) to the lease component.
KPMG insight – Consistency with IFRS 15
Under IFRS 16, lessors allocate the consideration of a lease contract between
lease and non-lease components in broadly the same way that a vendor
allocates the consideration for performance obligations in a contract with
customers under IFRS 15.
This broad consistency between the two standards will help to reduce the cost
and complexity of applying them. This may be an important consideration for
some companies when deciding whether to early adopt IFRS 16 (see Section 8).
Also, the practical expedient for lessees not to separate a lease component
has the potential to reduce cost and complexity in some cases. However,
lessees may find the accounting consequences unattractive. In effect, using
this practical expedient results in recognition by the lessee of a liability for the
service component of the contract, which would otherwise remain off-balance
sheet until the lessor performs.
4 Lessee accounting
4 Lessee accounting
The key objective of the new standard is to ensure that lessees
recognise assets and liabilities for their major leases.
4.1 Lessee accounting model

IFRS 16.22 A lessee applies a single lease accounting model under which it recognises all
major leases on-balance sheet.
IFRS 16.47, 49
Balance sheet Profit or loss
Asset Lease expense
= ‘Right-of-use’ of underlying asset Depreciation
+
Liability Interest
= Obligation to make lease payments =
Front-loaded total lease expense
KPMG insight – Major impacts for lessees
Currently, many analysts routinely adjust lessees’ reported financial figures

to reflect commitments under leases that are classified as operating leases,
based on the amounts disclosed in accordance with IAS 17 and IFRS 7
Financial Instruments: Disclosures. These adjustments require a high degree of
judgement and effort.
Bringing operating leases on the balance sheet will make companies appear to
be more asset-rich but also more heavily indebted. Moreover, it will change the
presentation of:
– expenses in the statement of profit or loss and other comprehensive income;
and
– cash flows in the statement of cash flows (see 4.6).
The additional assets and liabilities recognised and the change in presentation
will affect key performance ratios – e.g. asset ratios and debt/equity ratios – and
consequently could impair the ability to satisfy any debt covenants that are not
applied on a ‘frozen GAAP’ basis.
KPMG insight – A pre-tax accounting model
Tax considerations are often a major factor when a company is assessing

whether to lease or buy an asset, and when a lessor is pricing a lease contract.
However, the new requirements continue to address lessee (and lessor)
accounting on a pre-tax basis.
The income tax accounting for lease contracts remains in the scope of IAS 12
Income Taxes. It appears that the current complexities in accounting for income
taxes by lessees of on-balance sheet leases will continue. These complexities
include, for example, how to apply the initial recognition exemption and
whether the ‘right-of-use’ asset and the lease liability should be considered to
be linked for the purposes of the income tax analysis.
KPMG insight – Unlike IFRS, US GAAP retains a dual accounting

model for lessees
IFRS 16.BC304 Although IFRS 16 contains a single lessee accounting model, US GAAP will
feature a dual model for lessee accounting – i.e. finance vs operating leases.
Under US GAAP, finance leases will be accounted for in the same way as under
the IASB’s model. Operating leases will also be presented on the balance sheet
with a right-of-use asset and a lease liability.
However, for operating leases, lease expense will typically be recognised on
a straight-line basis – i.e. not front-loaded – and presented as a single amount
within operating expenses. In order to achieve this profile of lease expense, the
lessee will measure the right-of-use asset as a balancing figure – i.e. a plug. In
addition, lease payments for operating leases will be presented within operating
activities in the statement of cash flows.
4.2 Initial measurement of the lease liability

4.2.1 Overview
IFRS 16.26 At the commencement date, a lessee measures the lease liability at the present
value of the future lease payments.
IFRS 16.27
Present value
Present value of expected
Lease liability
= of lease rentals + payments at
end of lease

4 Lessee accounting
The key inputs to this calculation are as follows.
Lease
payments
(4.2.3)
Lease term (4.2.2)
Discount rate (4.2.4)
KPMG insight – Lease liability includes items that would be

recognised separately under the financial instruments standard
IFRS 9.2.1(b) Lease liabilities are financial liabilities. However, they will generally be measured
in accordance with IFRS 16 – not IFRS 9 Financial Instruments. This will
represent a considerable simplification compared with financial instruments
accounting in some cases. For example, common features of lease agreements
– e.g. renewal and purchase options – will not be accounted for separately, nor,
potentially, result in the liability being measured at fair value.
4.2.2 Lease term

IFRS 16.18, B35 The lease term is the non-cancellable period of the lease, together with:
– optional renewable periods if the lessee is reasonably certain to extend; and
– periods after an optional termination date if the lessee is reasonably certain not
to terminate early.
Termination options held only by the lessor are not considered when determining
the lease term.
IFRS 16.A, B36 The lease term starts when the lessor makes the underlying asset available for use
by the lessee. It includes any rent-free periods provided.
IFRS 16.B37 When determining the lease term, lessees consider all relevant facts and
circumstances that create an economic incentive to exercise or forfeit options to
renew and terminate early.
Examples of relevant facts and circumstances
Contractual/market Asset
– Level of rentals in any secondary – Nature of item (specialised)
period compared with market rates – Location
– Contingent payments – Availability of suitable alternatives
– Renewal and purchase options – Existence of significant leasehold
– Costs relating to the termination of improvements
the lease and the signing of a new
replacement lease
– Returning costs of the underlying
asset

Example 9 – Significant economic incentive to renew
Lessee X enters into a non-cancellable lease contract with Lessor L to lease a

building. The lease is for four years initially, and X has the option to extend the
lease by another four years at the same rental.
To determine the lease term, X considers the following factors.
– Market rentals for a comparable building in the same area are expected to
increase by 10% over the eight-year period covered by the lease. At inception
of the lease, lease rentals are in accordance with current market rents.
– X intends to stay in business in the same area for at least 10 years.
– The location of the building is ideal for relationships with suppliers and
customers.
X concludes that it has a significant economic incentive to extend the lease.
Therefore, for the purpose of accounting for the lease, X uses a lease term of
eight years.
Example 10 – No significant economic incentive to renew
Lessee Y enters into a lease of a three-year-old machine. The non-cancellable

lease term is 10 years. Y has the option to extend the lease after the initial
10‑year period for optional periods of 12 months each at market rents.
To determine the lease term, Y considers the following factors.
– The machine is to be used in manufacturing parts for a type of plane that Y
expects will remain popular with customers until development and testing of
an improved model are completed in approximately 10 years.
– The cost to install the machine in Y’s manufacturing facility is not significant.
– The non-cancellable term of Y’s manufacturing facility lease ends in 14 years,
and Y has an option to renew that lease for another eight years.
4 Lessee accounting
– Y does not expect to be able to use the machine in its manufacturing process
for other types of planes without significant modifications.
– The total remaining life of the machine is 25 years.
Y notes that the terms for the optional renewal provide no economic incentive
and the cost to install is insignificant. Y has no incentive to make significant
modifications to the machine after the initial 10-year period. Therefore, Y does
not expect to have a business purpose for using the machine after the non-
cancellable lease term.
Y therefore concludes that the lease term consists of the 10-year non-
cancellable period only.
KPMG insight – Lease term is a critical estimate
The assessment of the lease term is a critical estimate and a key input to the
amount of the lease liability. This is because the lease term determines which
lease payments are included in the measurement of the lease liability.
4.2.3 Lease payments

IFRS 16.27 At the commencement date, a lessee includes the following payments relating to
the use of the underlying asset in the measurement of the lease liability:
– fixed payments (including in-substance fixed payments), less any lease
incentives receivable;
– variable lease payments that depend on an index or a rate;
– amounts expected to be payable by the lessee under residual value guarantees;
– the exercise price of a purchase option that the lessee is reasonably certain to
exercise; and
– payments for terminating the lease if the lease term reflects early termination.
IFRS 16.B42 In-substance fixed payments are payments that are structured as variable lease
payments, but which – in substance – are unavoidable. Examples include:
– payments that have to be made only if an event occurs that has no genuine
possibility of not occurring;
– there is more than one set of payments that a lessee could make, but only one
of those sets is realistic; and
– there are multiple sets of payments that a lessee could realistically make, but it
has to make at least one set of payments.
Example 11 – In-substance fixed payments
IFRS 16.27, 38, B42 Company W leases a production line. The lease payments depend on the
number of operating hours of the production line – i.e. W has to pay 1,000 per
hour of use. The annual minimum payment is 1,000,000. The expected usage
per year is 1,500 hours.
This lease contains in-substance fixed payments of 1,000,000 per year, which
are included in the initial measurement of the lease liability. The additional
500,000 that W expects to pay per year are variable payments that do not
depend on an index or rate and, therefore, are not included in the initial
measurement of the lease liability but are expensed as the ‘over-use’ occurs.
IFRS 16.27 Variable lease payments that depend on an index or rate are initially measured
using the index or rate as at the commencement date of the lease.
Example 12 – Variable payments not depending on an index or rate
Company X leases a store. The lease payments for the store amount to 1% of
the store’s revenues. There is no minimum rental payment.
Because the lease contains only variable lease payments that do not depend
on an index or rate, X measures the lease liability at the commencement of the
lease as zero.
Example 13 – Variable payments depending on an index
IFRS 16.28 Company Y rents an office building. The initial annual rental payment is
2,500,000. The rent will be reviewed every year and increased by the change in
the consumer price index (CPI).
This is an example of a variable lease payment that depends on an index.

The initial measurement of the lease liability is based on the value of the CPI
on lease commencement – i.e. Y assumes an annual rental of 2,500,000. If
during the first year of the lease the CPI increases by 5%, then at the end of
the first year the lease liability is recalculated assuming future annual rentals of
2,625,000 (i.e. 2,500,000 x 1.05).
IFRS 16.27, B37 Lessees determine whether it is reasonably certain that they will exercise a
purchase option considering all relevant facts and circumstances that create an
economic incentive to do so. This is similar to the approach for assessing whether
a lessee expects to exercise a renewal option (see 4.2.2).
If a lessee provides a residual value guarantee, then it includes in the lease
payments the amount that it expects to pay under that guarantee.
4 Lessee accounting
Example 14 – Residual value guarantees
Lessee Z has entered into a lease contract with Lessor L to lease a car. The
lease term is five years.
In addition, Z and L agree on a residual value guarantee – if the fair value of the
car at the end of the lease term is below 400, then Z will pay to L an amount
equal to the difference between 400 and the fair value of the car.
At inception of the lease, Z expects that the fair value of the car at the end of the
lease term will be 400.
Z therefore includes an amount of zero in the lease payments when calculating
its lease liability.
KPMG insight – Initial measurement of the lease liability includes

only certain variable lease payments
Similar to current practice, the initial measurement of the lease liability includes
variable lease payments that depend on an index or rate – e.g. the CPI or a
market interest rate – and payments that appear to be variable but are in-
substance fixed payments.
Other variable payments are excluded from the initial measurement of the
lease liability. Instead, such payments – e.g. payments based on revenues
or usage – are recognised in profit or loss in the period during which the
event or condition that triggers those payments occurs. This has a number of
important consequences.
– The requirement to expense other variable payments as they are incurred
represents a considerable simplification compared with earlier drafts of the
standard. Many lessees will be relieved that the IASB stepped back from
its earlier proposal that an entity estimate all variable payments on lease
commencement.
– A lessee’s apparent indebtedness will depend on the mix of fixed and
variable payments within its lease portfolio. For example, suppose that
Retailer X leases a portfolio of retail outlets with fixed lease payments.
Retailer Y leases a similar portfolio of retail outlets on similar terms but with
a mix of fixed lease payments and lease payments that depend on turnover.
X will recognise higher lease liabilities than Y – even if the total expected
lease payments for X and Y are the same.
– Some power purchase agreements that are leases may result in a lease
liability of zero for the lessee. For example, if a lessee enters into an
agreement to purchase all of the electricity produced by a wind farm or
hydroelectric plant and the lease payments all depend on the amount of
electricity produced, then the lessee’s lease liability will be zero.
Variable lease payments
In-substance fixed Depend on index or rate Other
Include in initial measurement of right-of-use Expense and include

asset and lease liability in lease liability
when triggered
KPMG insight – Exercise of purchase option is a critical estimate
The assessment of whether the exercise of a purchase option is reasonably

certain is a critical estimate and a key input to the amount of the lease liability.
Lessees have to carefully consider all relevant facts and circumstances
(see 4.2.2) to determine whether there is an economic incentive to purchase.
KPMG insight – Initial measurement of residual value guarantees

differs from current practice
Amounts payable under residual value guarantees are currently included in a

lessee’s minimum lease payments under IAS 17. However, the amount to be
included under IAS 17 is the maximum exposure under the guarantee, not
the expected amount payable. Therefore, amounts relating to residual value
guarantees included in lease payments under IFRS 16 will usually be lower.
4.2.4 Discount rate

IFRS 16.26, A Lessees calculate the present value of the lease payments using the interest rate
implicit in the lease. This is the rate that causes the present value of the lease
payments and the unguaranteed residual value to equal the sum of the fair value of
the underlying asset and any initial direct costs of the lessor.
Lease payments Fair value underlying

asset
Unguaranteed
Initial direct costs
residual value
Rate
implicit in
the lease

4 Lessee accounting
If the lessee cannot readily determine the interest rate implicit in the lease, then
the lessee uses its incremental borrowing rate. This is the rate that a lessee
would have to pay on the commencement date of the lease for a loan of a similar
term, and with similar security, to obtain an asset of similar value to the right-of-
use asset in a similar economic environment.
KPMG insight – Lessees may not be able to determine the rate

implicit in the lease
Measuring the lease liability at the interest rate that the lessor charges the
lessee enables the specific circumstances of a lease – including the structured
financing of the arrangement or tax benefits inherent within the return agreed
between the lessee and the lessor – to be captured in the lease accounting.
However, it may be difficult for a lessee to determine the rate that the lessor
charges the lessee. For example, a lessee will often not know the amount
of the lessor’s initial direct costs, or will have only limited information about
the expected residual value of the underlying asset at the end of the lease
term. As a result, it appears likely that lessees will often use their incremental
borrowing rate.
4.3 Initial measurement of the right-of-use asset

IFRS 16.23–24 At the commencement date, a lessee measures the right-of-use asset at a cost
that includes the following.
Lease liability
Initial direct costs
Prepaid lease payments
Estimated costs to dismantle, remove or restore, measured

in accordance with IAS 37
Lease incentives received
Right-of-use asset

IFRS 16.A A lessee’s ‘initial direct costs’ are the incremental costs of obtaining a lease that
would otherwise not have been incurred.
IFRS 16.IE5 Payments that a lessee receives or makes and that are related to a separate
asset – e.g. reimbursements from the lessor for leasehold improvements – are
not included in the measurement of the right-of-use asset, but are accounted
for separately.
Typical initial direct costs of a lessee
Include
✔ Exclude

– Commissions – General overheads
– Legal fees* – Costs to obtain offers for potential
leases
– Costs of negotiating lease terms
and conditions*
– Costs of arranging collateral
– Payments made to existing tenants
to obtain the lease
* If they are contingent on origination of
the lease
KPMG insight – Similar to costs of acquiring other non-financial

assets
Broadly, the initial measurement of a lessee’s right-of-use asset (i.e. a

non‑financial asset) is consistent with most other non-financial assets that are
measured initially at cost (e.g. assets measured in accordance with IAS 16
Property, Plant and Equipment and IAS 38 Intangible Assets).
KPMG insight – Right-of-use asset is neither an intangible asset

nor an item of property, plant and equipment
IFRS 16 does not specify that a right-of-use asset is in the scope of either IAS 16
or IAS 38. Instead, it appears that a right-of-use asset is a new category of asset
in the scope of IFRS 16 itself.
This could have important consequences for assessing some of the impacts of
the new standard. Companies won’t have the full picture until other accounting
and regulatory bodies have responded. For example, the new accounting could
prompt changes in the tax treatment of leases. A key question for the financial
sector is how the prudential regulators will treat the new assets and liabilities
for regulatory capital purposes.
4 Lessee accounting
4.4 Subsequent measurement of the lease liability

4.4.1 Measurement basis
IFRS 16.36 After initial recognition, the lease liability is measured at amortised cost using the
effective interest method.
Example 15 – Measurement at amortised cost
Lessee X has entered into a contract with Lessor L to lease a building for
seven years. The annual lease payments are 450, payable at the end of each
year. X’s incremental borrowing rate – i.e. the effective interest rate – is 5.04%.
The initial recognition of the obligation to make lease payments is 2,600. At
the end of Year 1, X pays the first annual lease payment of 450 to L: of that, 131
(2,600 x 5.04%) is interest; and 319 (450 - 131) is principal, which decreases the
liability by 319.
The carrying amount of the liability at the start of Year 2 is 2,281 (2,600 - 319).
KPMG insight – No option to measure lessee’s lease liability at fair

value
IFRS 16.BC183 Lessees cannot choose to measure lease liabilities subsequently at fair value.
This is consistent with the measurement basis of finance lease liabilities under
IAS 17.
4.4.2 Reassessment of the lease liability

A lessee remeasures the lease liability to reflect changes in the lease payments
as follows.
IFRS 16.40–43, B42 Lessee remeasures lease liability using revised lease payments and...
an unchanged discount rate when: a revised discount rate when:

– the amount expected to be – future lease payments change as
payable under the residual value a result of a change in floating
guarantee changes; interest rates;
– future lease payments change to – the lease term changes; or
reflect market rates (e.g. based on – the assessment of the exercise of
a market rent review) or a change a purchase option changes.
in an index or rate* used to
determine the lease payments; or
– the variability of payments is
resolved so that they become in-
substance fixed payments.
* Other than changes in floating interest rates.
Example 16 – Change in variable payments linked to an index
Lessee Y enters into a lease for a five-year term with Lessor L for a retail
building, commencing on 1 January. Y pays 155 per year, in arrears. Y’s
incremental borrowing rate is 5.9%. Additionally, the lease contract states
that lease payments for each year will increase on the basis of the increase in
the CPI for the preceding year. At the commencement date, the CPI for the
previous year is 120 and the lease liability is 655 based on annual payments of
155. Assume that initial direct costs are zero and there are no lease incentives,
prepayments or restoration costs. Y records the following entries for Year 1.
Debit Credit
Right-of-use asset 655
Lease liability 655
To recognise lease at commencement date
Depreciation 131
Interest expense (655 x 5.9%) 39
Lease liability (155 - 39) 116
Cash (payment for Year 1) 155
To recognise payment and expenses for Year 1
At the end of Year 1, the CPI increases to 125. Y calculates the revised
payments for Year 2 and beyond adjusted for the change in CPI as 161 (155 x
125 / 120). Because the lease payments are variable payments that depend on
an index, Y adjusts the lease liability to reflect the change. The adjustment is
calculated as the difference between the original lease payments (155) and the
reassessed payment (161) over the remaining four-year lease term, discounted
at the original discount rate of 5.9% (21).
Debit Credit
Lease liability 21
To recognise remeasurement
Remeasurements of variable lease payments that depend on an index and

relate to future periods are reflected in the carrying amount of the right-of-use
asset (see 4.5).
4 Lessee accounting
KPMG insight – Reassessment is a significant difference from

current lease accounting
The reassessment of key judgements – e.g. the lease term – at each reporting
date is a significant change from IAS 17. It is no longer possible for companies to
compute a lease amortisation schedule on lease commencement and roll that
schedule forward at each reporting date. Instead, companies need to reassess
key judgements and consider the need to remeasure lease balances each time
they report.
Remeasurements during the lease term provide more up-to-date information
to users of financial statements. However, they also introduce new volatility
in reported assets and liabilities, which may impact the ability to accurately
predict and forecast future financial performance. Additional resources will be
focused on lease accounting not only at lease commencement, but also at each
reporting date.
Significant judgement is likely to be needed in determining whether there is
a change in relevant factors or a change in the lessee’s economic incentive to
exercise or not to exercise renewal or termination options. Additionally, it is
unclear how – in practice – an entity would ignore changes in market-based
factors (e.g. market rates) when performing a reassessment of the lease term.
The company’s reassessment of key judgements may, in some cases, have a
significant impact on the lease amounts recognised in the statement of financial
position and the statement of profit or loss and other comprehensive income.
4.5 Subsequent measurement of the right-of-use

asset
4.5.1 Measurement basis
IFRS 16.29–30 Generally, a lessee measures right-of-use assets at cost less accumulated
depreciation (see 4.5.2) and accumulated impairment losses (see 4.5.3).
IFRS 16.30(b), 38(b), 39 Lessees adjust the carrying amount of the right-of-use asset for remeasurement of
the lease liability (see 4.4.2), unless the carrying amount has already been reduced
to zero or the change in the lease liability relates to a variable lease payment that
does not depend on an index or rate.
IFRS 16.34–35 A lessee applies alternative measurement bases in two circumstances:
– if the right-of-use asset meets the definition of investment property, then the
lessee measures the right-of-use asset in accordance with its accounting policy
for other investment properties, which may be at fair value (see 6.3); and
– if a lessee applies the revaluation model to a class of property, plant and
equipment, then it may apply the revaluation model to all right-of-use assets
that belong to the same class.
Changes in carrying amount of lease liability due to:
Reassessment of Reassessment of variable

lease payments depending Variable lease
lease term,
on an index or rate payments not
purchase option
depending on
and residual value
Relates to Relates to an index or rate
guarantee
future periods current period
Adjust right-of-use asset* Recognise in profit or loss
* If the carrying amount of the right-of-use asset is reduced to zero, then any further reductions
are recognised in profit or loss.
KPMG insight – Subsequent measurement is always at cost if the

underlying asset is an intangible
The revaluation model can only be applied to right-of-use assets for which the
underlying asset is tangible. It will not be applicable if the underlying asset is
an intangible for which a lessee voluntarily applied the leases requirements.
However, this will only have a limited impact in practice because most intangible
assets do not qualify for the revaluation model.
4.5.2 Depreciation of the right-of-use asset

IFRS 16.31, IAS 16.60 Lessees depreciate right-of-use assets in accordance with the requirements of
IAS 16 – i.e. the depreciation method reflects the pattern in which the future
economic benefits of the right-of-use asset are consumed. This will often result in
a straight-line depreciation charge.
IFRS 16.32 Depreciation starts at the commencement date of the lease. The period over which
the asset is depreciated is determined as follows:
– if ownership of the underlying asset is transferred to the lessee, or the lessee
is reasonably certain to exercise a purchase option, then the depreciation period
runs to the end of the useful life of the underlying asset; otherwise
– the depreciation period runs to the earlier of the end of the useful life of the
right-of-use asset or the end of the lease term.
Example 17 – Depreciation period
Lessee X enters into a non-cancellable, non-renewable five-year lease with

Lessor L for a machine that will be used in X’s manufacturing process. The
useful life of the underlying machine is 10 years and ownership remains with L.
X depreciates the right-of-use asset beginning at the commencement date
over a period of five years, because it intends to use the machine for the entire
lease term.
4 Lessee accounting
KPMG insight – Applying the component approach
IFRS 16.31, IAS 16.43 Although IFRS 16 does not specify whether a right-of-use asset is a tangible
or intangible asset, it does specify that a lessee applies the depreciation
requirements in IAS 16 and therefore identifies separate components for the
purposes of depreciation. This could be an important practical consideration for
lessees that currently lease big-ticket items under operating leases and adopt
a component approach to maintenance accounting – e.g. major maintenance
checks in some aircraft leases.
KPMG insight – Total lease expense is front-loaded
Lessees will generally depreciate the right-of-use asset on a straight-line basis

and measure the lease liability at amortised cost using the effective interest
method. As a result, the total lease expense will generally be front-loaded. The
front-loaded effect arises from the combination of straight-line depreciation
coupled with a declining interest expense as the lease liability is drawn down
over the lease term. This front-loaded expense profile is typical of current
finance lease accounting.
The front-loaded expense pattern may average out across a portfolio of leases in
a large, stable business. However, there may be significant effects in aggregate
for a growing business, or a business that is undertaking a major refresh of its
portfolio of leased assets – e.g. an airline that is introducing a new model of
aircraft across its fleet.
4.5.3 Impairment of the right-of-use asset

IFRS 16.33, IAS 36.63 Lessees apply IAS 36 Impairment of Assets to determine whether a right-of-
use asset is impaired and to account for any impairment. After recognition of an
impairment loss, the future depreciation charges for the right-of-use asset are
adjusted to reflect the revised carrying amount.
Example 18 – Impairment of a right-of-use asset
Lessee Y leases a machine for its manufacturing process over a non-cancellable

10-year period. The initial carrying amount of the right-of-use asset is 1,000,
which is subsequently measured at cost and depreciated on a straight-line basis
over a period of 10 years – i.e. the depreciation charge per year amounts to 100.
At the end of Year 5, the cash-generating unit that includes the right-of-use asset
is impaired. An impairment charge of 200 is allocated to the right-of-use asset.
Immediately before the impairment, the carrying amount of the right-of-use
asset is 500. Following the impairment, the carrying amount is reduced to 300
and the future depreciation charges are reduced to 60 (300 / 5) per year.
KPMG insight – Impairment testing replaces onerous leases
In effect, the impairment test replaces the current requirement to assess

whether an operating lease is onerous. Because a lessee now recognises a
lease liability for its obligation to make lease payments, there is no additional
provision to recognise. Instead, the lessee assesses the right-of-use asset
for impairment.
Impairment testing may increase the financial reporting burden for lessees.
Operating leases are currently assessed to determine whether they have
become onerous, but not tested for impairment. Applying the impairment test
requirements may be more complex, particularly for right-of-use assets that are
not part of a larger cash-generating unit.
4.6 Presentation
IFRS 16.47–50 Lessees present leases in their financial statements as follows.
Statement of financial Statement of profit Statement of cash

position or loss and other flows
comprehensive income
Right-of-use asset Lease expenses Operating activities

– Separate presentation – Separate presentation – Variable lease
in the statement of of interest expense on payments not included
financial position* the lease liability from in the lease liability
or disclosure in the depreciation of the
– Payments for short-
notes to the financial right-of-use asset
term and low-value
statements
– Presentation of leases (subject to
interest expenses use of recognition
Lease liability
as a component of exemption)
– Separate presentation finance costs
in the statement of Financing activities
financial position or
– Cash payments for
disclosure in the notes
principal portion of
lease liability
Depending on
‘general’ allocation
– Cash payments for
the interest portion
are classified in
accordance with other
interest paid
* Right-of-use assets that meet the definition of investment property are presented within
investment property.
4 Lessee accounting
KPMG insight – More detailed presentation requirements
In general, the presentation requirements are more detailed than under IAS 17
– especially in respect of the presentation in the statement of cash flows. This
may represent a change in practice for many companies.
KPMG insight – EBITDA will increase
For most leases, expenses are presented as depreciation and interest expense
– except for variable payments that are expensed as they are incurred. As a
result, the lessee’s EBITDA will increase.
Summary of impact on key financial ratios
Profit or loss Balance sheet Ratios
EBITDA Total assets Gearing
EPS Net assets Interest cover

(in early years) Asset turnover
5 Lessor accounting
Lessor accounting remains similar to current requirements,
though some details change.
IFRS 16.61–62 A lessor classifies a lease as either a finance lease or an operating lease,
as follows:
– leases that transfer substantially all of the risks and rewards incidental to
ownership of the underlying asset are finance leases; and
– all other leases are operating leases.
The lease classification test is essentially unchanged from IAS 17.
Example 19 – Lease classification
Lessor L enters into a non-cancellable lease contract with Company X under

which X leases non-specialised equipment for five years. The economic life of
the equipment is estimated to be 15 years and legal title will remain with L.
The lease contract contains no purchase, renewal or early termination options.
The fair value of the equipment is 100,000 and the present value of the lease
payments amounts to 50,000.
In assessing the classification of the lease, L notes that:
– the lease does not transfer ownership of the equipment to X;
– X has no option to purchase the equipment;
– the lease term is for one-third of the economic life of the equipment, which is
less than the major part of the economic life;
– the present value of the lease payments amounts to 50% of the fair value of
the equipment, which is less than substantially all of the fair value; and
– the equipment is not specialised.
L notes that there are no indicators that the lease is a finance lease and that,
based on an overall evaluation of the arrangement, the lease does not transfer
substantially all of the risks and rewards incidental to the ownership of the
equipment to X.
Therefore, L classifies the lease as an operating lease.
5 Lessor accounting
The lessor accounting models are also essentially unchanged from IAS 17.
Finance lease Operating lease
Statement of financial position
IFRS 16.67, 83, 88 – Derecognise the underlying asset – Continue to present the underlying
asset
– Recognise a finance lease
receivable – Add any initial direct costs incurred
in connection with obtaining the
lease to the carrying amount of the
underlying asset
Statement of profit or loss
IFRS 16.71, 74–75, 81–82 – Recognise finance income on the – Recognise lease income over the
receivable based on the effective lease term, typically on a straight-
interest method line basis
In addition, manufacturer or dealer – Expense costs related to the
lessors recognise for finance leases: underlying asset – e.g. depreciation
– revenue based on the lower of the
fair value of the underlying asset
and the present value of the lease
payments
– cost of sales based on cost or
carrying amount of the underlying
asset, less the present value of any
unguaranteed residual value
– costs incurred in connection with
obtaining the lease as an expense
IFRS 16.67, 70, A A lessor initially measures a finance lease receivable at the present value of the
future lease payments plus any unguaranteed residual value accruing to the lessor.
The lessor discounts these amounts using the rate implicit in the lease.
A lessor includes the following lease payments in the measurement of the finance
lease receivable:
– fixed payments (including in-substance fixed payments), less lease incentives
payable;
– variable payments that depend on an index or rate;
– residual value guarantees provided to the lessor at the guaranteed amount;
– the exercise price of purchase options if the lessee is reasonably certain to
exercise; and
– termination penalties payable in accordance with the expected lease term.
KPMG insight – Limited impact on lessors
IFRS 16.BC289–BC290 The IASB’s stated aim has been to minimise changes to lessor accounting.
Much of the guidance in IFRS 16 on lessor accounting is a direct ‘cut and paste’
from IAS 17. This reflects feedback from users and other stakeholders that lessor
accounting is ‘not broken’.
However, there are a number of changes in the details of lessor accounting. For
example, lessors apply the new:
– definition of a lease (see Section 3);
– sale-and-leaseback guidance (see 6.1);
– sub-lease guidance (see 6.2); and
– disclosure requirements (see 7.3).
In addition, IFRS 16 includes specific guidance on accounting for lease
modifications by lessors (see 6.4.2 and 6.4.3).
KPMG insight – Lessor and lessee models are inconsistent
A key consequence of the decision to retain the IAS 17 dual accounting model
for lessors is a lack of consistency with the new lessee accounting model. This
can be seen in Example 19 above:
– the lessee applies the right-of-use model and recognises a right-of-use asset
and a liability for its obligation to make lease payments; whereas
– the lessor continues to recognise the underlying asset and does not
recognise a financial asset for its right to receive lease payments.
There are also more detailed differences. For example, lessees and lessors
use the same guidance for determining the lease term and assessing whether
purchase options are reasonably certain to be exercised. However, unlike
lessees, lessors do not reassess their initial assessments of lease term and
purchase options.
The IASB has noted that most constituents did not consider symmetry between
lessee and lessor accounting to be a high priority. The inconsistencies noted
above were acknowledged by the IASB as it finalised the standard. The risk is
that these inconsistencies may give rise to structuring opportunities in more
complex arrangements.
6 Other lease topics

The standard includes specific guidance on other lease accounting
topics that is generally more detailed and prescriptive than existing
requirements.
6.1 Sale-and-leaseback transactions

IFRS 16.98–103 In a sale-and-leaseback transaction, a company (the seller-lessee) transfers an
underlying asset to another company (the buyer-lessor) and leases that asset back
from the buyer-lessor.
To determine how to account for a sale-and-leaseback transaction, a company first
considers whether the initial transfer of the underlying asset from the seller-lessee
to the buyer-lessor is a sale. The company applies IFRS 15 to determine whether
a sale has taken place. This assessment determines the accounting by both the
seller-lessee and the buyer-lessor, as follows.
Lessee (seller) Lessor (buyer)
Transfer to – Derecognise the – Recognise the underlying

buyer-lessor is underlying asset and apply asset and apply the lessor
a sale the lessee accounting accounting model to the
model to the leaseback* leaseback*
– Measure the ROU asset at
the retained portion of the
previous carrying amount
(i.e. at cost)*
– Recognise a gain or loss
related to the rights
transferred to the lessor*
Transfer to – Continue to recognise the – Do not recognise the

buyer-lessor is underlying asset underlying asset
not a sale
– Recognise a financial – Recognise a financial
liability under IFRS 9 for asset under IFRS 9 for any
any amount received from amount paid to the seller-
the buyer-lessor lessee
* Adjustments are required if the sale is not at fair value or lease payments are off-market.
Example 20 – Sale-and-leaseback transaction when transfer is a

sale: Lessee perspective
IFRS 16.IE11 Company C sells an office building to Company D for cash of 2,000,000.
Immediately before the transaction, the building is carried at a cost of 1,000,000.
At the same time, C enters into a contract with D for the right to use the building
for 18 years with annual payments of 120,000 payable at the end of each year.
The transfer of the office building qualifies as a sale under IFRS 15. The fair value
of the office building on the date of sale is 1,800,000. Because the consideration
for the sale of the office building is not at fair value, C and D make adjustments
to recognise the transaction at fair value. The amount of the excess sale price of
200,000 (2,000,000 - 1,800,000) is recognised as additional financing provided
by D to C. The incremental borrowing rate of the lessee is 4.5% per annum.
The present value of the annual payments is 1,459,200, of which 200,000
relates to the additional financing and 1,259,200 relates to the lease.
C recognises the transaction as follows.
– C measures the right-of-use asset retained through the leaseback of the
office building as a proportion of its previous carrying amount, which is
699,556 (1,259,200 / 1,800,000 x 1,000,000).
– C recognises only the portion of the gain on sale that relates to the rights
transferred to D, which is 240,356. The total gain on sale of the building
amounts to 800,000 (1,800,000 - 1,000,000), of which:
- 559,644 (1,259,200 / 1,800,000 x 800,000) relates to the right to use the
office building retained by C; and
- 240,356 ((1,800,000 - 1,259,200) / 1,800,000 x 800,000) relates to the
rights transferred to D.
– At the commencement date, C makes the following entries.
Debit Credit
Cash 2,000,000 Building 1,000,000
ROU asset 699,556 Financial liability 1,459,200
Gain on sale-
and-leaseback 240,356
KPMG insight – IFRS 16 kills sale-and-leaseback as an off-balance

sheet financing proposition
Accounting for sale-and-leaseback transactions is – and remains – a complex

area. However, one thing remains clear: IFRS 16 largely eliminates sale-and-
leaseback transactions as a potential source of off-balance sheet finance. Under
the new standard, a seller-lessee always recognises a sale-and-leaseback
transaction on-balance sheet unless the leaseback is short or the underlying
asset is of low value.
IFRS 16 introduces new guidance on off-market terms that helps companies
to identify when a transaction is deemed to be off-market, and clarifies the
appropriate accounting treatment when the terms are above-market or
below-market. A company has to maximise the use of observable prices
and information to determine which measure is the most appropriate to use
when assessing whether terms are off-market. This may require significant
judgement, especially when the underlying asset is specialised.
KPMG insight – Sale-and-leaseback guidance is different from

US GAAP
There are a number of significant differences between the guidance on sale-

and-leaseback transactions under the IFRS and US GAAP versions of the
standard, as follows.
– Assessing whether the transfer is a sale: Under IFRS, the seller-lessee
does not recognise a sale of the underlying asset if it has a substantive
repurchase option, regardless of the exercise price of the option. Under
US GAAP, the seller-lessee may recognise a sale of the underlying asset if
it has a substantive repurchase option but the exercise price is fair value on
exercise and the underlying asset is readily available and non-specialised.
– Accounting for the leaseback: Under IFRS, the seller-lessee applies the
single lessee model to the leaseback. Under US GAAP, the seller-lessee
classifies the leaseback as either a finance lease or an operating lease, and
recognises no gain on sale if it classifies the leaseback as a finance lease.
– Gain recognition: Under IFRS, the seller-lessee restricts the gain that
it recognises on the sale to the amount that relates to the portion of the
underlying asset that has been transferred – i.e. to the buyer-lessor’s residual
interest in the underlying asset. Under US GAAP, the seller-lessee recognises
the full gain on disposal – i.e. including the amount of the gain that relates to
the portion of the underlying asset retained through the leaseback.
6.2 Sub-leases
IFRS 16.3, A A sub-lease is a transaction in which a lessee (or ‘intermediate lessor’) grants a
right to use the underlying asset to a third party, and the lease (or ‘head lease’)
between the original lessor and lessee remains in effect.
A company applies IFRS 16 to all leases of right-of-use assets in a sub-lease.
The intermediate lessor accounts for the head lease and the sub-lease as two
different contracts.
Head lessor
Original lessee/intermediate lessor
Sub-lessee

IFRS 16.B58 An intermediate lessor classifies the sub-lease as a finance lease or as an

operating lease with reference to the right-of-use asset arising from the head
lease. That is, the intermediate lessor treats the right-of-use asset as the
underlying asset in the sub-lease, not the item of property, plant or equipment that
it leases from the head lessor.
IFRS 16.68 At the commencement date of the sub-lease, if the intermediate lessor cannot
readily determine the rate implicit in the sub-lease, then it uses the discount rate
that it uses for the head lease to account for the sub-lease, adjusted for any initial
direct costs associated with the sub-lease.
However, if the head lease is a short-term lease for which the company, as
a lessee, has elected the short-term lease exemption (see 3.6), then as an
intermediate lessor the company classifies the sub-lease as an operating lease.
Example 21 – Sub-lease classified as a finance lease with reference

to the ROU asset in the head lease
IFRS 16.IE6 Head lease: Intermediate lessor L enters into a five-year lease for 5,000m2 of
office space (the head lease) with Company M (the head lessor).
Sub-lease: At the beginning of Year 3, L sub-leases the 5,000m2 of office space
for the remaining three years of the head lease to Sub-lessee N.
L classifies the sub-lease with reference to the right-of-use asset arising from
the head lease. Because the sub-lease is for the whole of the remaining term
of the head lease – i.e. the sub-lease is for the major part of the useful life of the
right-of-use asset – L classifies it as a finance lease.
At the commencement date of the sub-lease, L:

– derecognises the right-of-use asset relating to the head lease that it transfers
to N and recognises the net investment in the sub-lease;
– recognises any difference between the carrying amounts of the right-of-use
asset and the net investment in the sub-lease in profit or loss; and
– continues to recognise the lease liability relating to the head lease, which
represents the lease payments owed to the head lessor.
During the term of the sub-lease, L recognises both interest income on the sub-
lease and interest expense on the head lease.
KPMG insight – Difference from US GAAP
Under IFRS 16, an intermediate lessor determines the classification of the

sub-lease with reference to the right-of-use asset arising from the head lease.
Therefore, a ‘head-lessor’ might account for a head lease as an operating lease,
but an intermediate lessor entering into a sub-lease on largely back-to-back
terms might account for the sub-lease as a finance lease.
Under US GAAP, sub-lease classification is based on the underlying asset.
This means that more sub-leases will be classified as operating leases by
intermediate lessors applying US GAAP.
6.3 Investment property

IAS 40.2, 30, IFRS 16.48, 56 A company applies IAS 40 Investment Property to account for a right-of-
use asset if the underlying asset would otherwise meet the definition of
investment property.
In accordance with IAS 40, a company chooses as its accounting policy either
the fair value model or the cost model for measuring its investment property.
The company applies the policy to all of its investment property – i.e. it applies
the same policy to owned and leased investment property. However, in either
case the company complies with the disclosure requirement of IAS 40 – including
disclosures of the fair value of the investment property.
KPMG insight – Leased investment property is common in some

jurisdictions
This is important new guidance for investment property companies that hold
leasehold interests, as is common in the UK, Hong Kong and elsewhere. There
are two key differences.
– The election becomes a requirement: Previously, a company could elect
on a property-by-property basis to recognise investment property held under
an operating lease on-balance sheet. Now, all leasehold property will be on-
balance sheet, and treated as investment property if the definition is met.
– There is a choice of valuation basis: Previously, if a company elected
to recognise investment property held under an operating lease on-
balance sheet, then it was required to apply the fair value model to all of its
investment property. Now, an entity has a free choice over whether to apply
the cost or fair value model to its investment property.
This new guidance may also affect companies that do not think of themselves
as investment property companies. For example, a company that is managing a
portfolio of leasehold properties following a restructuring or change in business
model – e.g. a retailer or bank that has reduced its number of stores/branches
as its business moves online – will need to assess whether each property
meets the definition of investment property. If so, then the company will be
required to prepare a valuation of the property, either for inclusion in its balance
sheet or for disclosure, depending on its accounting policy choice.
6.4 Lease modifications

IFRS 16.A A lease modification is 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 – e.g.
adding or terminating the right to use one or more underlying assets.
6.4.1 Lessee
IFRS 16.44–46 A lessee accounts for a lease modification as a separate lease if both of the
following conditions exist:
– the modification increases the scope of the lease by adding the right to use one
or more underlying assets; and
– the consideration for the lease increases by an amount equivalent to the stand-
alone price for the increase in scope and any appropriate adjustments to that
stand-alone price to reflect the circumstances of the particular contract.
For a lease modification that is not a separate lease, at the effective date of the
modification, the lessee accounts for the lease modification by remeasuring the
lease liability using a discount rate determined at that date and:
– for lease modifications that decrease the scope of the lease, the lessee
decreases the carrying amount of the right-of-use asset to reflect the partial
or full termination of the lease, and recognises a gain or loss that reflects the
proportionate decrease in scope; and
– for all other lease modifications, the lessee makes a corresponding adjustment
to the right-of-use asset.
Change to the contractual terms and conditions

(excludes exercise of option included in original lease contract)
Increase in scope of lease by

All other lease Decrease the
adding the ROU for one or more
modifications scope
underlying assets
At stand-alone Not at
price for increase stand-alone price
Adjust ROU/
Separate lease Adjust ROU asset
gain or loss

6.4.2 Lessor – Modifications to a finance lease

IFRS 16.79–80 A lessor accounts for a modification to a finance lease as a separate lease if both
of the following conditions exist:
– the modification increases the scope of the lease by adding the right to use one
or more underlying assets; and
– the consideration for the lease increases by an amount commensurate with the
stand-alone price for the increase in scope and any appropriate adjustments to
that stand-alone price to reflect the circumstances of the particular contract.
If the modification is not a separate lease, then the lessor accounts for a
modification to a finance lease as follows:
– if the lease would have been classified as an operating lease if the modification
had been in effect at the inception date, then the lessor:
- accounts for the lease modification as a new lease from the effective date of
the modification; and
- measures the carrying amount of the underlying asset as the net investment
in the original lease immediately before the effective date of the lease
modification; or otherwise
– applies the requirements of IFRS 9.
6.4.3 Lessor – Modifications to an operating lease

IFRS 16.87 A lessor accounts for a modification to an operating lease as a new lease from
the effective date of the modification, considering any prepaid or accrued lease
payments relating to the original lease as part of the lease payments for the
new lease.
Change to the contractual terms and conditions

(excludes exercise of option included in original lease contract)
Increase in scope of lease

by adding the ROU for one All other contract modifications
or more underlying assets
At stand-alone Operating lease Finance lease

price for increase (at inception) (at inception)
Separate lease Apply IFRS 9

KPMG insight – More specific guidance than at present
Many companies will welcome the introduction – for the first time in IFRS –
of detailed guidance on accounting for lease modifications. This has been a
significant practice issue for some years, with lease modifications becoming
common in changing economic circumstances.
7 Disclosures
7 Disclosures
The new standard increases the disclosure burden for lessees
and lessors.
7.1 General disclosure objective

IFRS 16.51, 89 Lessees and lessors disclose information that provides a basis for users of
financial statements to assess the effects that leases have on financial position,
financial performance and cash flows.
KPMG insight – Lessees and lessors focus on the disclosure

objective, not on a fixed checklist
IFRS 16.BC215–BC216 The IASB aims to improve the interpretation and implementation of the
disclosure requirements by including a general disclosure objective. This is
intended to be a benchmark for lessees and lessors to assess whether the
overall quality and informational value of their lease disclosures are sufficient.
Lessees and lessors also apply the concept of materiality to determine what
should be disclosed. Therefore, it appears that the necessary disclosures
could be less or more than what is listed in IFRS 16, depending on the
individual situation. This is in line with the IASB’s overall approach for its
disclosure initiative.
IFRS 16.59, 92, B48–B52 IFRS 16 contains specific considerations for lessees to determine whether
additional quantitative and qualitative information should be disclosed and lists
various examples of such additional useful disclosures. Similar considerations
apply to lessors. However, the guidance in IFRS 16 on additional disclosures for
lessors is limited compared with that for lessees.
7.2 Disclosures for lessees

Normally, a lessee discloses at least the following information.
Quantitative information
IFRS 16.47, 53, 58 Relating to the statement of financial position

– Additions to right-of-use assets
– Year-end carrying amount of right-of-use assets by class of underlying asset
and (if they are not presented separately) the corresponding line items in the
statement of financial position
– Lease liabilities and the corresponding line items in the statement of financial
position if lease liabilities are not presented separately
– Maturity analysis for lease liabilities
IFRS 16.53–54 Relating to the statement of profit or loss and other comprehensive
income (including amounts capitalised as part of the cost of another
asset)
– Depreciation charge for right-of-use assets by class of underlying asset
– Interest expense on lease liabilities
– Expense relating to short-term leases for which the recognition exemption is
applied (leases with a lease term of up to one month can be excluded)
– Expense relating to leases of low-value items for which the recognition
exemption is applied
– Expense relating to variable lease payments not included in lease liabilities
– Income from sub-leasing right-of-use assets
– Gains or losses arising from sale-and-leaseback transactions
IFRS 16.53 Relating to the statement of cash flows

– Total cash outflow for leases
IFRS 16.55 Other

– Amount of short-term lease commitments if current short-term lease expense
is not representative for the following year
Qualitative disclosures
IFRS 16.58, 60 – Description of how liquidity risk related to lease liabilities is managed
– Use of exemption for short-term and/or low-value item leases
7 Disclosures
Additional disclosures (when applicable)
IFRS 16.56–57 – Disclosures required by IAS 40 for right-of-use assets qualifying as investment
property
– If the revaluation model of IAS 16 is applied for right-of-use assets, then:
- Effective date of revaluation
- Whether an independent valuer was involved
- Carrying amount that would have been recognised under the cost model
- Revaluation surplus, change for the period and any distribution restrictions
KPMG insight – More extensive disclosures for lessees
Generally, lessees have to provide more extensive disclosures than those

for finance leases under IAS 17. In addition, lessees need to assess whether
additional information is necessary to meet the overall objective. Therefore,
more effort and judgement will be needed in the preparation of disclosures.
Users are likely to welcome the new disclosures, because they provide a basis
for additional analysis.
Preparers are likely to be less impressed. The extent of the disclosure
requirements suggests that the IASB does not expect users to rely solely on the
quantification of the lease liability that will be included in the balance sheet.
7.3 Disclosures for lessors

Normally, a lessor discloses at least the following information.
Quantitative information
IFRS 16.90, 93–97 – Selling profit or loss – Lease income relating to variable
lease payments that do not depend
– Finance income on the net
on an index or rate
investment in the lease
– Other lease income
– Lease income relating to variable
lease payments not included in the – Detailed maturity analysis of the
net investment in the lease lease payments receivable
Quantitative information (continued)
– Significant changes in the carrying – If applicable, disclosures in

amount of the net investment in accordance with IAS 16 (separately
the lease from other assets), IAS 36, IAS 38,
IAS 40 and IAS 41 Agriculture
– Detailed maturity analysis of the
lease payments receivable
Qualitative information
IFRS 16.93 – Significant changes in the carrying – N/A

amount of the net investment in
the lease
IFRS 16.92 A lessor also discloses quantitative and qualitative information about its leasing
activities, such as:
– the nature of its leasing activities; and
– how it manages risks associated with rights that it retains in underlying assets.
KPMG insight – More disclosures for lessors
Generally, lessors are asked to provide more disclosures for finance and
operating leases than under IAS 17. They also need to assess whether additional
information is necessary to meet the overall objective. As a result, more effort
and judgement will be needed in the preparation of disclosures. However,
compared with the disclosure requirements for lessees, lessors need to
disclose much less.
8 Effective date and transition

The IASB proposes two approaches, which are described below.
Application of either of these approaches is optional.
8.1 Effective date

IFRS 16.C1 The new standard is effective for annual reporting periods beginning on or after
1 January 2019.
Early adoption is permitted for companies that also adopt IFRS 15.
KPMG insight – 2019 effective date reflects outreach with preparers
The IASB staff conducted outreach on the effective date and found that a
majority of companies:
– considered that they would need two to three years to implement the new
standard following publication – though some argued for an effective date as
late as 2020 or 2021; and
– would prefer to adopt the new leases standard after IFRS 15, though some
wanted the option to adopt both standards at the same time.
In contrast, users of financial statements generally wanted companies to apply
the IASB’s new standards on financial instruments, leases and revenue at the
same time – i.e. from 2018.
Many companies will be pleased that the IASB has been influenced more
by feedback from preparers than from users. However, it is clear that the
closing years of this decade will see a period of major accounting change for
companies. The IASB’s new financial instruments and revenue standards will
take effect in 2018, followed by leases one year later.
KPMG insight – Early adoption may bring benefits, but at a cost
The possibility of adopting IFRS 16 at the same time as IFRS 15 may be

attractive to some. For example, lessors who offer multiple-component
contracts may prefer not to restate the same contract once in 2018 for the new
revenue and financial instruments standards, and again in 2019 for the new
leases standard. Other companies may simply prefer to adopt the three major
standards together, to avoid disruption and maintain clearer trend information in
future years.
However, companies may face capacity constraints in their finance and
accounting policy functions during such a major period of accounting change.
For practical reasons, they may prefer to spread the implementation effort.
8.2 Lease definition on transition

IFRS 16.C3 On transition to IFRS 16, companies can choose whether to:
– apply the new definition of a lease to all of their contracts; or
– apply a practical expedient to ‘grandfather’ their previous assessment of which
existing contracts are, or contain, leases.
A company that chooses to take advantage of the practical expedient:
– applies IFRS 16 to leases previously identified in accordance with IAS 17 and
IFRIC 4 Determining whether an Arrangement contains a Lease;
– does not apply IFRS 16 to contracts previously identified as not containing
leases in accordance with IAS 17 and IFRIC 4; and
– applies the IFRS 16 definition of a lease to assess whether contracts
entered into after the date of initial application of the new standard are, or
contain, leases.
IFRS 16.C2 The date of initial application is the beginning of the annual reporting period in
which a company first applies the standard.
IFRS 16.C4 If it is chosen, the practical expedient applies to all contracts entered into before
the date of initial application, and the requirements of IFRS 16 apply to contracts
entered into (or modified) on or after the date of initial application.
KPMG insight – Practical expedient to grandfather the definition of

a lease on transition offers considerable relief on transition
The practical expedient to grandfather the definition of a lease on transition

offers considerable relief on transition. Without this relief, companies would
be required to reassess all of their previous decisions about which existing
contracts do and do not contain leases. The practical expedient is therefore
likely to prove popular.
Cost Comparability
Apply the new definition to

all contracts
or
Grandfather existing contracts

and apply the new definition
only to new contracts
However, it will not be adopted by all companies. For example, a company that
is a purchaser under a power purchase agreement that is an operating lease
under current requirements but not a lease under IFRS 16 may prefer to apply
the new definition of a lease, rather than bring the power purchase agreement
on-balance sheet.
Companies that are party to such agreements will want to evaluate carefully
whether to apply the new transition relief, balancing:
– the cost savings that would arise if they take the transition relief; against
– the need to apply the new lease accounting model to arrangements that
would fall outside lease accounting under the new definition.
Other considerations will include the number, size and duration of such
agreements – and the extent of the lack of consistency in accounting for
agreements entered into before and after the date from which the company
applies IFRS 16.
8.3 Lessee approach to transition

IFRS 16.C5 A lessee is permitted to:
– adopt the standard retrospectively; or
– follow a modified retrospective approach.
IFRS 16.C6 A lessee applies the election consistently to all of its leases.
8.3.1 Modified retrospective approach – Measurement

IFRS 16.C7 If a lessee elects to apply IFRS 16 using the modified retrospective approach, then
it does not restate comparative information. Instead, the lessee recognises the
cumulative effect of initially applying the standard as an adjustment to equity at the
date of initial application.
IFRS 16.C8–C11 The modified retrospective approach is applied as follows.
Modified retrospective approach
Operating lease Finance lease
ROU asset1,2 Lease liability ROU asset Lease liability

As if IFRS 16 Present value Previous carrying Previous carrying
had always of remaining amount of amount of
been applied lease payments finance lease finance lease
OR asset liability
Lease liability

1. Under the modified retrospective approach, a lessee chooses on a lease-by-lease basis how to
measure the ROU asset on transition to IFRS 16.
2. A lessee measures an ROU asset that will be accounted for as investment property using the
fair value model in IAS 40 from the date of initial application. A lessee is not required to make
any adjustments on transition for leases previously accounted for as investment property
using the fair value model in IAS 40.
IFRS 16.C8 A lessee is permitted to choose, on a lease-by-lease basis, how to measure the
right-of-use asset using one of two methods:
– as if IFRS 16 had always been applied (but using the incremental borrowing rate
at the date of initial application); or
– at an amount equal to the lease liability (subject to certain adjustments).
KPMG insights – Each transition method has pros and cons
The IASB decided not to require lessees to follow a full retrospective approach
because the costs of such an approach could be significant and might outweigh
the benefits.
A full retrospective approach requires companies to determine the carrying
amount of all leases in existence at the earliest comparative period as if those
leases had always been accounted for in accordance with IFRS 16. That could
be impracticable for companies that have thousands of leases. Because
comparative information is not restated under the modified retrospective
transition method, additional disclosure is required to help users of financial
statements understand the effect of applying IFRS 16 for the first time.
Conversely, a full retrospective approach would provide better information to
users of financial statements by increasing comparability. Some stakeholders
appear keen to apply the standard retrospectively.
A lessee can choose to apply Cost Comparability

the standard…
Retrospectively to all
accounting periods
or
As a ‘big bang’ at the date of

initial application
8.3.2 Modified retrospective approach – Practical expedients for

operating leases
IFRS 16.C10 When applying the modified retrospective approach to previous operating leases,
a lessee may use one or more of the following practical expedients on a lease-by-
lease basis.
– Apply a single discount rate to a portfolio of leases with reasonably similar
characteristics.
– Rely on a previous assessment of whether leases are onerous in accordance
with IAS 37 Provisions, Contingent Liabilities and Contingent Assets
immediately before the date of initial application as an alternative to performing
an impairment review.
– Account for leases for which the lease term ends within 12 months of the date
of initial application as short-term leases.
– Exclude initial direct costs from the measurement of the right-of-use asset at
the date of initial application.
– Use hindsight, such as in determining the lease term if the contract contains
options to extend or terminate the lease.
KPMG insights – A range of possible outcomes on transition
Applying IFRS 16 for the first time will be a time-consuming and costly process
for many companies. They will be required to gather key inputs for all leases,
especially for those currently classified as operating leases under IAS 17.
IFRS 16.BC287 The IASB has sought to reduce transition costs by introducing a series of
practical expedients. Some expedients are accounting policy choices, some
apply by class of underlying asset and some can be elected on a lease-by-
lease basis. Some companies will face a bewildering choice of combinations
and permutations.
In effect, most companies will find that they have a range of possible accounting
outcomes on transition. In addition to assessing the balance between cost
and comparability in deciding how to make the transition to the new standard,
companies may also wish to complete detailed modelling to understand what
their opening balance sheet would look like in each case.
8.4 Lessor approach to transition

IFRS 16.C14 Except for sub-leases and sale-and-leaseback transactions (see 8.5 and 8.6), a
lessor does not make any adjustments on transition. Instead, a lessor accounts for
its leases in accordance with IFRS 16 from the date of transition.
8.5 Sub-leases on transition

IFRS 16.C15 At the date of initial application, an intermediate lessor reassesses ongoing sub-
leases that were classified as operating leases under IAS 17 to determine whether
each sub-lease should be classified as an operating lease or a finance lease under
IFRS 16. This assessment is made on the basis of the remaining contractual terms
and conditions of the head lease and sub-lease.
For sub-leases classified as operating leases under IAS 17 but finance leases under
IFRS 16, a lessor accounts for the sub-lease as a new finance lease entered into at
KPMG insights – Many sub-leases may be reclassified on transition
Under IFRS 16, an intermediate lessor evaluates the classification of a sub-lease

with reference to the right-of-use asset associated with the head lease and not
with reference to the underlying asset. Consequently, many sub-leases that
were classified by an intermediate lessor as operating leases under IAS 17 will
be classified as finance leases under IFRS 16.
8.6 Sale-and-leaseback on transition

IFRS 16.C16 A seller-lessee does not reassess sale-and-leaseback transactions entered into
before the date of initial application to determine whether a sale occurred in
accordance with IFRS 15.
IFRS 16.C17 For a sale-and-leaseback transaction accounted for as a sale and finance lease in
accordance with IAS 17, the seller-lessee:
– accounts for the leaseback in the same way as for any finance lease that exists
at the date of initial application; and
– continues to amortise any gain on the sale over the lease term.
IFRS 16.C18 For a sale-and-leaseback transaction accounted for as a sale and operating lease in
accordance with IAS 17, the seller-lessee:
– accounts for the leaseback in the same way as for any other operating lease
that exists at the date of initial application; and
– adjusts the leaseback right-of-use asset for any deferred gains or losses that
relate to off-market terms recognised in the statement of financial position
immediately before the date of initial application.
KPMG insights – Transition relief for sale-and-leasebacks
The transition requirements for sale-and-leaseback transactions are consistent

with the general transition requirements for all leases. Consequently, a seller-
lessee is not required to perform retrospective accounting for the sale element
and accounts for the leaseback in the same way as for other leases existing at
A seller-lessee does not apply the partial gain recognition approach to sale-and-
leaseback transactions entered into before the date of initial application. This
decision will simplify transition for companies that have many such transactions
at the date of initial application.
9 Your next steps
9

Your next steps
Planning your implementation project will take time and care. However, it might be
worth asking yourself a few simple questions now – just to get a feel for the scale
of the challenge ahead…
Topic Questions and comments ✔

Lease Do you know which of your transactions are, or
definition contain, leases?
Will you elect to grandfather the lease definition for

existing contracts on transition?
– In many cases, lease definition will be obvious, and a

transaction that is a lease today will be a lease in 2019.
However, there are significant changes in lease definition that
will affect many common transactions – e.g. power purchase
agreements and transport agreements.
– There is also a big decision to be made on transition – will you
spend the time and cost necessary to reassess your existing
transactions and thereby exclude some existing transactions
from lease accounting, or grandfather existing arrangements
and apply the new definition only to new arrangements?
Lease data
Do you have a database of all of your leases?
Do you have the systems and processes necessary

to calculate lease assets and liabilities?
Are your current disclosures of operating lease

commitments complete and accurate?
– Some companies have databases that capture all of their lease

data – but this isn’t true for everyone. Now is the time to begin
to assess whether your current systems have the information
necessary to apply the new standard.
– The operating lease commitments note may not always be the
top priority in a busy reporting season. Now is the time to check
that it includes all of the leases that you will soon be bringing
on-balance sheet, so that there are no surprises on transition.

Debt Will application of the new standard impact your
covenants debt and other covenants?
– Many financial agreements feature covenants that are applied

on a ‘frozen GAAP’ basis – that is, a change in accounting policy
won’t affect the covenant test. But this isn’t true in all cases.
– Given the scale of accounting change – with new standards
on financial instruments, leases and revenue to be applied in
2018–19 – it’s time to double-check, to identify any covenants
that you may wish to renegotiate before the standard
becomes effective.
Sale-and- Do you understand the impact of the new standard

leaseback on your sale-and-leaseback transactions?
– Most companies and users know that the new leases

standard eliminates sale-and-leaseback as an off-balance
sheet proposition.
– But there’s more than one way in which a sale-and-leaseback
can come back on-balance sheet.
– If the transaction is a true sale under IFRS 15, then it comes
on-balance sheet like a current sale-and-finance leaseback – i.e.
with the liability measured at cost.
– If the transaction is not a sale under IFRS 15, then it comes on-
balance sheet as a financing under IFRS 9, which may require
ongoing remeasurement at fair value through profit or loss.
Financial Do you understand the impact of the new standard

ratios on your financial ratios, KPIs etc?
Will optional exemptions, such as those for short-

term leases and leases of low-value items, have a
material impact on your financial statements?
– Most companies and users know that the new standard brings
more leases on-balance sheet, increasing gearing etc.
– But what about other effects?
- Detailed modelling may be required to predict the impact
of the front-loaded total lease expense in moving from
operating lease accounting to the ROU model.
- The geography of the profit or loss account will change,
as operating lease expense is replaced by depreciation/
amortisation of the ROU asset and interest expense.
9 Your next steps

- Will you redefine non-GAAP measures such as EBITDA to
reflect the new lease model?
- How will you present variable lease payments?
- Do you know what impact the optional exemptions will have
on your KPIs? Have you decided which ones to elect?
Transition Have you thought about how to transition to the

options new standard?
– The new standard will offer a wide range of transition options,

featuring many practical expedients. One key question is
whether to apply the standard:
- retrospectively, which may require additional cost and effort
but will result in greater consistency in comparative periods; or
- as a ‘big bang’ on the date of initial application, which will
require less historical information but may impact your trend
data for many years to come.
Appendix: Comparison with

US GAAP
Key aspects of the IFRS and US GAAP versions of the new leases standard are
converged. Notably, both versions of the standard feature on-balance sheet lessee
accounting models. However, there are a number of differences between the IFRS
and US GAAP versions of the standards, including the following.
IFRS and US GAAP standards converged?
Lease Leases on-balance sheet Lessor

definition for lessees accounting
Lessee Detailed measurement Exemption for

accounting and transition low value
model requirements items

Lessee – Single lease accounting – Dual lease accounting

accounting model model
model
– No lease classification test – Lease classification
test based on IAS 17
classification criteria
- lessee recognises
an ROU asset and
lease liability - finance leases treated as
the purchase of an asset
- treated as the purchase
on a financed basis
of an asset on a financed
basis - operating leases
generally feature
straight-line recognition
of total lease expense
Lessor – The lessor requirements have substantially been brought

accounting forward from currently effective standards under IFRS
model and US GAAP. Consequently, there are a number of
differences between the new IFRS and US GAAP lessor
accounting requirements that reflect differences in
previous requirements
Appendix: Comparison with US GAAP
Lessor – No restriction on – Selling profit not recognised

accounting recognising selling profit on on commencement of
model commencement for finance leases that qualify for
(continued) leases finance lease classification
solely due to the
involvement of third parties
other than the lessee, even
if the carrying amount and
fair value of the underlying
asset are different
– N/A – leveraged lease – Existing leveraged leases

accounting does not exist will be grandfathered
under IFRS and exempt from the
new standard
Related party – There is no specific – Account for leases

leases guidance on accounting between related parties
for related party leasing based on their contractual
transactions terms, even if they differ
from the substance of the
arrangement
– Disclose lease transactions
between related parties
Practical – Optional lessee exemption – No exemption for leases of

expedients for leases of low-value low-value items
and targeted items – i.e. assets with
reliefs a value of USD 5,000 or
less when they are new
– even if they are material
in aggregate
Variable – Lessees reassess variable – Lessees reassess variable

lease lease payments based on lease payments based
payments an index or rate when: on an index or rate only
when lease payments
- Lease payments
are remeasured for
are remeasured for
other reasons (e.g. a
other reasons (e.g. a
reassessment due to a
reassessment due to a
change in the lease term)
change in the lease term)
- There is a contractual
change in the cash flows
(i.e. when an adjustment
to the lease payments
based on an index or rate
takes effect under the
terms of the lease)
Sale and – N/A – If the leaseback is a finance

leaseback lease, then no sale is
recognised
– Gain on sale (with market – Gain on sale (with market

terms) restricted to the terms) based on the entire
residual interest in the underlying asset
underlying asset
– Any substantive repurchase – A repurchase option

option precludes sale does not preclude sale
recognition (regardless of recognition if the exercise
exercise price) price is fair value on
exercise and the underlying
asset is readily available,
non-specialised equipment
Sub-leases – A sub-lessor considers the – A sub-lessor considers the

ROU asset to be the leased underlying asset to be the
asset in determining the leased asset in determining
classification of the sub- the classification of the sub-
lease lease
Discount rate – N/A: there is no concept of – Non-public business entity

non-public business entities lessees are permitted to
under IFRS elect as an accounting
policy to use a risk-free
discount rate
Effective – Accounting periods – Fiscal years beginning after

date beginning on or after 15 December 2018
1 January 2019
– Early adoption is permitted,
– Early adoption is permitted even before the adoption
if IFRS 15 is also adopted of the US version of the
revenue standard
Presentation, – There are a number of differences in the presentation,

disclosure disclosure and transition requirements. These are primarily
and a consequence of the differences between the lessee
transition accounting models, and differences between other
requirements of IFRS and US GAAP that affect leases – e.g.
differences in the general disclosure requirements applicable
to all financial liabilities.
About this publication
About this publication

This publication has been produced by the KPMG International Standards Group
(part of KPMG IFRG Limited).
Our First Impressions publications are prepared on the release of a new standard,
Content or amendment(s) to the requirements of existing standards. They include a
discussion of the key elements of the new standard and highlight areas that may
result in a change in practice.
This edition considers the requirements of IFRS 16 Leases published by the IASB in
January 2016.
The text of this publication refers to IFRS 16 and to selected other current standards
in issue at 1 January 2016.
Further analysis and interpretation will be needed for an entity to consider the
potential impact of the proposals in light of its own facts, circumstances and
individual transactions. The information contained in this publication is based on
initial observations developed by the KPMG International Standards Group and
these observations may change.
Acknowledgements We would like to acknowledge the efforts of the principal authors of this publication:
Almudena Cossío Capdevila, Sylvie Leger, Brian O’Donovan and Frank Richter of
the KPMG International Standards Group. We would like to thank the following
reviewers for their input: Kimber Bascom and Ramon Jubels.
We would also like to thank the members of KPMG’s global IFRS leases topic team
for their contribution:
Kimber Bascom (leader) US
Archana Bhutani India
Judit Boros Hungary
Una Curtis Ireland
Karine Dupre France
Ramon Jubels Brazil
Wolfgang Laubach Germany
Sylvie Leger Canada
Andrew Marshall UK
Genevieve Naik South Africa
Brian O’Donovan (deputy leader) UK
Julie Santoro US
Mag Stewart Canada
Kenny Tan Singapore
Beth Zhang China
Keeping you informed Visit kpmg.com/ifrs for the latest on IFRS.

Whether you are new to IFRS or a current user,
you can find digestible summaries of recent
developments, detailed guidance on complex
requirements, and practical tools such as illustrative
disclosures and checklists.
Helping you deal with IFRS today…
Insights into IFRS Guides to financial
CASH FLOWS
OPERATING SEGMENTS
GOING CONCERN
BUSINESS COMBINATIONS
OCI
UNCONSOLIDATED STRUCTURED ENTITIES FINANCIAL POSITION

DISCLOSURES
PERFORMANCE
STATEMENT
SIGNIFICANT PROPERTY ACQUISITION ASSUMPTIONS COMPARATIVE EQUITY

FINANCIAL POSITION SHARE-BASED PAYMENT EPS JOINT ARRANGEMENTS DISCLOSURES HELD-FOR-SALE PENSION
DISPOSAL
SUBSIDIARY
ASSETS
IFRS EQUITY
statements
OPERATING SEGMENTS
FAIR VALUE NON-CONTROLLING INTERESTS
PRESENTATION
ESTIMATES PROVISIONS
Helping you
DISCONTINUED OPERATIONS
LEASES
OFFSETTING JUDGEMENT
ACCOUNTING POLICIES
SHARE-BASED PAYMENT PERFORMANCE TRANSACTIONS
CARRYING AMOUNT SHARE-BASED PAYMENT
U P D AT E FINANCIAL INSTRUMENTS ACCOUNTING POLICIES
FINANCIAL POSITION CASH FLOWS
apply IFRS to real Illustrative IFRS

L OA N S B O R R O W I N G S
IMPAIRMENT FAIR PRESENTATION
ANNUAL
COST CONSOLIDATION
PENSION PROFIT OR LOSS IFRS
ASSUMPTIONS
2015
REVENUE
transactions and disclosures and
DISCONTINUED OPERATIONS DERIVATIVES
PRESENTATION GROUP
ASSOCIATE IFRS
FAIR VALUE NOTES
PROFIT OR LOSS
PRESENTATION
LIABILITIES CONSOLIDATION
GOODWILL ESTIMATES OFFSETTING OCI

JOINT ARRANGEMENTS
arrangements. checklists.
BUSINESS COMBINATIONS
CASH EQUIVALENTS FAIR VALUE MEASUREMENT ACCOUNTING POLICIES
CURRENT CONTINGENCY RELATED PARTY

TRANSACTIONS INTANGIBLE ASSETS
EPS INVENTORIES
GOING CONCERN PERFORMANCE OFFSETTING
PROFIT OR LOSS MATERIALITY
ACQUISITION TAX
CAPITAL COMPARATIVE VALUATION UPDATE
ASSETS MATERIALITY
CGU
NCI
PENSION
FAIR VALUE
Newly effective US GAAP

standards
… and prepare for IFRS tomorrow
IFRS news IFRS newsletters
IFRS for banks IFRS 15 for sectors
Keeping you informed
Major new and forthcoming standards
Revenue Financial
instruments
Leases Insurance contracts

(under development)
Amendments to existing standards
Business Presentation and

combinations and disclosures
consolidation
For access to an extensive range of accounting, auditing and financial reporting

guidance and literature, visit KPMG’s Accounting Research Online. This web-based
subscription service can be a valuable tool for anyone who wants to stay informed
in today’s dynamic environment. For a free 15-day trial, go to aro.kpmg.com and
register today.
kpmg.com/ifrs
Publication name: First Impressions: IFRS 16 Leases
Publication number: 133321
Publication date: January 2016
The KPMG name and logo are registered trademarks or trademarks of KPMG International.
KPMG International Standards Group is part of KPMG IFRG Limited.
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IFRS 16

Lessee – Single lease accounting – Dual lease accounting model

Lessor – Dual lease accounting model for lessors

Effective – Accounting periods – Fiscal years beginning after

1.2 Key impacts

Determine when to apply the standard

Apply the lease accounting models

Apply other relevant guidance

Prepare the necessary disclosures (Section 7)

Prepare for transition

Lessee obtains the No

Contract is or contains a lease

KPMG insight – Lease definition is the new on/off-balance sheet

IFRS 16 eliminates the current operating/finance lease dual accounting model

KPMG insight – Lease definition is superficially similar to the

3.2 Identified asset

Example 1 – Substantive substitution right

Lessee L enters into a five-year contract with a freight carrier (Lessor M)

KPMG insight – Substitution rights will be a key area of focus

3.3 Economic benefits

Example 2 – Primary products and by-products

KPMG insight – Specific guidance on renewable energy credits and

Many jurisdictions have introduced tax and other benefits to stimulate

KPMG insight – A customer may obtain substantially all of the

3.4 Directing the right to use

Who takes the ‘how and what purpose’ decisions?

Customer Predetermined Supplier

Contract is or Further analysis Contract does not

* If other criteria are met.

In making this assessment, a company considers the decision-making rights

Example 3 – Right to direct the use

Example 4 – Right to direct the use

KPMG insight – An increased focus on control

KPMG insight – The assessment of whether an arrangement

3.5 Protective rights

Example 5 – Protective rights

KPMG insight – A threefold classification of decision-making rights

IFRS 16 effectively requires a threefold classification of decision-making rights

3.6 Practical expedients

Short term leases Leases of

Example 6 – Applying the short-term leases exemption

Example 7 – Applying the leases of low value exemption

KPMG insight – Significant relief for preparers but a potentially

KPMG insight – Difference from US GAAP for leases of low‑value

3.7 Lease and non-lease components

Step 1: Identify the component(s)

Step 2: Account for the component(s)

When there is an Unless the practical Always separate and

When there is not Maximise the use of

Practical expedient: Combine lease and N/A

Example 8 – Accounting for lease and non-lease components

Lessee L enters into a five-year lease contract with Lessor M to use an

KPMG insight – Consistency with IFRS 15

4.1 Lessee accounting model

KPMG insight – Major impacts for lessees

Currently, many analysts routinely adjust lessees’ reported financial figures

KPMG insight – A pre-tax accounting model

Tax considerations are often a major factor when a company is assessing

KPMG insight – Unlike IFRS, US GAAP retains a dual accounting