The new IFRS proposal for leases - The initial and subsequent measurement -

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1 Putting leasing on the line: The new IFRS proposal for leases - The initial and subsequent measurement - Martin Vogel 22. May 2009, May Fair Hotel, London 2004 KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, the German member firm of KPMG International, a Swiss cooperative. All rights reserved. Printed in Germany. Success Story ATLAS V ppt

2 - Initial Measurement - Measuring the obligation to pay rentals Lessee s obligation to pay rentals meets the definition of a financial liability in IAS 32 IAS 32/IAS 39 initial measurement at fair value The fair value of the obligation to pay rentals cannot be observed directly discounted cash flow techniques present value of the obligation to pay rentals Interest Rate - Interest rate implicit in the lease - The lessee s incremental borrowing rate (preferred by IASB) 2

3 - Initial Measurement - Measuring the right-of-use asset Most non-financial assets subject to IAS(IAS 16, 38) and US GAAP (ABP No. 43, SFAS 142) are measured at cost The cost of the right-of-use asset will generally equal the fair value of the obligation to pay rentals and the discounted lease payments will be a reasonably approximation to the fair value of the obligation Interest rate used for discounting lease payments: lessee s incremental borrowing rate At inception of the lease the right-of-use asset will be measured at the same amount as the liabilities to pay rentals. The acquisition of the asset will not affecting net income. 3

4 Linked approach The right-of-use asset and the obligation to pay rentals remain equal over the lease term as the amortisation of the obligation and the asset is the same Rejected by IASB because - inconsistent with the treatment of other financial liabilities - could reduce the comparability for user - non-derivative financial liabilities give rise to interest expense - not recognising the interest would fail to reflect the economics of the lease - lessee is required to differentiate between finance and operating leases - the link at inception is not necessarily the case after inception 4

5 Non-linked approach (Obligation to pay rentals) Fair value approach (rejected by IASB) Amortised cost-based approach (preferred by IASB) - Consistent with many other non-derivative financial liabilities - Consistent with decision not to require fair value measurement on initial recognition - Simpler and less costly Reassessment of the incremental borrowing rate - FASB no reassessment - IASB reassessment either at each reporting date or only upon change of cash flows 5

6 Non-linked approach (Obligation to pay rentals) Accounting for changes in estimated cash flows - prospective approach - retrospective approach - catch-up approach (preferred by IASB) - IASB: based on revised lessee s incremental borrowing rate - FASB: based on original lessee s incremental borrowing rate Cross-referencing to existing guidance 6

7 Non-linked approach (Right-of-use asset) Fair value Amortised cost basis (preferred by IASB) - Amortisation of the asset over the shorter of the lease term and the economic life of the leased asset - description of decrease in value some FASB members: rental expense (+ interest expense) IASB: amortization / depreciation (+ interest expense) Impairment The asset has to be review for impairment. No preliminary view on how to determine the impairment of the asset 7