Athens, January 2019
Chris Ragkavas, BA, MA, FCCA, CGMA
IFRS technical expert, financial consultant.
What’s the story with the right-of-use asset?
The right-of-use asset reflects the minimum economic benefits expected to flow into the lessee’s entity, which has undertaken a liability of such a magnitude as the long-term lease liability.
It is only safe to assume, that an entity would enter into a long-term contract undertaking the obligation to make a series of payments, only when it expects to earn at least as much in economic benefits during the lease period.
Is the right-of-use asset, the actual property being leased?
The right-of-use asset therefore, should not be confused with the non-current asset itself in which the benefits will be earned. The right-of-use asset and the non-current asset where the benefits will be earned, may very well be (but not necessarily) two separate assets, therefore there is no double counting of the asset when the lessor and the lessee recognize one, each.
When the leased item is a property for example, the lessor will treat this according to IAS 40 Investment Properties. The property is treated as being held to earn rentals.
The transaction entered into with the lessee, will be treated by the lessor according to IFRS 16. Note that IFRS 16 does not alter lessor accounting. Leases are still treated by lessors as being either financial or operational ones.
In fact, a finance lease is ab initio an actual sale of the property, for which the lessor recognizes a long-term receivable. As such, provided the lease is classified as a finance lease, for example because the lease period is for the major part of the asset’s life, or because at the end of the lease term it is virtually certain that the lessee will exercise a purchase option, the lessor will derecognize the asset and expense its value in the statement of profit or loss.
However, provided the lessor classifies the contract as an operating lease, the lessor will not derecognize this property.
The lessor treats the lease as an operating lease
The fact that both the lessor and the lessee, each recognize a non-current asset does not result into double counting of the same asset.
The asset presented in the lessee statement of financial position, reflects, as explained, the minimum expected benefits to be earned by using the asset to which the lease obligation relates.
The asset presented in the lessor statement of financial position, reflects the value of the “bricks and mortar”, tangible property (or any other leased asset, for that matter). There is no double counting, as although both assets are non-current, they are not the same asset.
The lessor treats the lease as a finance lease
Note however, that the right-of-use asset may reflect the value of the non-current asset itself in which the benefits will be earned, i.e. the property leased.
In this particular case, the lessor will recognize the lease as a finance lease and will derecognize the non-current asset, i.e. the investment property; so double counting will again be avoided. In this case, the lessee’s right-of-use asset still reflecting the minimum benefits expected to be earned by using the asset to which the lease obligation relates, also reflects the value of the non-current asset in which the benefits will be earned.
Reference to lessor’s treatment here, is made in order to juxtapose the treatment of the lease contract at both ends. It should not be assumed to mean that the lessee’s treatment depends on the lessor’s, as the two parties cannot impose proper treatment of the lease contract to each other. It is very likely though, that the financial reporting teams of the two entities will be aware of each other’s treatment.
Queries, comments, are welcome at [email protected]