IFRS16-Leases (Effective 1st January 2019)
Post transition - Accounting and
Presentation


Objective

1

Recap – IFRS 16 changes

2

Accounting under IFRS 16

3

Re-measurement of lease liability

4

Specific Scenarios

5

Audit pack and MIS changes

6

SAP Changes

Olam International Limited

2


Objective

1

Recap – IFRS 16 changes

2

Entries under IFRS 16

3

Re-measurement of lease liability

4

Specific Scenarios

5

Audit pack and MIS changes

6

SAP Changes


Olam International Limited

3


Definition of lease
Is there an identified asset?

No
Yes
IFRS 16 brings
many more leases as
‘on-balance sheet’
hence evaluation is
Critical

Does the customer have the right to obtain
substantially all of the economic benefits
from the use of the identified asset throughout
the period of use?

No

Yes
Does the customer have the right to direct
the use (how & for what purpose) of the
identified asset throughout the period of use?

Contract is

not (does not
contain) a
lease

"A contract, or part of a
contract, that conveys the
right to use an asset (the
underlying asset) for a
period of time in
exchange for
consideration"

No

Yes
Contract is (contains) a lease

Olam International Limited

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Definition of a lease
Example 1 – Warehouse Rental
• Olam Dutch has approached to
3rd party warehousing company
locally for storage of cocoa
beans. Contact is for two-years.
• Is it a lease? It depends.


Analysis
If contract specifies the exact place in a warehouse, for example, unit 1A in the
warehouse and we can exclusively use it? If YES, then there is a lease.
If it only specifies 60 sq. mtr in a warehouse, without the specification of a
particular place. If warehouse manager can shift places from time to time?
If YES, there is no lease under IFRS 16
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Definition of a lease
Example 2 – Contract Manufacturing
• Customer enters into a contract manufacturing arrangement with a manufacturer to supply
an own-brand food product for a three-year period. The recipe, packaging and quantity of the
food product are specified in the contract
• Contract does not specify which factory (or factories) will be used, but the manufacturer has
only one suitable factory for said purpose
• Constructing another factory would not be viable. Fulfilling this contract will not utilize full capacity of factory
• Manufacturer makes all decisions about the operations of the factory, including how to utilize the
available capacity and what output to produce with that capacity.
Analysis
• The contract does not contain a lease
• Although the contract implicitly specifies an asset (the one suitable factory), the retailer
does not have the right to decide how this factory is used after the contract has been
signed
• The Customer does not have the right to obtain substantially all the benefits from use
of the factory because the manufacturer decides how to use the available capacity
Olam International Limited


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Definition of a lease
Example 3 - Ship
• A car manufacturer enters into a contract with a shipping company to transport cars from Japan
to Singapore
• The contract specifies a particular ship and the cars to be transported, which will require the full
capacity of the ship
• The shipping company operates and maintains the ship and is responsible for the safe
passage of the cars to Singapore
• The car manufacturer is not able to make changes (e.g. to the destination or nature of the cargo) once the
contract has been signed.

Analysis
• The contract does not contain a lease
• After signing the contract the car manufacturer is not able to direct how and for what
purpose the ship is used and does not therefore control the use of the asset
• The contract pre-determines how and for what purpose the ship will be used and the
car manufacturer neither operates nor designed the ship.
Olam International Limited

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Definition of a lease
Example 4 - Ship
• A car manufacturer enters into a contract with a shipping company to transport cars from Japan
to Singapore
• The contract specifies a particular ship and the cars to be transported, which will require the full

capacity of the ship
• The shipping company operates and maintains the ship and is responsible for the safe passage
of the cars to Singapore
• The car manufacturer is not able to make changes (e.g. to the destination or nature of the cargo) once the
contract has been signed.

Analysis
• The contract does not contain a lease
• After signing the contract the car manufacturer is not able to direct how and for what
purpose the ship is used and does not therefore control the use of the asset
• The contract pre-determines how and for what purpose the ship will be used and the
car manufacturer neither operates nor designed the ship.
Olam International Limited

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Non Lease Components
Separating Lease/Non lease Components
Lease and non-lease
components are
accounted for
separately

• Each lease component –
apply IFRS 16

• Each non-lease component
– apply other standards


• Allow lessees to make an
accounting policy election (by
class of underlying asset) to
treat non-lease elements as
part of the lease

Practical expedient

• Simplifies the accounting for a
contract that contains a lease

Allocate
consideration to lease
and non-lease
components

•

• Lessees – on a relative
standalone price basis
(unless the practical
expedient is elected)

Examples: maintenance, security services in a
property lease, operational services in a transport or
lessor paying insurance costs or property taxes for
the underlying asset

• However, increase the amount
of assets and liabilities

recognized and could have
implications for impairment

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Lease term
Non-cancellable period of a lease, together with
Period covered by extension option – if reasonably certain that the option will be exercised by lessee;

Period covered by termination option – if reasonably certain that the option will not be exercised by
lessee.
The option is purely management discretion.
Examples of factors to consider includes:
a) contractual terms and conditions for optional periods compared with market rates;
b) significant leasehold improvements undertaken during contract term;
c) costs relating to termination of lease.

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Discount rate
Lessee discounts the lease
payments using
Interest Rate Implicit in the Lease
(if this can be readily determined)


Incremental Borrowing Rate (IBR)

IBR : Interest rate to borrow over a similar
term, and with a similar security, the funds
necessary to obtain an asset of a similar
value to the right-of-use asset in a similar
economic environment.
As a group policy, we have taken below approach for discount rate:
Entities having long term bank borrowings: Higher of entities’ average long term borrowing rate and OIL’s
average long term borrowing rate which is currently 5%.
Entities not having long term bank borrowings: OIL’s average long term borrowing rate which is currently 5%.
The discount rate will be revisited every six months and change, if any, shall be communicated for new leases to
be incurred prospectively.
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Recognition exemptions
Short-term leases

Low-value asset leases

• Available if the lease term is 12 months or less at
commencement

• Assessment of value is based on the absolute value
of each leased asset when new


• Cannot qualify if the lease contains a purchase
option

• Leases of assets such as low value IT equipment,
office equipment and furniture would typically
qualify. Cars not included

• Use of this exemption is an accounting policy choice
that must be made consistently for each class of
underlying asset
• Incase of lease modification or change of lease
terms, to be considered as new lease and reassessed

• Use of this exemption is an accounting policy choice
that can be made on a lease-by-lease basis
• Low Value threshold = US$5,000

Lease payments are recognised as an expense as and when accrued/paid over the lease term.

Olam International Limited

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Example Low Value - lease-by-lease selection
• Olam Information enters into a single lease contract for ten office printers/copiers
• Lease has 3 year term, non cancellable
• One of the assets is a high-end production printer with a purchase price when new of US$20,000.
The other nine assets are more basic models with prices when new of $3,000 each.
• Although the ten assets are under the same lease, the company concludes that each asset is a separate ‘lease

component’ because:
─ The company benefits from each asset on its own
─ The assets are not highly interrelated.

Analysis
• Because each asset is a distinct lease component, IFRS 16 treats this contract as containing ten separate leases in
principle. The total lease payments are then allocated to each of the ten components on a relative stand-alone selling
price basis.
• The company can then elect to apply the low-value asset exemption to some or all of the nine basic model lease
components. If it does so, these are accounted for similarly to operating leases under IAS 17.
• The lease of the high-end production printer must be accounted for ‘on-balance sheet’.
Olam International Limited

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Example Short-Term lease – Class of Assets
•

•
•

Olam Ghana enters into several leases of transport vehicles. Each lease has a stated term of 36
months, but with break clauses allowing the company to terminate each lease after 12 months and 24
months without penalty.
After 3 years, it can be renewed for another term of 3 years

Management concludes that there is a realistic possibility that the 12-month termination option will be exercised. In reaching
this conclusion, company takes into account that:
─ there is no significant termination penalty

─ the rentals in years 2 and 3 are not below market
─ their transport needs tend to change with time & the existing vehicle fleet may no longer be optimal in 12 months’ time or
alternative vehicles could be sourced and introduced into the operations without significant cost or disruption.

Analysis
•

•
•

This qualifies for the short-term election. Choice available to either apply the general IFRS 16 lessee model or account
similarly to operating leases under IAS 17 (i.e. recognize the lease payments on a straight-line basis over the lease term or
another systematic basis if more representative of the pattern of benefit)
This accounting policy must be applied consistently to all short-term leases of underlying assets of the same class (e.g. all
short-term leases of transport vehicles).
After 3 Yrs.: Subsequent, renewal is which is with mutual consent has to be considered as new lease. However, if extension
is only at option of lessee and there is reasonable certainty of renewal, subsequent term to be included while defining lease
term.
Olam International Limited

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Variable Lease Payments
Type of payment

Initial accounting

Subsequent accounting


Variable lease payments
that depend on an index or
a rate

Include in lease liability and asset based
on level of index/rate at the
commencement date
(In scope of IFRS 16)

Adjust lease liability and asset when
revised index/rate changes the lease
payments (using original discount rate)

In-substance fixed lease
payments

Include in lease liability and treat as
fixed lease payments
(In scope of IFRS 16)

Treat as fixed lease payments

Other variable lease
payments
(that cannot be estimated)

Exclude from lease liability and asset.
Will be charged off to P&L as and when
it arises
(Outside the scope of IFRS 16)


Recognise an expense in the period that
the event or condition that triggers the
payments occurs

Olam International Limited

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Objective
1

Recap – IFRS 16 changes

2

Accounting under IFRS 16

3

Re-measurement of lease liability

4

Specific Scenarios

5

Audit pack and MIS changes


6

SAP Changes

Olam International Limited

16


Lessee Accounting – on Transition
Transition
Options

Full
retrospective

Modified
retrospective

Restate each period before the date
of initial application that is
presented
in
the
financial
statements.

Cumulative effect of applying the standard is
recognized as an adjustment to the opening

retained earnings without restatement of
comparative period amounts.

Option I
ROU is recognized at its carrying amount as
if the standard had been applied since the
commencement date

Olam as a Group
adopted for
Option II

Option II
ROU is recognized at an amount equal to
the lease liability (adjusted with prepaid
rents or accrued lease payments).

At the Group level, we have opted for Modified retrospective Option II where ROU = Lease
liability adjusted to accrued/prepaid rent.

Olam International Limited

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Lessee accounting
Recognition & measurement at a glance
Initial recognition &
measurement


•

Initially measure right-of-use (ROU) asset* & lease liability at
present value of lease payments

Subsequent
measurement of lease
liability

•

Accrue interest cost on lease liability (based on Incremental
borrowing rate)

•

Reduce lease liability by payments made

Subsequent
measurement of ROU
asset

•

Depreciate ROU asset based on straight-line basis over the lease
term

•

Generally 'front-loaded' expense for individual lease


•

Separate recognition of interest & depreciation

Profit or loss

*

Initial measurement of the ROU asset would also include the lessee's initial direct costs, prepayments made to the lessor less lease incentives received
from the lessor, if any, and restoration, removal and dismantling costs
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Initial measurement of the lease liability
Fixed (and in-substance fixed) future payments for lease elements, less any lease
incentives receivable over the lease term (including payments in optional extension
periods if extension 'reasonably certain')

+
Variable payments linked to an index/rate based on level of index/rate at commencement

+
Amounts expected to be payable under residual value guarantees

+

Discounted at

rate implicit in
the lease (or
lessee's
incremental
borrowing rate)

Exercise price of a purchase option if the lessee is reasonably certain to exercise that
option

+
Termination penalties if lease term reflects exercise of a termination option

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Initial measurement of the right-of-use asset
Initial amount of lease liability

+
Lease payments made to lessor at or before commencement date

Lease incentives received

Right-of-use
asset

+
Initial direct costs


+
Estimated cost of removing and/or restoring leased asset

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Subsequent measurement
• Right-of-Use asset is accounted for similarly to a purchased asset
─ ROU asset is depreciated over its useful life

• Lease liability is accounted for similarly to a financial liability
─ The lease liability is accounted for using the effective interest method
─ Lease payments are apportioned between interest expense and a reduction of the lease obligation
i.e.., similar to todays accounting of finance leases

Olam International Limited

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GLs created under IFRS 16
S.No.

1

2


Classification

Right-of-use assets - Gross Block:
Class wise

Right-of-use assets - Accumulated
Depreciation: Class wise

GL Code

Description of GL code required

PL/BS

300025

ROU Assets - Land (IFRS 16)

BS

300026

ROU Assets - Building (IFRS 16)

BS

300027

ROU Assets - Plant & Machinery (IFRS 16)


BS

300028

ROU Assets - Motor Vehicles (IFRS 16)

BS

300029

ROU Assets - Office Equipments (IFRS 16)

BS

300030

ROU Assets - Computers (IFRS 16)

BS

302038

ROU Cum Depn - Land (IFRS 16)

BS

302039

ROU Cum Depn - Building (IFRS 16)


BS

302040

ROU Cum Depn - Plant & Machinery (IFRS 16)

BS

302041

ROU Cum Depn - Motor Vehicles (IFRS 16)

BS

302042

ROU Cum Depn - Office Equipments (IFRS 16)

BS

302043

ROU Cum Depn - Computers (IFRS 16)

BS

3

Lease liability current (renamed earlier
Finance lease payable GL)


113007

Lease liability current (IFRS 16)

BS

4

Lease liability Non-current (renamed
earlier Finance lease payable GL)

110004

Lease liability Non-current (IFRS 16)

BS

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GLs created under IFRS 16
S.No.

5

6


7

Classification

Right-of-use assets depreciation (PnL):
Class wise

Lease rentals (PnL)

Interest cost on leases (renamed earlier
Finance lease payable GL)

GL Code

Description of GL code required

PL/BS

640046

ROU Depn - Land

PL

640047

ROU Depn - Building

PL


640048

ROU Depn - Plant & Machinery

PL

640049

ROU Depn - Motor Vehicles

PL

640050

ROU Depn - Office Equipments

PL

640051

ROU Depn - Computers

PL

622024

Lease rental - Variable payment

PL


622025

Lease rental - Short term leases

PL

622026

Lease rental - Low value leases

PL

671016

Interest cost on leases (IFRS 16)

PL

Note: For all PL account codes, three GL’s have been created e.g. for ROU Depn – Land:
640046_D

ROU Depn - Land - D

640046_ID_D

ROU Depn - Land - ID-D

640046_ID_A

ROU Depn - Land - ID-A


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Example lease accounting
•

On 1.1.2019, a Cocoa Pte enters into a three-year lease of office premises

•

1st year Prepaid Rent & remaining S$10,000 at beginning of each year

•

There are no services, other non-lease elements, initial direct costs or incentives

•

WITH applicable discount rate of 5%, initial ROU asset & lease liability is

18,593 is PV of
lease liabilities
and 10,000
prepaid rent

NPV = S$18,593 (S$10,000/1.05 + S$10,000/1.05^2)


Lease Liab

Op Bal

2019

18,593

2020

19,523

2021

10,000

Paid

Int.

Cl Bal

ROU Asset

Op Bal

Dep

Cl Bal


930

19,523

2019

28,593

-9,531

19,062

10,000

477

10,000

2020

19,062

-9,531

9,531

10,000

-


-

2021

9,531

-9,531

-

-

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Entries under IFRS 16
1 Initial recognition of ROU asset and lease liability
Note: ROU is to be recognized Asset class wise and Product wise.
Particulars

Dr./Cr.

Amount

ROU asset (BS)

Dr.


18,593

Lease liability Non-current (IFRS 16) (BS)

Cr.

18,593

2 Transfer of Prepaid lease payments to ROU asset
Note: ROU is to be recognized Asset class wise and Product wise.

Particulars

Dr./Cr.

Amount

ROU asset (BS)

Dr.

10,000

Prepaid expenses (reclassification to ROU) (BS)

Cr.

10,000

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