Leases

Issuance of IFRS 16 by IASB

The International Accounting Standards Board (IASB) issued IFRS 16 Leases in January 2016. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, ie the customer (‘lessee’) and the supplier (‘lessor’). IFRS 16 is effective from 1 January 2019. A company can choose to apply IFRS 16 before that date but only if it also applies IFRS 15 Revenue from Contracts with Customers. IFRS 16 replaces the previous leases standard, IAS 17 Leases, and related Interpretations.

Issuance of FRS 116 by ASC

On 30 June 2016, the Singapore Accounting Standards Council (ASC) issued the Singapore equivalent leases standard, FRS 116 Leases, which is also effective for annual periods beginning on or after 1 January 2019. This will replace the existing FRS 17 Leases.

On 28 December 2016, ASC issued a reminder letter to companies applying the FRS on the new major standards on financial instruments, revenue recognition and leases. The standards, which will be effective from annual periods of 2018-2019, will affect companies across different industries, with potentially broad implications beyond financial reporting. The ASC reminds directors and chief financial officers of the aforesaid companies to take the necessary steps to ensure a smooth and timely transition to the standards. The letter also provides a high-level overview of the standards and some of their key implications.

Please click here for ASC reminder letter in December 2016.

SGX’s Communiqué to Listed Issuers

In SGX’s communiqué issued in December 2016, the following development in Singapore accounting standards was shared:

“New Accounting Standard on Leasing

SGX-listed issuers that are currently reporting under SFRS or IFRS should undertake a review and re-examine their loan covenants. They should communicate with their creditors to explain the expected impact of the new accounting standard on their financial statements and renegotiate their loan covenants if the need arises. Prompt action should be taken to avoid falling into any technical loan default situation.”

ISCA’s Initiatives

Leasing activities are very pervasive across all entities because it is one form of obtaining financing and many of such leasing activities are structured as operating leases which are off-balance sheet. With FRS 116, the status quo for accounting for leases transactions, especially operating leases would be very different. Companies which have leasing activities would also need to prepare themselves to ensure that they are able to comply with the requirements come 1 January 2019. In addition, to ensure compliance with accounting standards, companies need to re-think their strategies on how to finance or operate their companies. For some, taking loans to buy assets may not be a more efficient way of financing their business, while for others, leasing could still be the preferred option.

ISCA views the development in FRS 116 as important and thus, places priority on this standard with the intention of encouraging companies to start thinking about the implementation of FRS 116 on their business and to start their preparation early. Being the “go-to” place for the accounting profession, ISCA endeavours to understand the implementation challenges faced by Singapore entities and to facilitate their implementation of FRS 116 from various platforms.

1. Articles

ISCA had published several leases articles in ISCA Journal with the objective of providing deeper understanding of the pertinent areas of the new leases standard which has implementation challenges.

Leases: Ready for the Demands of Today

Highlights the key requirements of the new leases standard
Touches on how the concept of the new leases standard was evolved
Features ISCA’s Leases Roadmap which provides guidance in determining whether a contract contains a lease

Click here to read more.

Leases: Getting a Balanced Perspective

Features a holistic overview of the key differences between FRS 116 and FRS 17 and the changes required to be made to the accounting of leases for lessees and lessors under FRS 116
Shares some simplifications and practical expedients of FRS 116

Click here to read more.

Leases: Beat the Deadline

Highlights the commercial and business challenges faced by companies when implementing FRS 116 through an exclusive interview with ISCA CEO
Provides questions a CFO should ask when preparing the FRS 116 implementation roadmap
Features the “non-accounting” areas companies must consider and requests companies to commence preparations early

Click here to read more.

Accounting for Sale and Leaseback Transactions: A Comparison between FRS 17 and FRS 116

Compares the accounting treatment for sale and leaseback transactions between FRS 116 and FRS 17
- Features the three accounting treatments in relation to a sale and leaseback transaction
  whether the sale and leaseback should be accounted for as a sale transaction plus a lease transaction or just as a financing transaction;
- Where the sale and leaseback is accounted for as a sale transaction plus a lease transaction, how the profit or loss from the sale transaction should be accounted for;
- Where the selling price is artificially fixed at lower or higher than the fair value so as to accommodate a higher or lower than market lease rental, how these off-market prices should be accounted for;

Click here to read more.

FRS 116 Leases: Diving into the Complex

This cover story expounds on several accounting complexities when applying the requirements of FRS 116, providing insights into areas requiring more thinking and preparation time. These areas are just four of the more complex requirements; this is by no means an exhaustive list:

• Is a capacity portion of an asset an identified asset?
• Are the supplier’s asset substitution rights substantive?
• Who makes decision about how and for what purpose an asset is used?
• Are variable lease payments in-substance fixed payments?

Click here to read more.

2. Outreaches

Small and Medium Practitioners

In October 2016, ISCA reached out to the Small and Medium Practitioners (SMPs) for them to share their challenges faced from the requirements of the new leases standard.

These slides were used for the outreach.

Small and Medium Enterprises

Two outreach sharing sessions were also held on 29 November 2016 and 7 December 2016 as a platform to share and discuss challenges relating to the accounting implications and implementation of FRS 116 with impacted preparers.

If you have any implementation challenges on FRS 116 to share with us, please email to technical@isca.org.sg and indicate “FRS 116 Leases: Implementation Challenges” in the subject of your email.

3. Survey: Getting Ready for FRS 116

To understand the readiness of companies in the implementation of FRS 116, a study was conducted by ISCA and Nanyang Business School (NBS) at Nanyang Technological University in May and June 2016 on companies that lease assets for their use (lessees). It was found that while 72% of companies surveyed showed a good level of awareness of the new standard, more than half (53%) have not started preparing for it.

Find out more about the study here.

Read the highlights of the study in this article.

4. SAC 2016 Leases Panel: Preparing for the Changes Ahead

The leases panel was moderated by Ms Kok Moi Lre, Partner, PricewaterhouseCoopers LLP and Chairperson of ISCA’s Financial Statements Review Committee. The panel consisted of professionals from diverse backgrounds:

Mr Cheung Pui Yuen, ASC member and Deputy Managing Partner of Deloitte & Touche LLP, representing the standard setter;
Mr Ashutosh Sharma, Associate Director, Corporate Ratings, S&P Global Ratings (Asia Pacific), representing the investor analyst community;
Mr Chiang Joon Arn, Managing Partner, Asia Pacific Financial Advisory Services, EY Solutions LLP; representing the consultant in assisting companies in implementing the standard;
Ms Lelaina Lim, Group Finance Director, Al-Futtaim Retail Asia LLC, representing the lessees; and
Mr Ho Tuck Chuen, Group Chief Financial Officer, JTC Corporation, representing the lessors.

The panel discussion focused on organisational readiness, challenges in implementation and the business implications as a result of this standard. The panel also discussed which industries are most affected and what should preparers and auditors do to get ready for the transition.

A key implication (to lessees) is an increase in financial assets and liabilities on the balance sheets. This in turn would lead to the recognition of depreciation of leased assets and interest on lease liabilities on the profit and loss statements, and the front loading of total lease expenses. Consequently, key financial metrics such as gearing and liquidity ratios would be impacted; hence, a recalibration of organisational key performance indicators is necessary.

Another implication that could result from the new leases standard is that lessees may reassess their business decisions regarding “buy or lease” since either choice would result in the capitalisation of the assets. This would cause a change in the demand for long term lease and affect commercial sales.

In addition, it is important to acknowledge that FRS 116 has consequences that may go beyond the company’s accounting team. Commercial aspects which include areas such as lease negotiations, reassessment of contract terms will need considerable time and effort and the list of stakeholders involved includes auditors, consultants, and legal advisers. Companies should ensure sufficient resources have been set aside to manage the changes resulting from the implementation of the new standard.

In its concluding comments, the panel advised companies to start preparation early. This would include communication to internal and external stakeholders to ensure that everyone can embrace the new leasing requirements and business implications.

5. Invitation for feedback/views on: the implications of the new FRS 116 “Leases” to the current income tax treatment for leases, and changes to existing income tax rules

FRS 116 makes significant changes to the existing leases accounting by lessees especially with the removal of differentiation between operating lease and finance lease. Lessor accounting is also impacted but to a lesser degree. ISCA has prepared a paper on the key implications of FRS 116 and existing income tax treatment for leases.

ISCA welcomes feedback/views on tax implications arising from this change for sharing with the Inland Revenue of Singapore (IRAS).

Please click here for the Invitation for Feedback and Views.

Please submit written comments by 30 May 2017 to –

Financial Reporting Standards & Corporate Reporting
Institute of Singapore Chartered Accountants
60 Cecil Street
ISCA House
Singapore 049709
Email: technical@isca.org.sg

Useful references Issued by Other Organisations