Canada: IFRS 16 - A Lessee's Perspective

What's new?

A major change is underway for the accounting of leases by lessees with the introduction of IFRS 16 - Leases ("IFRS 16") where many leases that were previously not reported on the balance sheet will now be included. These changes will have a significant impact on the financial position, earnings and EBITDA of entities, especially those that operate in capital intensive industries and use leasing as a method of financing. The new standards take effect for fiscal years beginning on or after January 1, 2019.

What is considered a lease?

IFRS 16 defines a lease as 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. It does not matter if the lease is the entire contract or a component of another contract. Certain contracts contain a right to use multiple assets. In these situations, the right to use each underlying asset may be considered a separate lease component.

Which leases are subject to the new standards?

IFRS 16 applies to all leases except:

  1. leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources;
  2. leases of biological assets within the scope of IAS 41 Agriculture held by a lessee;
  3. service concession arrangements within the scope of IFRIC 12 Service Concession Arrangements;
  4. licences of intellectual property granted by a lessor within the scope of IFRS 15 Revenue from Contracts with Customers; and
  5. rights held by a lessee under licensing agreements within the scope of IAS 38 Intangible Assets for such items as motion picture films, video recordings, plays, manuscripts, patents and copyrights.

A lessee may, but is not required to, apply this standard to leases of intangible assets other than those described in 5 above.

What's changed?

This new standard will require that all leases subject to the new standard be recorded on the statement of financial position as an asset and a liability. As a result of this, leases that were previously treated as operating leases under the existing standard will now be included on the statement of financial position as a right-of-use asset and a lease liability. Further, a lessee will report depreciation expense on the right-of-use asset and interest expense on the lease liability, rather than the current reporting of an operating lease as a lease expense.

The lease liability will be measured using the present value of the lease payments discounting by the interest rate implicit in the lease or, if this rate cannot be readily determined, the lessee's incremental borrowing rate shall be used.

The right-of-use asset will be measured by the lessee at:

  • the amount of the lease liability;
  • plus any lease payments made at or before the commencement date, less any lease incentive renewal;
  • plus any initial direct costs of the tenant; and
  • plus an estimate of costs for dismantling or removal of an underlying asset or site restoration costs to the condition required by the lease.

What's not included?

The standard provides an exemption from recognizing a lease under the above requirements where it is a short-term lease and leases for an underlying asset of low value. In this situation, the accounting treatment is similar to that of an operating lease as currently required in IAS 17 where the lease payments are recognized on a straight-line basis over the term of the lease.

Action steps

To prepare for the adoption of IFRS 16, an entity should undertake the following steps:

  • identify all leases
  • determine the non-lease components which are accounted for separately
  • measure the lease liability and right-of-use asset assess the financial impact of adoption of IFRS 16

    • determine impact to the statement of financial position

      • assets will generally increase
      • liabilities will generally increase
      • in most cases, there will be a negative impact on debt ratios
    • determine impact to the income statement

      • for leases that were previously treated as operating leases:

        • earnings will change in the individual years of lease, but will be the same over the lease term under both IFRS 16 and IAS 17 (the impact may be significant for companies with numerous leases)
        • you will need to separate the service component of lease contracts, which may involve estimates and judgements
        • changes may effect earnings for purposes of calculation of compensation
    • determine impact on EBITDA

      • EBITA will generally increase because previous lease costs recognized on a straight-line basis as lease costs will now be replaced with interest expense and depreciation, both of which are added back in the determination of EBITDA
    • determine impact on debt covenants and financial ratios

      • an entity should commence assessing the impact on its financial ratios and debt covenants
      • discussions with lenders may be necessary, as debt covenants may require renegotiations (commencing discussions as soon as possible will help facilitate the transition process)

In summary

The accounting for leases as a lessee will have a significant impact upon the financial statements of some entities compared to current practices. These entities will need to have a clear understanding of how these standards will impact them and the repercussions of those changes with respect to matters such as debt and loan covenants, the valuation of the entity and compensation and performance evaluation that is dependent upon results. Implementation of this standard can take time to fully assess its impact and implement the changes in existing contracts and agreements to account for the impact. The year 2019 may sound like it is a long time away, but time has a habit of passing quickly. Your Collins Barrow advisor would be pleased to discuss this standard with you.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.