There have been numerous publications on how IFRS 16 Leases changes the accounting for leases and what the main challenges are. One would think that by now the hype around the new standard has settled, yet the circular letter issued by the CSSF recently seems to have caused anxiety among some Luxembourg's credit institutions.

The circular requests all credit institutions to fill in a concise questionnaire providing details about the lease arrangements they have. Essentially, the credit institutions have to:

Identify all lease arrangements that fall within the scope of IFRS 16 and where the asset is itself in the scope of IAS 16 Property, Plant and Equipment.

This could be challenging when identifying leases embedded in service and concession arrangements or when determining whether the bank acts as a lessee and lessor or only as an intermediary when it comes to staff company car leases. Another common difficulty we have observed is whether a contract qualifies as a lease under IFRS 16 or whether another standard should be applied, especially when it comes to IT equipment.

Decide on the transition method to be applied by the bank.

There are three possible methods: full retrospective, and modified retrospective approaches one and two. In the full retrospective method, the Right of Use (RoU) asset and lease liability are calculated as if the standard had always been in effect.

Under modified retrospective approach one, the RoU asset of operating leases is calculated similarly to the retrospective method; however, the lease liability comprises only the remaining lease payments at the transition date. These two approaches will affect the equity as of the transition date.

Under modified retrospective approach two, the lease liability of operating leases is based on the remaining lease payments as of the transition date (similarly to approach one) and the RoU asset is stated at the value of lease liability. This approach will not affect equity as of the transition date. The choice of transition method will also affect the future profitability as each method leads to a different amount of RoU asset and lease liability at the transition date, which in turn leads to a different future depreciation and interest expense. Therefore it is encouraged to duly consider the impacts of the three methods and consider performing a sensitivity analysis before selecting any of them.

Calculate the RoU asset amount for all tangible asset leases previously classified as operating leases under IAS 17.

This already requires the banks to come up with an appropriate discount rate, concluded by looking at the different options embedded in the lease arrangements such as options to renew, terminate, purchase, etc. At this stage, the banks should also indicate whether they will apply any of the practical expedients offered by the standard: short-term leases, leases of low-value items, and leases with a remaining lease term of fewer than 12 months at the transition date. All these elements may require significant judgment and will affect the amount of RoU asset and lease liability.

Present property, plant, and equipment movements during the first quarter of 2019 including movements of RoU assets.

This means the banks should already apply depreciation and impairment requirements to RoU assets recognized at the transition date and during the first quarter.

The cherry on the top of all this is that the deadline to transmit this data is 30 April 2019, giving banks not even three weeks to tackle all the above-mentioned items!

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