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Onerous lease contracts and impairments, and investor issues - Coggle…
Onerous lease contracts and impairments, and investor issues
Onerous lease contracts and impairments
ROU asset needs to be tested for impairment
as it is a non-financial asset, then IAS 36 shall apply
however, there are two exemptions
when a lessee applies the fair value model in accordance with IAS 40 for its investment properties
it also applies the fair value model to the ROU asset
if a ROU asset relates to a class of PPE to which the lessee applies the revaluation model
then the lessee can elect to apply the revaluation model to all of the ROU assets that relate to that class of PPE
ROU asset is tested for impairment on a standalone basis unless it forms part of a cash-generating unit (CGU)
IAS 36 requires entities to consider whether a buyer would be required to assume any liabilities, which could include the lessee’s lease liability
In such a case, the lease liability needs to be included in the recoverable amount of the CGU and in the carrying amount of CGU as well
onerous contracts, IAS 37
unavoidable costs of meeting the contract obligations exceed the economic benefits expected to be received under that contract
However, it is interesting to consider whether IAS 37 and IFRS 16 can co-exist
the Board decided not to specify any particular requirements in IFRS 16 for onerous contracts
for leases that have already commenced, no requirements are necessary. After the commencement date, an entity can appropriately reflect an onerous lease contract by applying the requirements of IFRS 16. A lessee will determine and recognise any impairment of right-of-use assets applying IAS 36, Impairment of Assets.
for leases that have not already commenced, the requirements for onerous contracts in IAS 37, Provisions, Contingent Liabilities and Contingent Assets are sufficient. The requirements in IAS 37 apply to any contract (and hence any lease contract) that meets the definition of an onerous contract in that standard
how to deal with onerous contracts when initially applying IFRS 16
either
apply IAS 36 to its right-of-use assets, or
not apply IAS 36 on the date of initial application, but instead rely on its assessment of whether any of its leases are onerous under IAS 37. Any onerous lease provision is derecognised and an equal amount is deducted from the carrying amount of the relevant right-of-use asset
Investors issues in SBR
Board has received feedback from investors along the following lines
Investors are concerned about ineffective communication. In particular, they highlight the importance of proper application of materiality by entities when deciding what to disclose and how best to communicate that information.
Investors consider comparability and entity-specific information to be particularly important but note that there is potential for conflict between these two principles.
Many investors think that the inclusion of IFRS information outside the financial statements could be useful in some circumstances but have some concerns about understandability, assurance and the on-going availability of information.
Many investors agree that the Board should not prohibit the inclusion of non-IFRS standard information in financial statements. However, investors have concerns about the risk of entities providing misleading information, or clouding IFRS standard information.
Investors think that the Board should require an entity to clearly identify, label, explain and reconcile any non-IFRS standard information presented in the financial statements.
Many investors feel that the Board should define performance measures. Many investors have encouraged the Board to define one or more of the following: EBIT, EBITDA and other performance measures such as operating profit.
Most investors support the suggestion to develop definitions of, and requirements for the presentation of, unusual or infrequently occurring items. Investors think that this would help to avoid misleading or inconsistent use of those terms.
Investors think that useful accounting policy disclosures are those that relate to material items, transactions or events or provide insight into how an entity has exercised judgement in selecting and applying accounting policies.
The application of SBR knowledge to question scenarios
for example
accounting for contingent performance conditions
either refer to
CF, or
def of a liability
therefore entity has an obligation
however, When a player’s contract is signed, management should make an assessment of the likely outcome of performance conditions in order to determine if there is an obligation.
there needs to be an obligation to transfer an economic resource which will be a cash amount
the obligation needs to be a present obligation that exists as a result of past event
Hence, any contingent amounts will only be recognised from the date management believes that the performance conditions will be met.
Before this date, an obligation will not exist and the past event can be argued as the signing of the contract.
other existing accounting standard
definition of a provision in IAS 37
A provision is a present obligation that has arisen as a result of a past event, payment is probable, and the amount can be estimated reliably
Leicester City Football Club
Contractual obligations are recognised when they become payable with prepayments/accruals recognised at each period end.
Manchester United Football Club
following re bonus payments to players – 'Any performance bonuses are recognised when the Company considers that it is probable that the condition related to the payment will be achieved.'
possible financial liability which should be recognised at the acquisition of the player
examining team do not necessarily agree with this view as players
leave the football club, or
become injured and not trigger the payments