IFRS 16 Leases sets out principles for the recognition, measurement, presentation and disclosure of leases, aiming to enhance information provided for investors and other users of financial statements regarding lease arrangements. To achieve this, it introduces a single lessee accounting model that treats leases as providing finance. Lessees are required to recognize both lease assets (right-of-use assets) and lease liabilities on their statements of financial position for almost all leases.
The International Accounting Standards Board (IASB) is currently undertaking a Post-implementation Review (PIR) of IFRS 16. As part of this review, the IASB has published a Request for Information (RFI) to gather stakeholder feedback and assess whether IFRS 16 is functioning as intended. In October, the Institute’s Standard Setting Department responded to the RFI. This article highlights the key comments from our submission, with the full response available on our website.
Overall, we consider that IFRS 16 has achieved its objectives and has improved the transparency and comparability of financial information regarding leases. We also believe that the core principles of IFRS 16 are clear. Nevertheless, we have identified the following application issues relating to certain aspects of the requirements that warrant the IASB’s further consideration.
Rent concessions
There have been ongoing concerns regarding the lack of clarity in how a lessee distinguishes between a lease modification under IFRS 16 and an extinguishment (or partial extinguishment) of a lease liability under IFRS 9 Financial Instruments when accounting for rent concessions. These challenges were particularly evident during the COVID-19 pandemic and have re-emerged with the recent economic slowdown and uncertainty as entities negotiate rent concessions.
While the IASB addressed part of this issue in the 2024 Annual Improvements to IFRS Accounting Standards – clarifying through a narrow-scope amendment to IFRS 9 that a lessee is required to apply IFRS 9.3.3.3 when it has determined that a lease liability has been extinguished in accordance with IFRS 9 – the broader issue of how IFRS 9 and IFRS 16 interact remains unresolved. We believe that this PIR presents an appropriate and timely opportunity for the IASB to address this broader issue.
In light of the above, we recommend that the IASB undertake a narrow-scope standard-setting project to clarify the interaction between IFRS 16 and IFRS 9 in the context of rent concessions. To support this recommendation, we have included potential approaches, along with their rationale, in our submission for the IASB’s consideration. We also suggest that the IASB provide illustrative examples to enhance consistent application of the requirements.
Sale and leaseback transactions
We noted several application questions regarding the assessment of whether a transfer of an asset in a sale and leaseback transaction qualifies as a sale under IFRS 15 Revenue from Contracts with Customers. These application questions are frequently encountered in practice, particularly in the real estate industry, and divergent views exist due to a lack of guidance in IFRS 16. Accordingly, we recommend that the IASB provide clarification on how the relevant requirements should be applied. These application questions include:
(i) Whether a seller-lessee’s renewal option in a sale and leaseback transaction, which permits the seller-lessee to extend the lease for substantially all the remaining economic life of the underlying asset and places them in a similar position to a lessee that has an option to purchase the underlying asset, precludes accounting for the asset transfer as a sale;
(ii) How to determine the unit of account when an entire building is sold but only part of the building is leased back;
(iii) Whether the asset transfer may still constitute a sale if the buyer-lessor classifies the leaseback as a finance lease; and
(iv) Whether a reassessment of the transfer of asset as a sale is required when the seller-lessee’s repurchase option lapses.
Corporate wrappers
There is a lack of guidance on how to account for a transaction in which an entity sells its equity interest in a subsidiary that holds one asset to a third party and leases that asset back. Specifically, it is unclear whether such transactions should be accounted for by (i) first applying the loss of control requirements in IFRS 10 Consolidated Financial Statements and then overlaying the sale and leaseback requirements in IFRS 16 to recognize partial gain or loss, or (ii) applying IFRS 10 only and recognizing a full gain or loss for the disposal of the subsidiary. Similar questions have also been raised regarding the accounting considerations for other fact patterns, such as the disposal of a corporate wrapper with one or more assets that constitute a business.
Transactions involving corporate wrappers are prevalent in the real estate industry and accounting issues often arise, such as in the sale of properties through a corporate wrapper. We believe that the underlying question for these issues is the same, i.e. whether the form of the transaction should result in a different accounting outcome.
Given the cross-cutting nature of the corporate wrapper issues across several IFRS Accounting Standards and consistent with our comments provided in our submission on the PIR of IFRS 10, IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities, we recommend that the IASB undertake a broader project to address these issues holistically.
This article was contributed by Carrie Lau and Katherine Leung, Associate Directors of the Institute’s Standard Setting Department.
