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ScopeIFRS 16 applies to all leases for both the lessee and lessor, except for a few scope exclusions. These exclusions, some of which aresimilar to IAS 17’s, are summarised in the table:Scope exclusions from IFRS 16Scope exclusionStandard to applyLeases to explore for or use minerals, oil, natural gas and similarnon-regenerative resourcesNone specified. Depending on the circumstances IFRS 6 ‘Explorationfor and Evaluation of Mineral Resources’ or IAS 38 ‘Intangible Assets’might applyLeases of biological assets in scope of IAS 41 held by a lesseeIAS 41 ‘Agriculture’Service concession arrangements in scope of IFRIC 12IFRIC 12 ‘Service Concession Arrangements’Licences of intellectual property granted by a lessor in scopeof IFRS 15IFRS 15 ‘Revenue from Contracts with Customers’Rights held under licensing agreements in scope of IAS 38 for itemssuch as motion picture films, video recordings, plays, manuscripts,patents and copyrights*IAS 38 ‘Intangible Assets’* for leases of other types of intangible asset a lessee is permitted to apply IFRS 16 but not required to do soDefinition of a leaseBecause the new lease accounting model brings many moreleases ‘on-balance sheet’, the evaluation of whether a contractis (or contains) a lease becomes even more important than itis today.Under IFRS 16 a lease is defined as: ‘a contract, or part of acontract, that conveys the right to use an asset (the underlyingasset) for a period of time in exchange for consideration’. Acontract is, or contains, a lease if: fulfilment of the contract depends on the use of an identifiedasset; and the contract conveys the right to control the use of theidentified asset for a period of time in exchange forconsideration.In practice, the main impact of IFRS 16’s new definition andsupporting guidance is likely to be on contracts that are not inthe legal form of a lease but involve the use of a specific assetand may therefore contain a lease.Lessee accountingSubject to the optional accounting simplifications discussedbelow, a lessee will be required to recognise its leases on thebalance sheet. This involves recognising: a ‘right-of-use’ asset; and a lease liability.The lease liability is initially measured as the present valueof future lease payments. For this purpose, lease paymentsinclude fixed, non-cancellable payments for lease elements,amounts due under residual value guarantees, certain types ofcontingent payments and amounts due during optional periodsto the extent that extension is ‘reasonably certain’.In subsequent periods, the right-of-use asset is accounted forsimilarly to a purchased asset and depreciated or amortised.The lease liability is accounted for similarly to a financialliability using the effective interest method.Navigating the changes to IFRS – 2021 Edition 5

‘IFRS 16 will require lessees toaccount for leases ‘on-balancesheet’ by recognising a ‘righof-use-asset’ and a leaseliability.’Optional accounting simplificationsIFRS 16 provides important reliefs or exemptions for: short-term leases (a lease is short-term if it has a lease termof 12 months or less at the commencement date) low-value asset leases (the assessment of value is basedon the absolute value of the leased asset when new andtherefore requires judgement. In the Basis for Conclusionswhich accompanies the Standard, however, the IASB notesthat they had in mind leases of assets with a value whennew of around US 5,000 or less).If these exemptions are used, the accounting is similar tooperating lease accounting under the current Standard IAS 17‘Leases’. Lease payments are recognised as an expense on astraight-line basis over the lease term or another systematic basis(if more representative of the pattern of the lessee’s benefit).If an entity (the seller-lessee) transfers an asset to anotherentity (the buyer-lessor) and leases that asset back fromthe buyer-lessor, both the seller-lessee and the buyer-lessordetermine whether the transfer qualifies as a sale. Thisdetermination is based on the requirements for satisfying aperformance obligation in IFRS 15.In November 2020, the IASB issued an exposure draft lookingto expand the requirements of sale and leaseback accountingin IFRS 16, so changes to these current requirements areanticipated.For more information, please refer toour special edition of IFRS News onMajor reforms to globalIFRS 16 ‘Leases’. The special editionlease accountingexplains the key features of the newStandard and provides practical insightsinto its application and impact. Toobtain your copy, please get in touchwith the IFRS contact in your localGrant Thornton office or go to -newsspecial-edition-on-ifrs-16/.s n gew io nN dit untiRS l E coIF cia Ace eSp easLonLessor accountingIFRS 16’s requirements for lessor accounting are similar toIAS 17’s. In particular: the distinction between finance and operating leases isretained the definitions of each type of lease, and the supportingindicators of a finance lease, are substantially the same asIAS 17’s the basic accounting mechanics are also similar, butwith some different or more explicit guidance in a fewareas. These include variable payments; sub-leases; leasemodifications; the treatment of initial direct costs; and lessordisclosures.Sale and leaseback accountingIFRS 16 makes significant changes to sale and leasebackaccounting.IFRS News Special EditionFebruary 2016The IASB has published IFRS 16 ‘Leases’ completing itslong-running project on lease accounting.This special edition of IFRS News explains the key featuresof the new Standard and provides practical insights intoits application and impact.‘The new Standard replaces IAS 17 ‘Leases’ along with threeInterpretations (IFRIC 4 ‘Determining whether an Arrangementcontains a Lease’, SIC 15 ‘Operating Leases-Incentives’ andSIC 27 ‘Evaluating the Substance of Transactions Involvingthe Legal Form of a Lease’).’6 Navigating the changes to IFRS – 2021 Edition

Effective date and transitionIFRS 16 is effective for annual periods beginning on or after1 January 2019 with earlier application permitted.In terms of transition, IFRS 16 provides lessees with achoice between two broad methods: full retrospective application – with restatement ofcomparative information in accordance with IAS 8‘Accounting Policies, Changes in Accounting Estimatesand Errors’ partial retrospective application – without restatingcomparatives. Under this approach the cumulative effectof initially applying IFRS 16 is recognised as an adjustmentto equity at the date of initial application. If a lesseechooses this method, a number of more specific transitionrequirements and optional reliefs also apply.AccountingTaxInsights into IFRS 16GlobalUnderstanding the discount rateUnder IFRS 16 ‘Leases’, discount rates are used to determinethe present value of the lease payments used to measurea lessee’s lease liability. Discount rates are also used todetermine lease classification for a lessor and to measure alessor’s net investment in a lease.For lessees, the lease payments are required to be discountedusing: the interest rate implicit in the lease (IRIL), if that rate can bereadily determined, or the lessee’s incremental borrowing rate (IBR).For lessors, the discount rate will always be the interest rateimplicit in the lease.The interest rate implicit in the lease is defined in IFRS 16as ‘the rate of interest that causes the present value of (a)the lease payments and (b) the unguaranteed residual valueto equal the sum of (i) the fair value of the underlying assetand (ii) any initial direct costs of the lessor.’The lessee’s incremental borrowing rate is defined inIFRS 16 as ‘the rate of interest that a lessee would have topay to borrow over a similar term, and with a similar security,the funds necessary to obtain an asset of a similar value tothe right-of-use asset in a similar economic environment’.The incremental borrowing rate is determined on thecommencement date of the lease. As a result, it will incorporatethe impact of significant economic events and other changesin circumstances arising between lease inception andcommencement.A lessee will need to determine a discount rate for virtuallyevery lease to which it applies the lessee accounting modelin IFRS 16. However, a discount rate may not need to bedetermined for a lease if: a lessee applies the recognition exemption for either a shortterm or a low-value asset lease all lease payments are made on (or prior to) thecommencement date of the lease, or all lease payments are variable and not dependent on anindex or rate (eg, all lease payments vary based on sales orusage).The interest rate implicit in the lease may be similar to thelessee’s incremental borrowing rate in many cases. Both ratesconsider the credit risk of the lessee, the term of the lease, thesecurity and the economic environment in which the transactionoccurs.Our Insights into IFRS 16 series looksat key areas of the new Standard andaims to provide assistance in preparingfor IFRS 16. The key areas covered in theseries are: Understanding the discount rate Interim periods Definition of a lease Lease term Transition choices Sale and leaseback accounting Lease payments Presentation and disclosure Lease incentivesCommercial significanceMostNumber ofentities affectedIFRS 16 will affect most companies that report under IFRS andare involved in leasing.HighImpact onaffected entitiesIFRS 16 will have a substantial impact on the financialstatements of lessees of property and high value equipment.Bringing all leases on-balance sheet is controversial. The IASBtherefore made compromises to reduce the controversy, inparticular exemptions for short-term and low value asset leases.As a result businesses that lease only assets such as printersand laptops will face only a limited impact. For businessesthat lease ‘big-ticket’ assets, such as property and high-valueequipment, this will however be a major change.To obtain your copy, please get in touch with the yourlocal IFRS contact or go to ating the changes to IFRS – 2021 Edition 7

Prepayment Features withNegative Compensation(Amendments to IFRS 9)In October 2017, the IASB published ‘Prepayment Featureswith Negative Compensation (Amendments to IFRS 9)’.The amendments allow companies to measure particularprepayable financial assets with negative compensation atamortised cost or at fair value through other comprehensiveincome – instead of measuring those assets at fair valuethrough profit or loss (FVTPL).The amendments also include clarifications to the modificationor exchange of a financial liability that does not result inderecognition.After IFRS 9 was issued, the IFRS Interpretations Committeereceived a request on how to apply the IFRS 9 requirementsfor recognising and measuring financial instruments tocertain debt instruments where the borrower is permitted toprepay the instrument at an amount that could be less thanthe unpaid principal and interest owed. Such a prepaymentfeature is often referred to as including potential ‘negativecompensation’.Under the then existing requirements of IFRS 9, an entity wouldhave measured a financial asset with negative compensationat FVTPL as the ‘negative compensation’ feature would havebeen viewed as introducing potential cash flows that were notsolely payments of principal and interest.However, to improve the usefulness of the information provided,in particular on the instrument’s effective interest rate andexpected credit losses, the IASB issued the amendments so thatentities will now be able to measure some prepayable financialassets with negative compensation at amortised cost.8 Navigating the changes to IFRS – 2021 Edition‘The change to the accountingfor a modification or exchangeof a financial liability that doesnot result in derecognition iseffective from 2018 as this textmerely clarifies the existingStandard as opposed toamending it.’

Another issue – Modification or exchange of a financialliability that does not result in derecognitionConcurrent with the amendment to IFRS 9 for prepaymentfeatures with negative compensation, the IASB discussedthe accounting for a modification or exchange of a financialliability measured at amortised cost that does not result in thederecognition of the financial liability. Specifically, the IASBconsidered whether, when applying IFRS 9, an entity shouldrecognise any adjustment to the amortised cost of the financialliability arising from such a modification or exchange in profitor loss at the date of the modification or exchange.The IASB concluded that no change needed to be made tothe Standard itself but has clarified the existing position byadding text to the Basis for Conclusions on IFRS 9 in theseamendments.To summarise, the IASB believes IFRS 9 provides an adequatebasis for an entity to account for modifications and exchangesof financial liabilities that do not result in derecognition. Thetext which has been added in the amendments highlightsthat the requirements in IFRS 9 for adjusting the amortisedcost of a financial liability when a modification (or exchange)does not result in the derecognition of the financial liabilityare consistent with the requirements for adjusting the grosscarrying amount of a financial asset when a modificationdoes not result in the derecognition of the financial asset.Those requirements state when contractual cash flows ofa financial asset are renegotiated or otherwise modifiedand the renegotiation or modification does not result in thederecognition of that financial asset, an entity shall recalculatethe gross carrying amount of the financial asset and shallrecognise a modification gain or loss in profit or loss.The change to the accounting for a modification or exchangeof a financial liability that does not result in derecognition iseffective from 2018 as this text merely clarifies the existingStandard as opposed to amending it.‘To summarise, the IASB believes that IFRS 9 provides anadequate basis for an entity to account for modificationsand exchanges of financial liabilities that do not result inderecognition.’Navigating the changes to IFRS – 2021 Edition 9

Ironically, the ‘other issue’ clarifying the accounting for amodification or exchange of a financial liability that does notresult in derecognition may well result in the most significantchange in accounting as modification gains and losses will nowbe recognised immediately in profit or loss in such situations.‘Prepayment Features with Negative Compensation –Amendments to IFRS 9’ is effective for annual periods beginningon or after 1 January 2019, with earlier application permitted.Commercial significanceSomeNumber ofentities affectedThe amendments will have most relevance to financialinstitutions who hold these types of financial instruments,although it is possible that some other entities will be affected.HighImpact onaffected entitiesThese amendments are important to financial institutions, aswithout them they would have had to account for what areessentially debt-type financial assets at fair value as opposedto amortised cost, which may not have provided the most usefulinformation to users.The ‘other issue’ included in these amendments could have aneven more significant impact and must be applied at the sametime IFRS 9 is applied.‘Ironically, the ‘other issue’ clarifying the accounting fora modification or exchange of a financial liability that doesnot result in derecognition may well result in the mostsignificant change in accounting as modification gains andlosses will now be recognised immediately in profit or lossin such situations.’10 Navigating the changes to IFRS – 2021 Edition

Long-term Interests inAssociates and JointVentures (Amendmentsto IAS 28)In October 2017 the IASB published ‘Investments in Associatesand Joint Ventures (Amendments to IAS 28)’ clarifying thatcompanies account for long-term interests in an associate orjoint venture – to which the equity method is not applied – usingIFRS 9 ‘Financial Instruments’. This includes long-term intereststhat, in substance, form part of the entity’s net investment in anassociate or joint venture.IFRS 9 excludes interests in associates and joint venturesaccounted for in accordance with IAS 28. However, somestakeholders expressed an opinion that it was not clear whetherthat exclusion applies only to interests in associates and jointventures to which the equity method is applied or whether itapplies to all interests in associates and joint ventures.In the amendments, the IASB clarifies that the exclusion inIFRS 9 applies only to interests accounted for using the equitymethod. Therefore, an entity applies IFRS 9 to other interestsin associates and joint ventures, including long-term intereststo which the equity method is not applied and which, insubstance, form part of the net investment in those associatesand joint ventures.The IASB has also published an example that illustrates howentities apply the requirements in IFRS 9 and IAS 28 to longterm interests in an associate or joint venture.Commercial significanceSomeNumber ofentities affectedThe amendments will impact entities that have interests inassociates and joint ventures to which the equity method isapplied.HighImpact onaffected entitiesThe amendment is significant as it means holdings in debttype instruments issued by an associate or joint venture will besubject to IFRS 9’s impairment requirements.‘IFRS 9 excludes interests inassociates and joint venturesaccounted for in accordancewith IAS 28.’Navigating the changes to IFRS – 2021 Edition 11

IFRIC 23 Uncertainty overIncome Tax TreatmentsThe IFRS Interpretations Committee (IFRIC) publishedIFRIC 23 ‘Uncertainty over Income Tax Treatments’, specifyinghow entities should reflect uncertainty in accounting forincome taxes.IAS 12 ‘Income Taxes’ specifies how to account for current anddeferred tax but not how to reflect the effects of uncertainty.IFRIC 23 addresses this previous lack of guidance.IFRIC 23 addresses uncertainty over how tax treatments shouldaffect the accounting for income taxes. IFRIC observed therewas diversity in practice for various issues on the recognitionand measurement of a tax liability or asset in circumstanceswhere there is uncertainty in the application of the tax lawin concern. The table illustrates the main issues that areaddressed by the Interpretation.Main issues addressed by IFRIC 23IssueProposalWhen and how the effect of uncertainty over income taxtreatments should be included in the determination oftaxable profit (tax loss), tax bases, unused tax losses,unused tax credits and tax rates an entity is required to consider whether it is probable that a taxationauthority will accept an uncertain tax treatment if it is, the entity would determine taxable profit (tax loss), tax bases, unusedtax losses, unused tax credits or tax rates consistently with the tax treatmentused or planned to be used in its income tax filings if the entity concludes it is not probable the taxation authority will accept anuncertain tax treatment, it uses either the most likely amount or the expectedvalue in determining taxable profit (tax loss), tax bases, unused tax losses,unused tax credits and tax rates (depending on which method is expected tobetter predict the resolution of the unce

2 Navigating the changes to IFRS – 2021 Edition Effective dates of new Standards Based on Standards issued at 31 December 2020 The colour coding gives an indication of when the changes covered in the publication become effective in relation to the spe