Leases – IFRS 16

Requirement

IFRS 16 defines a lease as a contract that conveys to the customer, also referred to as the lessee, the right to use an asset for a period longer than twelve months in exchange for consideration. The company assesses whether a contract contains a lease based on whether the customer has the right to control the use of an identified asset for a period.

IFRS 16 must be applied only to leases, or the lease components of a contract. Service contracts are not covered.

IFRS 16 does not include a classification of leases as operating leases or finance leases for a lessee. Instead, the processing of all leases is similar to the processing of finance leases to which IAS 17 is applied.

On the balance sheet, leases are capitalized through the recognition of the present value of the future lease payments and their display as lease assets, that is, right-of-use (ROU) assets, or together with property, plant, and equipment.

If lease payments are made over time, the company also recognizes a financial liability representing its obligation to make future lease payments.

M3 solution

This requirement is supported by the Financial Agreement Controlling (FAC) module in the M3 Financial Controlling application:

  • The agreement master file is the repository for all past, existing, and future financial agreements that are entered by a business entity.
  • For each agreement, the agreement line identifies the actual product or service being provided to the lessee by the lessor of the goods, product, or service. One agreement can have several detailed lines, and one line can relate to several identical objects. Information from the header record is retrieved by default from the various agreement lines, but users can change it.
  • From the agreement line, a payment plan is created and connected to reflect the amount and timing of future payments that are due to the payee under the agreement terms. The payment plan is used to calculate the net present value of this agreed cash flow into future periods.
  • From the agreement line, accounting records are created to reflect the accounting entries that are required for lease accounting and reporting. When considering which accounting entries to reflect at the M3 division level, the company must consider these reporting rules:
    • Local GAAP reporting rules
    • IFRS 16 lease reporting rules
  • The period-end valuation of the lease liability is produced by M3. The general ledger accounting entries are created by M3 to the profit and loss accounts and the balance sheet accounts of the division.
  • In accounts payable, recurring payments that are connected to finance agreements are generated and updated as part of the normal processing of payment proposals, so that bank transactions be correctly reflected.
  • The connection to lease object line items in a financial agreement is used for the straight-line depreciation of leased equipment that is being accounted for as ROU fixed assets.

Configuration guidelines

See ‘Financial Agreement Controlling’ in the M3 Business Engine User Documentation Infocenter.