AASB 16 Check: How do I apply the 'grandfathering' exemption?
AASB 16 Check: Applying the 'grandfathering' exemption
AASB 16 Leases contains a new lease definition, however on transition to AASB 16 entities can 'grandfather' their previous assessment of whether there is a lease. This AASB 16 Check responds to some of the more common questions we are hearing relating to 'grandfathering' the lease assessment.
Let’s pose a scenario that prior to the date of initial application of AASB 16, a company entered into an IT services arrangement. When assessed under AASB 117 Leases and Interpretation 4 Determining whether an Arrangement contains a Lease, the IT services arrangement does not contain a lease.
Interpretive response: Yes. On transition to AASB 16 an entity can choose to apply a practical expedient to 'grandfather' the previous assessment of whether a contract contains a lease. This means that for those contracts which did not contain leases under AASB 117 and Interpretation 4, there is no requirement to reassess whether those contracts contain leases upon adoption of AASB 16.
Interpretive response: No. If an entity chooses to apply the 'grandfathering' practical expedient, it applies the practical expedient to all contracts entered into before the date of initial application. This means that if the company 'grandfathers' the lease assessment, on transition:
- the IT services arrangement shall not be accounted for as a lease; and
- all other arrangements which contain leases under AASB 117 and Interpretation 4 shall be accounted for as leases under AASB 16.
An entity cannot choose which contracts to 'grandfather'.
Interpretive response: No. On application of AASB 16, all leases are accounted for on balance sheet with limited exceptions*.
Let’s pose a scenario that the company elects to apply the 'grandfathering' practical expedient. Accordingly, the IT contract is not accounted for as a lease. Post implementation, the company negotiates a change to the terms and conditions of the IT services arrangement not contemplated in the original contract.
Interpretive response: Yes. The practical expedient to 'grandfather' the lease definition applies to the terms and conditions of contracts at the date of initial application only. Post the date of initial application if there is a change to the terms and conditions of a contract, the entity is required to reassess whether the contract contains a lease applying AASB 16.
In technical speak
*There are some scenarios where leases may not be recognised on-balance sheet, for example:
- If the lease payments are variable, for example based on usage [AASB 16: 26-28]
- Leases which are eligible for the short-term or low value elections [AASB 16: 5-6].
If you would like to discuss the implementation of the new standard for your organisation, get in touch.
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