AASB 16 Check: Are ECLs recognised on sub-lease receivables?

AASB 16 Check: Sub-lease receivables and ECLs

In one of our previous AASB 16 Check articles we discussed the considerations for sub-lessors under the new standard. Following on, this issue of AASB 16 Check responds to the question we are hearing from sub-lessors relating to the recognition of expected credit losses (ECL) on sub-lease receivables on the adoption of AASB 16 Leases.

Leases AASB 16: Recognition and measurement, flow on impacts and transition infographic


Let’s pose a scenario that Company Y leases five floors of an office building for ten years (head lease). After four years, Company Y sub-leases three floors separately for the remaining lease term. Under AASB 117 Leases Company Y classified the head lease and the sub-lease as operating leases.

On adoption of the new leases standard, the head lease and sub-lease have a remaining lease term of three years. Company Y adopts the modified retrospective method and recognises a lease liability and right-of-use (ROU) asset equal to the carrying amount of the lease liability in respect of the head lease.

Company Y reassesses the classification of sub-leases on transition and determines that the sub-leases are finance leases on adoption of AASB 16. Company Y therefore recognises lease receivables for the lease payments receivable under the sub-leases. In accordance with AASB 9 Financial Instruments it recognises an expected credit loss in relation to lease receivables.

Question: Can this expected credit loss be recognised in opening retained earnings as part of transition to AASB 16?

Interpretive response: Yes. It would appear that the credit loss relating to the reclassification of the sub-lease as a finance lease by Company Y at the date of initial application may be recognised in opening retained earnings*.

* This adjustment is part of the transition to AASB 16.

In technical speak

On transition, an intermediate lessor must:

(a) reassess subleases that were classified as operating leases applying AASB 117 and are ongoing at the date of initial application, to determine whether each sublease should be classified as an operating lease or a finance lease. This assessment is performed at the date of initial application on the basis of the remaining contractual terms and conditions of the head lease and sublease at that date.

(b) for subleases that were classified as operating leases applying AASB 117 but finance leases applying AASB 16, account for the sublease as a new finance lease entered into at the date of initial application. [AASB 16: C15]

If you would like to discuss the implementation of the new standard for your organisation, please contact us.

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