IFRS 16 Leases - Disclosures required in the first set of interim financial statements

IFRS 16 Leases (“IAS 16”) came into effect on 1 January 2019. The first interim set of financial statements, which are usually presented in a condensed format in accordance with IAS 34 Interim Financial Reporting (“IAS 34”), must therefore take account of the implementation of the new standard. For entities with a 31 December 2019 year-end, the half-year interim set of financial statements will therefore be as at 30 June 2019.

What is required in a set of interim financial statements, as applicable for IFRS 16

The condensed interim financial statements to 30 June 2019 must include, in accordance with IAS 34 and in conjunction with IFRS 16: a) a condensed statement of financial position that takes account of the new principles for presentation of the statement of financial position in IFRS 16 and the elections made by the entity for the presentation of lease assets and lease liabilities – IFRS 16 permits entities to either present right-of-use assets separately from other assets or aggregate them with the line items representing the underlying fixed assets. Similarly, lease liabilities may be either presented separately, or aggregated with other liability line items; b) one or more condensed statements of profit and loss and other comprehensive income; c) a condensed statement of changes in equity – This statement should include a separate line item for the impact of the change of accounting policy on opening equity (i.e. at 1 January 2018 if the full retrospective approach is used and only one comparative period is presented, or at 1 January 2019 if the modified retrospective approach is used); d) a condensed statement of cash flows; and e) a selection of explanatory notes: i) IAS 34 requires an explanation of significant events and transactions to enable users to understand how the entity’s financial position and performance have changed since 31 December 2018. These disclosures must update the relevant information contained in the most recent annual report; and ii) IAS 34 also includes a minimum list of disclosures required in the notes (or elsewhere in the interim financial reporting, incorporated by cross-reference to the interim financial statements) including a description of the nature and impact of the change of accounting policy in response to the introduction of the new standards (IFRS 34.16 A (a)).

Entities may also need to disclose any other information that is relevant, particularly if IFRS 16 has a significant impact.

In addition, because 2019 is the first year of application of IFRS 16, the disclosures required by Appendix C of IFRS 16 relating to the initial application and chosen method of transition need to be provided. This applies to the first financial statements issued in the first year of application, which in our view means it applies to the interim financial statements, as well as to the annual financial statements.

What are the transition disclosures required under IFRS 16

IFRS 16 offers lessees the choice between: 1) full retrospective application (which involves restating the comparative financial statements presented and disclosing the impact of first-time application on opening equity for the first comparative period presented); or 2) modified retrospective application (which involves recognising the impact of first-time application on equity at the transition date i.e. at 1 January 2019). Therefore, the transition disclosures required under IFRS 16 differ depending on the transition approach chosen by the entity.

The full retrospective application approach – If the entity has elected to use the full retrospective application approach, IFRS 16 refers back to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (“IAS 8”). In this case, the entity should disclose the following information in accordance with IAS 8.28:

• the title of the IFRS;
• when applicable, that the change in accounting policy is made in accordance with its transitional provisions;
• the nature of the change in accounting policy;
• when applicable, a description of the transitional provisions;
• when applicable, the transitional provisions that might have an effect on future periods;
• for the current period and each prior period presented, to the extent practicable, the amount of the adjustment:
  • for each financial statement line item affected; and
  • if IAS 33 Earnings per Share applies, for basic and diluted earnings per share;
• the amount of the adjustment relating to periods before those presented, to the extent practicable; and
• if the required retrospective application is impracticable for a particular prior period, or for periods before those presented, the circumstances that led to the existence of that condition and a description of how and from when the change in accounting policy has been applied.

The modified retrospective application approach – If the entity has elected to use the modified retrospective transition approach, IFRS 16.C12 states that the entity should disclose all the information required by IAS 8.28, except for the information required by 28(f), i.e. the amount of the adjustment for each financial statement line item affected, and for earnings per share. This adjustment to the requirements of IAS 8 stems from the fact that the modified retrospective approach prohibits entities from restating comparative information presented (in the primary financial statements and in the notes). However, an entity may still choose to present this information outside the financial statements. Accordingly, instead, IFRS 16 requires first-time adopters using the modified retrospective approach to disclose the following:

• the weighted average lessee’s incremental borrowing rate applied to lease liabilities at the date of initial application; and
• an explanation of any difference between:
  • operating lease commitments disclosed applying IAS 17 (i.e. the amount of commitments disclosed immediately preceding the date of initial application), discounted using the incremental borrowing rate at the date of initial application; and
  • lease liabilities recognised at the transition date.

And finally, as the modified retrospective approach permits entities to choose from a list of available practical expedients, (for example applying a single discount rate to a portfolio of leases with reasonably similar characteristics, relying on assessments made under IAS 37 immediately before the transition date rather than carrying out an impairment test, not restating leases with a remaining term of less than 12 months, excluding initial direct costs) entities that elect to apply this transition approach should disclose which of these practical expedients they use.

Is there a requirement to present of an additional balance sheet in the interim financial statements?

If an entity elects to apply the full retrospective application approach, there is no obligation to present an additional balance sheet/statement of financial position at the start of the earliest period presented within the interim financial statements as at 30 June 2019. However, an entity may elect to present this information if IFRS 16 has had a significant impact. Accordingly, the presentation of a “third”/additional balance sheet (which for a 31 December 2019 year-end would generally be as at 31 December 2017) is only required in the 2019 annual financial statements. The question of whether, or not, to present an additional balance sheet does not arise if the entity uses the modified retrospective transition approach, as this approach prohibits restatement of comparative information presented.