IFRS16: How to eliminate operating lease in Consolidated FS

[Jack7527]

As we know about IFRS16, we can see that the accounting for operating leases is asymmetrical: both lessees and lessors recognize the same asset in their financial statements

Situation:
What If Company A (lessor) is a parent and Company B (lessee) is a subsidiary.

Company A considers the lease as Operating Lease and keeps recognizing the leased asset in his statement of financial position

While Company B's journal entries take an asset under the lease:
Debit Right-of-use asset
Credit Lease liability (in the amount of the lease liability)

This means now the same asset is in both company financial statements.

Moreover, not only for the initial recognition

Company A (lessor) recognize the lease income as an income on a straight-line basis over the lease term

BUT Company B
depreciate the asset over the lease term:
Debit Profit or loss – Depreciation charge
Credit Accumulated depreciation of right-of-use asset

recognize an interest on the lease liability:
Debit Profit or loss – Interest expense
Credit Lease liability

a reduction of the lease liability:
Debit Lease liability
Credit Bank account (cash)

So the question is:
How to eliminate the transaction like this in working paper to create the consolidated financial statements

 

[kirby]

Given - a lease you make to your sub needs to be totally eliminated
Assume Co A has an asset that Co B wants to use
In a rational world, A would sell it to B at cost and we're done monkeying around with this stuff (after we elim the interco sale)
In the post, B leases from A. B now has all sorts of complex lease accounting entries while A just shows the leased asset as an asset, depreciates it and has rental income from B
Oversimplified - In your worksheet entries, you reverse all the entries B made. For cash payments, record now as intercompany due to and due from.
Leaves the consolidated company with - only the original asset in the books of A, its depreciation expense and no rental income
And also results in some very tired and very bitter parent company accountants who worked through all the eliminations because of the way the deal was structured.

 

[Fidget]

As we know about IFRS16, we can see that the accounting for operating leases is asymmetrical: both lessees and lessors recognize the same asset in their financial statements

Situation:
What If Company A (lessor) is a parent and Company B (lessee) is a subsidiary.

Company A considers the lease as Operating Lease and keeps recognizing the leased asset in his statement of financial position

While Company B's journal entries take an asset under the lease:
Debit Right-of-use asset
Credit Lease liability (in the amount of the lease liability)

This means now the same asset is in both company financial statements.

No it doesn't. The "asset" only appears on the balance sheet of the lessor. The "right to use" is what will appear in the lessee's balance sheet. So, the same asset isn't in both sets of financial statements. It's a bit of a mind fcuk to be fair, seeing as the lessee will essentially be capitalising what seems more like an intangible asset ("right of use"), as if it was a tangible asset like any other.

Moreover, not only for the initial recognition

Company A (lessor) recognize the lease income as an income on a straight-line basis over the lease term

BUT Company B
depreciate the asset over the lease term:
Debit Profit or loss – Depreciation charge
Credit Accumulated depreciation of right-of-use asset

recognize an interest on the lease liability:
Debit Profit or loss – Interest expense
Credit Lease liability

a reduction of the lease liability:
Debit Lease liability
Credit Bank account (cash)

So the question is:
How to eliminate the transaction like this in working paper to create the consolidated financial statements

IFRS 16 should've been called "Right to use Assets" or something similar to get it way from the term "lease", because by calling it "leases", it gets everybody thinking that it's all about treating all leases as finance leases to get them on the balance sheet.

Whilst doing away with operating leases in the accounts of lessees was its intention, the term "lease" as we know it, for lessees, will no longer apply under IFRS 16 - it's all about "right of use". So forget accounting for "finance leases" & "operating leases" and the term "lease" in general.

The capitalisation of the "right of use" does away with the norm of both operating & finance leases, and therefore that current/long term liability "lease" obligation stuff with finance leases because the whole term of the payments is capitalised and depreciated - all rolled into one, basically.

In a straightforward Parent/Sub "right to use", there won't be any issues. But there are issues where say two subs have a "right to use" asset that doesn't qualify to be capitalised because it is not distinct to either of them... yet on consolidation... yep.. it is distinct and so it becomes capitalised in the consolidated accounts.

Despite years in the making, IFRS 16 is going to instigate a lot of changes in accounting.

 

[KaranNahar]

I just came across similar problem on elimination entry on consolidation. On application of IFRS 16 to an inter-company transaction, the Depreciation and Interest Expense recognized by the Lessee would not be exactly equal to the Rental Income recognized by Lessor. How would the elimination happen then?

 

[Fadcenzo]

I just came across similar problem on elimination entry on consolidation. On application of IFRS 16 to an inter-company transaction, the Depreciation and Interest Expense recognized by the Lessee would not be exactly equal to the Rental Income recognized by Lessor. How would the elimination happen then?

Hi, did you have the answer for this question? Im also stuck with this kind of elimination. Kindly please reply this with the solution. Thank you in advances

 

[kirby]

Yes, this is awful.
So, eliminate as much intercompany income/expense as you can, then
if you have uneliminated income left over, reclass it to other income.
if you have uneliminated expense left over, reclass it to other expense
then go forward with your life...