UK IFRS16 - sub lease

[RoverDom]

So I have the joys of all things IFRS16 at my company which likes to put fiddly arrangements in place. My company has a number of subsidiary companies and I work at the parent.

For office accommodation for Subsidiary A, we, the parent lease a building from a third party and sublease on identical terms to the subsidiary. Therefore the following items appear on the two balance sheets

Parent
- Finance lease liability to third party
- Finance lease receivable to subsidiary

Subsidiary

- Finance lease liability to parent
- Right of Use Asset

Simple enough so far (although would prefer there to be just one lease)

However there are now discussions taking place around the parent taking on the cost of the lease and eliminating the recharge to the subsidiary although the sub-lease would not be terminated as the subsidiary would still be bound by certain requirements. How would we deal with this under IFRS16? The ROUA asset I think is straight forward and stays with the subsidiary and depreciated but not sure what to do with the liability as the liability is decreasing but cash isn't going through their books, so I'm guessing would they have to recognise some sort of income?

 

[simply_slmn]

I have certain questions before I could answer yours:

1. If the cost is now to be borne by the Parent, instead of the subsidiary, how do we plan to extinguish the remaining liability from the books of subsidiary? (One option is to take it to equity in the books of subsidiary and create a deemed investment in the books of Parent)

2. How do we substantiate the fact the right to control the use of asset remains with the subsidiary in this case of a sub-lease

 

[RoverDom]

I have certain questions before I could answer yours:

1. If the cost is now to be borne by the Parent, instead of the subsidiary, how do we plan to extinguish the remaining liability from the books of subsidiary? (One option is to take it to equity in the books of subsidiary and create a deemed investment in the books of Parent)

2. How do we substantiate the fact the right to control the use of asset remains with the subsidiary in this case of a sub-lease

1. I guess that's the bit I'm struggling with is what happens to the liability.

2. That's the current assessment that control sits with the sub which has been agreed by auditors (and advisors) for the 2 years since IFRS 16 came in. Given that nothing else changes apart from the flow of money we're assuming that the assessment stays the same.

 

[simply_slmn]

We can evaluate two options then:

Option 1:

1. Since the cost will be borne by the parent here onwards, the liability should no longer exist in the books of subsidiary. In that case the company should debit the Liability account and give the credit to Equity.
2. In the books of parent, a liability is required to be created for the same amount. This has to be considered as a deemed investment for parent and the entry should be a debit of Investment and credit to Liability.

Option 2:

1. Treat the lease as lease modification, reassess the right of use if it is still with the subsidiary or transferred to the parent.
2. If the ROU is with subsidiary – Liability should be extinguished and taken to income statement as an income.
3. If the ROU is with parent – Asset and Liability both have to be derecognised from the books of subsidiary and the resultant profit or loss is to be taken to the income statement. Parent will recognise a new lease in the books as per IFRS 16.

Hope this helps!