leases hw

NZ IFRS 16

1

New Zealand Equivalent to International Financial Reporting Standard 16

Leases (NZ IFRS 16)

Issued February 2016 and includes amendments to 12 July 2018

This Standard was issued on 11 February 2016 by the New Zealand Accounting Standards Board of the External

Reporting Board pursuant to section 12(a) of the Financial Reporting Act 2013.

This Standard is a disallowable instrument for the purposes of the Legislation Act 2012, and pursuant to section 27(1)

of the Financial Reporting Act 2013 takes effect on 10 March 2016.

Reporting entities that are subject to this Standard are required to apply it in accordance with the effective date, which

is set out in paragraph C1 of Appendix C.

In finalising this Standard, the New Zealand Accounting Standards Board has carried out appropriate consultation in

accordance with section 22(1) of the Financial Reporting Act 2013.

This New Zealand Tier 1 and Tier 2 For-profit Accounting Standard has been issued as a result of a new International

Financial Reporting Standard.

NZ IFRS 16 incorporates the equivalent IFRS® Standard as issued by the International Accounting Standards Board

(IASB).

Tier 1 for-profit entities that comply with NZ IFRS 16 will simultaneously be in compliance with IFRS 16 Leases.

Tier 2 for-profit entities must comply with all the provisions of NZ IFRS 16.

This Standard, when applied, will supersede the following Standards:

(a) NZ IAS 17 Leases;

(b) NZ IFRIC 4 Determining whether an Arrangement contains a Lease;

(c) NZ SIC-15 Operating Leases—Incentives; and

(d) NZ SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease.

NZ IFRS 16

2

COPYRIGHT

© External Reporting Board (XRB) 2016

This XRB standard contains International Financial Reporting Standards (IFRS®) Foundation copyright material.

Reproduction within New Zealand in unaltered form (retaining this notice) is permitted for personal and

non-commercial use subject to the inclusion of an acknowledgement of the source.

Requests and enquiries concerning reproduction and rights for commercial purposes within New Zealand should be

addressed to the Chief Executive, External Reporting Board at the following email address: [email protected] and

the IFRS Foundation at the following email address: [email protected]

All existing rights (including copyrights) in this material outside of New Zealand are reserved by the IFRS Foundation.

Further information and requests for authorisation to reproduce for commercial purposes outside New Zealand should

be addressed to the IFRS Foundation.

ISBN 978-0-947505-03-5

Copyright

IFRS Standards are issued by the

International Accounting Standards Board

30 Cannon Street, London, EC4M 6XH, United Kingdom.

Tel: +44 (0)20 7246 6410 Fax: +44 (0)20 7246 6411

Email: [email protected] Web: www.ifrs.org

Copyright © International Financial Reporting Standards Foundation All rights reserved.

Reproduced and distributed by the External Reporting Board with the permission of the IFRS Foundation.

This English language version of the IFRS Standards is the copyright of the IFRS Foundation.

1. The IFRS Foundation grants users of the English language version of IFRS Standards (Users) the permission to

reproduce the IFRS Standards for

(i) the User’s Professional Use, or

(ii) private study and education

Professional Use: means use of the English language version of the IFRS Standards in the User’s professional

capacity in connection with the business of providing accounting services for the purpose of application of IFRS

Standards for preparation of financial statements and/or financial statement analysis to the User’s clients or to

the business in which the User is engaged as an accountant.

For the avoidance of doubt, the abovementioned usage does not include any kind of activities that make

(commercial) use of the IFRS Standards other than direct or indirect application of IFRS Standards, such as but

not limited to commercial seminars, conferences, commercial training or similar events.

2. For any application that falls outside Professional Use, Users shall be obliged to contact the IFRS Foundation

for a separate individual licence under terms and conditions to be mutually agreed.

3. Except as otherwise expressly permitted in this notice, Users shall not, without prior written permission of the

Foundation have the right to license, sublicense, transmit, transfer, sell, rent, or otherwise distribute any portion

of the IFRS Standards to third parties in any form or by any means, whether electronic, mechanical or otherwise

either currently known or yet to be invented.

4. Users are not permitted to modify or make alterations, additions or amendments to or create any derivative

works, save as otherwise expressly permitted in this notice.

5. Commercial reproduction and use rights are strictly prohibited. For further information please contact the IFRS

Foundation at [email protected].

The authoritative text of IFRS Standards is that issued by the International Accounting Standards Board in the English

language. Copies may be obtained from the IFRS Foundation’s Publications Department.

NZ IFRS 16

3

Please address publication and copyright matters in English to:

IFRS Foundation Publications Department

30 Cannon Street, London, EC4M 6XH, United Kingdom.

Tel: +44 (0)20 7332 2730 Fax: +44 (0)20 7332 2749

Email: [email protected] Web: www.ifrs.org

Trade Marks

The IFRS Foundation logo, the IASB logo, the IFRS for SMEs logo, the “Hexagon Device”, “IFRS Foundation”,

“eIFRS”, “IAS”, “IASB”, “IFRS for SMEs”, “IASs”, “IFRS”, “IFRSs”, “International Accounting Standards” and

“International Financial Reporting Standards”, “IFRIC” and “SIC” are Trade Marks of the Foundation.

Disclaimer

The authoritative text of the IFRS Standards is reproduced and distributed by the External Reporting Board in respect

of their application in New Zealand. The International Accounting Standards Board, the Foundation, the authors and

the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on

the material in this publication, whether such loss is caused by negligence or otherwise.

NZ IFRS 16

4

CONTENTS

NEW ZEALAND EQUIVALENT TO INTERNATIONAL FINANCIAL REPORTING STANDARD 16 LEASES

from paragraph

OBJECTIVE 1

SCOPE NZ 2.1

RECOGNITION EXEMPTIONS 5

IDENTIFYING A LEASE 9

Separating components of a contract 12

Lessee 13

Lessor 17

LEASE TERM 18

LESSEE 22

Recognition 22

Measurement 22

Initial measurement 23

Subsequent measurement 29

Presentation 47

Disclosure 51

LESSOR 61

Classification of leases 61

Finance leases 67

Recognition and measurement 67

Operating leases 81

Recognition and measurement 81

Presentation 88

Disclosure 89

Finance leases 93

Operating leases 95

SALE AND LEASEBACK TRANSACTIONS 98

Assessing whether the transfer of the asset is a sale 99

Transfer of the asset is a sale 100

Transfer of the asset is not a sale 103

APPENDICES

A Defined terms

B Application guidance

C Effective date and transition

D Amendments to other Standards

HISTORY OF AMENDMENTS

NZ IFRS 16

5

The following is available within New Zealand on the XRB website as additional material

APPROVAL BY THE IASB OF IFRS 16 LEASES ISSUED IN JANUARY 2016

IASB BASIS FOR CONCLUSIONS

IASB DISSENTING OPINION

APPENDIX Amendments to the Basis for Conclusions on other Standards

IASB ILLUSTRATIVE EXAMPLES

APPENDIX Amendments to guidance on other Standards

NZ IFRS 16

6

New Zealand Equivalent to International Financial Reporting Standard 16 Leases (NZ IFRS 16) is set out in

paragraphs 1–103 and Appendices A–D. All the paragraphs have equal authority. Paragraphs in bold type state the main

principles. Terms defined in Appendix A are in italics the first time that they appear in the Standard. Definitions of

other terms are given in the Glossary. NZ IFRS 16 should be read in the context of its objective, the IASB’s Basis for

Conclusions on IFRS 16 and the New Zealand Equivalent to the IASB Conceptual Framework for Financial Reporting

(NZ Framework). NZ IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for

selecting and applying accounting policies in the absence of explicit guidance.

Any New Zealand additional material is shown with either “NZ” or “RDR” preceding the paragraph number.

NZ IFRS 16

7

New Zealand Equivalent to International Financial Reporting Standard 16 Leases

Objective

1 This Standard sets out the principles for the recognition, measurement, presentation and disclosure of

leases. The objective is to ensure that lessees and lessors provide relevant information in a manner that

faithfully represents those transactions. This information gives a basis for users of financial statements

to assess the effect that leases have on the financial position, financial performance and cash flows of

an entity.

2 An entity shall consider the terms and conditions of contracts and all relevant facts and circumstances when

applying this Standard. An entity shall apply this Standard consistently to contracts with similar

characteristics and in similar circumstances.

Scope

NZ 2.1 This Standard applies to Tier 1 and Tier 2 for-profit entities.

3 An entity shall apply this Standard to all leases, including leases of right-of-use assets in a sublease, except

for:

(a) leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources;

(b) leases of biological assets within the scope of NZ IAS 41 Agriculture held by a lessee;

(c) service concession arrangements within the scope of NZ IFRIC 12 Service Concession Arrangements;

(d) licences of intellectual property granted by a lessor within the scope of NZ IFRS 15 Revenue from

Contracts with Customers; and

(e) rights held by a lessee under licensing agreements within the scope of NZ IAS 38 Intangible Assets

for such items as motion picture films, video recordings, plays, manuscripts, patents and copyrights.

4 A lessee may, but is not required to, apply this Standard to leases of intangible assets other than those

described in paragraph 3(e).

Recognition exemptions (paragraphs B3–B8)

5 A lessee may elect not to apply the requirements in paragraphs 22–49 to:

(a) short-term leases; and

(b) leases for which the underlying asset is of low value (as described in paragraphs B3–B8).

6 If a lessee elects not to apply the requirements in paragraphs 22–49 to either short-term leases or leases for

which the underlying asset is of low value, the lessee shall recognise the lease payments associated with those

leases as an expense on either a straight-line basis over the lease term or another systematic basis. The lessee

shall apply another systematic basis if that basis is more representative of the pattern of the lessee’s benefit.

7 If a lessee accounts for short-term leases applying paragraph 6, the lessee shall consider the lease to be a new

lease for the purposes of this Standard if:

(a) there is a lease modification; or

(b) there is any change in the lease term (for example, the lessee exercises an option not previously

included in its determination of the lease term).

8 The election for short-term leases shall be made by class of underlying asset to which the right of use relates.

A class of underlying asset is a grouping of underlying assets of a similar nature and use in an entity’s

operations. The election for leases for which the underlying asset is of low value can be made on a lease-by-

lease basis.

NZ IFRS 16

8

Identifying a lease (paragraphs B9–B33)

9 At inception of a contract, an entity shall assess whether the contract is, or contains, a lease. A contract

is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a

period of time in exchange for consideration. Paragraphs B9–B31 set out guidance on the assessment

of whether a contract is, or contains, a lease.

10 A period of time may be described in terms of the amount of use of an identified asset (for example, the

number of production units that an item of equipment will be used to produce).

11 An entity shall reassess whether a contract is, or contains, a lease only if the terms and conditions of the

contract are changed.

Separating components of a contract

12 For a contract that is, or contains, a lease, an entity shall account for each lease component within the contract

as a lease separately from non-lease components of the contract, unless the entity applies the practical

expedient in paragraph 15. Paragraphs B32–B33 set out guidance on separating components of a contract.

Lessee

13 For a contract that contains a lease component and one or more additional lease or non-lease components, a

lessee shall allocate the consideration in the contract to each lease component on the basis of the relative

stand-alone price of the lease component and the aggregate stand-alone price of the non-lease components.

14 The relative stand-alone price of lease and non-lease components shall be determined on the basis of the price

the lessor, or a similar supplier, would charge an entity for that component, or a similar component, separately.

If an observable stand-alone price is not readily available, the lessee shall estimate the stand-alone price,

maximising the use of observable information.

15 As a practical expedient, a lessee may elect, by class of underlying asset, not to separate non-lease components

from lease components, and instead account for each lease component and any associated non-lease

components as a single lease component. A lessee shall not apply this practical expedient to embedded

derivatives that meet the criteria in paragraph 4.3.3 of NZ IFRS 9 Financial Instruments.

16 Unless the practical expedient in paragraph 15 is applied, a lessee shall account for non-lease components

applying other applicable Standards.

Lessor

17 For a contract that contains a lease component and one or more additional lease or non-lease components, a

lessor shall allocate the consideration in the contract applying paragraphs 73–90 of NZ IFRS 15.

Lease term (paragraphs B34–B41)

18 An entity shall determine the lease term as the non-cancellable period of a lease, together with both:

(a) periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that

option; and

(b) periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise

that option.

19 In assessing whether a lessee is reasonably certain to exercise an option to extend a lease, or not to exercise

an option to terminate a lease, an entity shall consider all relevant facts and circumstances that create an

economic incentive for the lessee to exercise the option to extend the lease, or not to exercise the option to

terminate the lease, as described in paragraphs B37–B40.

20 A lessee shall reassess whether it is reasonably certain to exercise an extension option, or not to exercise a

termination option, upon the occurrence of either a significant event or a significant change in circumstances

that:

(a) is within the control of the lessee; and

(b) affects whether the lessee is reasonably certain to exercise an option not previously included in its

determination of the lease term, or not to exercise an option previously included in its determination

of the lease term (as described in paragraph B41).

NZ IFRS 16

9

21 An entity shall revise the lease term if there is a change in the non-cancellable period of a lease. For example,

the non-cancellable period of a lease will change if:

(a) the lessee exercises an option not previously included in the entity’s determination of the lease term;

(b) the lessee does not exercise an option previously included in the entity’s determination of the lease

term;

(c) an event occurs that contractually obliges the lessee to exercise an option not previously included in

the entity’s determination of the lease term; or

(d) an event occurs that contractually prohibits the lessee from exercising an option previously included

in the entity’s determination of the lease term.

Lessee

Recognition

22 At the commencement date, a lessee shall recognise a right-of-use asset and a lease liability.

Measurement

Initial measurement

Initial measurement of the right-of-use asset

23 At the commencement date, a lessee shall measure the right-of-use asset at cost.

24 The cost of the right-of-use asset shall comprise:

(a) the amount of the initial measurement of the lease liability, as described in paragraph 26;

(b) any lease payments made at or before the commencement date, less any lease incentives received;

(c) any initial direct costs incurred by the lessee; and

(d) an estimate of costs to be incurred by the lessee in dismantling and removing the underlying asset,

restoring the site on which it is located or restoring the underlying asset to the condition required by

the terms and conditions of the lease, unless those costs are incurred to produce inventories. The lessee

incurs the obligation for those costs either at the commencement date or as a consequence of having

used the underlying asset during a particular period.

25 A lessee shall recognise the costs described in paragraph 24(d) as part of the cost of the right-of-use asset

when it incurs an obligation for those costs. A lessee applies NZ IAS 2 Inventories to costs that are incurred

during a particular period as a consequence of having used the right-of-use asset to produce inventories during

that period. The obligations for such costs accounted for applying this Standard or NZ IAS 2 are recognised

and measured applying NZ IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

Initial measurement of the lease liability

26 At the commencement date, a lessee shall measure the lease liability at the present value of the lease

payments that are not paid at that date. The lease payments shall be discounted using the interest rate

implicit in the lease, if that rate can be readily determined. If that rate cannot be readily determined,

the lessee shall use the lessee’s incremental borrowing rate.

27 At the commencement date, the lease payments included in the measurement of the lease liability comprise

the following payments for the right to use the underlying asset during the lease term that are not paid at the

commencement date:

(a) fixed payments (including in-substance fixed payments as described in paragraph B42), less any lease

incentives receivable;

(b) variable lease payments that depend on an index or a rate, initially measured using the index or rate

as at the commencement date (as described in paragraph 28);

(c) amounts expected to be payable by the lessee under residual value guarantees;

NZ IFRS 16

10

(d) the exercise price of a purchase option if the lessee is reasonably certain to exercise that option

(assessed considering the factors described in paragraphs B37–B40); and

(e) payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option

to terminate the lease.

28 Variable lease payments that depend on an index or a rate described in paragraph 27(b) include, for example,

payments linked to a consumer price index, payments linked to a benchmark interest rate (such as LIBOR) or

payments that vary to reflect changes in market rental rates.

Subsequent measurement

Subsequent measurement of the right-of-use asset

29 After the commencement date, a lessee shall measure the right-of-use asset applying a cost model,

unless it applies either of the measurement models described in paragraphs 34 and 35.

Cost model

30 To apply a cost model, a lessee shall measure the right-of-use asset at cost:

(a) less any accumulated depreciation and any accumulated impairment losses; and

(b) adjusted for any remeasurement of the lease liability specified in paragraph 36(c).

31 A lessee shall apply the depreciation requirements in NZ IAS 16 Property, Plant and Equipment in

depreciating the right-of-use asset, subject to the requirements in paragraph 32.

32 If the lease transfers ownership of the underlying asset to the lessee by the end of the lease term or if the cost

of the right-of-use asset reflects that the lessee will exercise a purchase option, the lessee shall depreciate the

right-of-use asset from the commencement date to the end of the useful life of the underlying asset. Otherwise,

the lessee shall depreciate the right-of-use asset from the commencement date to the earlier of the end of the

useful life of the right-of-use asset or the end of the lease term.

33 A lessee shall apply NZ IAS 36 Impairment of Assets to determine whether the right-of-use asset is impaired

and to account for any impairment loss identified.

Other measurement models

34 If a lessee applies the fair value model in NZ IAS 40 Investment Property to its investment property, the

lessee shall also apply that fair value model to right-of-use assets that meet the definition of investment

property in NZ IAS 40.

35 If right-of-use assets relate to a class of property, plant and equipment to which the lessee applies the

revaluation model in NZ IAS 16, a lessee may elect to apply that revaluation model to all of the right-of-use

assets that relate to that class of property, plant and equipment.

Subsequent measurement of the lease liability

36 After the commencement date, a lessee shall measure the lease liability by:

(a) increasing the carrying amount to reflect interest on the lease liability;

(b) reducing the carrying amount to reflect the lease payments made; and

(c) remeasuring the carrying amount to reflect any reassessment or lease modifications specified in

paragraphs 39–46, or to reflect revised in-substance fixed lease payments (see paragraph B42).

37 Interest on the lease liability in each period during the lease term shall be the amount that produces a constant

periodic rate of interest on the remaining balance of the lease liability. The periodic rate of interest is the

discount rate described in paragraph 26, or if applicable the revised discount rate described in paragraph 41,

paragraph 43 or paragraph 45(c).

38 After the commencement date, a lessee shall recognise in profit or loss, unless the costs are included in the

carrying amount of another asset applying other applicable Standards, both:

(a) interest on the lease liability; and

(b) variable lease payments not included in the measurement of the lease liability in the period in which

the event or condition that triggers those payments occurs.

NZ IFRS 16

11

Reassessment of the lease liability

39 After the commencement date, a lessee shall apply paragraphs 40–43 to remeasure the lease liability to reflect

changes to the lease payments. A lessee shall recognise the amount of the remeasurement of the lease liability

as an adjustment to the right-of-use asset. However, if the carrying amount of the right-of-use asset is reduced

to zero and there is a further reduction in the measurement of the lease liability, a lessee shall recognise any

remaining amount of the remeasurement in profit or loss.

40 A lessee shall remeasure the lease liability by discounting the revised lease payments using a revised discount

rate, if either:

(a) there is a change in the lease term, as described in paragraphs 20–21. A lessee shall determine the

revised lease payments on the basis of the revised lease term; or

(b) there is a change in the assessment of an option to purchase the underlying asset, assessed considering

the events and circumstances described in paragraphs 20–21 in the context of a purchase option. A

lessee shall determine the revised lease payments to reflect the change in amounts payable under the

purchase option.

41 In applying paragraph 40, a lessee shall determine the revised discount rate as the interest rate implicit in the

lease for the remainder of the lease term, if that rate can be readily determined, or the lessee’s incremental

borrowing rate at the date of reassessment, if the interest rate implicit in the lease cannot be readily

determined.

42 A lessee shall remeasure the lease liability by discounting the revised lease payments, if either:

(a) there is a change in the amounts expected to be payable under a residual value guarantee. A lessee

shall determine the revised lease payments to reflect the change in amounts expected to be payable

under the residual value guarantee.

(b) there is a change in future lease payments resulting from a change in an index or a rate used to

determine those payments, including for example a change to reflect changes in market rental rates

following a market rent review. The lessee shall remeasure the lease liability to reflect those revised

lease payments only when there is a change in the cash flows (ie when the adjustment to the lease

payments takes effect). A lessee shall determine the revised lease payments for the remainder of the

lease term based on the revised contractual payments.

43 In applying paragraph 42, a lessee shall use an unchanged discount rate, unless the change in lease payments

results from a change in floating interest rates. In that case, the lessee shall use a revised discount rate that

reflects changes in the interest rate.

Lease modifications

44 A lessee shall account for a lease modification as a separate lease if both:

(a) the modification increases the scope of the lease by adding the right to use one or more underlying

assets; and

(b) the consideration for the lease increases by an amount commensurate with the stand-alone price for

the increase in scope and any appropriate adjustments to that stand-alone price to reflect the

circumstances of the particular contract.

45 For a lease modification that is not accounted for as a separate lease, at the effective date of the lease

modification a lessee shall:

(a) allocate the consideration in the modified contract applying paragraphs 13–16;

(b) determine the lease term of the modified lease applying paragraphs 18–19; and

(c) remeasure the lease liability by discounting the revised lease payments using a revised discount rate.

The revised discount rate is determined as the interest rate implicit in the lease for the remainder of

the lease term, if that rate can be readily determined, or the lessee’s incremental borrowing rate at the

effective date of the modification, if the interest rate implicit in the lease cannot be readily determined.

46 For a lease modification that is not accounted for as a separate lease, the lessee shall account for the

remeasurement of the lease liability by:

(a) decreasing the carrying amount of the right-of-use asset to reflect the partial or full termination of the

lease for lease modifications that decrease the scope of the lease. The lessee shall recognise in profit

or loss any gain or loss relating to the partial or full termination of the lease.

(b) making a corresponding adjustment to the right-of-use asset for all other lease modifications.

NZ IFRS 16

12

Presentation

47 A lessee shall either present in the statement of financial position, or disclose in the notes:

(a) right-of-use assets separately from other assets. If a lessee does not present right-of-use assets

separately in the statement of financial position, the lessee shall:

(i) include right-of-use assets within the same line item as that within which the corresponding

underlying assets would be presented if they were owned; and

(ii) disclose which line items in the statement of financial position include those right-of-use

assets.

(b) lease liabilities separately from other liabilities. If the lessee does not present lease liabilities

separately in the statement of financial position, the lessee shall disclose which line items in the

statement of financial position include those liabilities.

48 The requirement in paragraph 47(a) does not apply to right-of-use assets that meet the definition of investment

property, which shall be presented in the statement of financial position as investment property.

49 In the statement of profit or loss and other comprehensive income, a lessee shall present interest expense on

the lease liability separately from the depreciation charge for the right-of-use asset. Interest expense on the

lease liability is a component of finance costs, which paragraph 82(b) of NZ IAS 1 Presentation of Financial

Statements requires to be presented separately in the statement of profit or loss and other comprehensive

income.

50 In the statement of cash flows, a lessee shall classify:

(a) cash payments for the principal portion of the lease liability within financing activities;

(b) cash payments for the interest portion of the lease liability applying the requirements in NZ IAS 7

Statement of Cash Flows for interest paid; and

(c) short-term lease payments, payments for leases of low-value assets and variable lease payments not

included in the measurement of the lease liability within operating activities.

Disclosure

51 The objective of the disclosures is for lessees to disclose information in the notes that, together with the

information provided in the statement of financial position, statement of profit or loss and statement

of cash flows, gives a basis for users of financial statements to assess the effect that leases have on the

financial position, financial performance and cash flows of the lessee. Paragraphs 52–60 specify

requirements on how to meet this objective.

52 A lessee shall disclose information about its leases for which it is a lessee in a single note or separate section

in its financial statements. However, a lessee need not duplicate information that is already presented

elsewhere in the financial statements, provided that the information is incorporated by cross-reference in the

single note or separate section about leases.

53 A lessee shall disclose the following amounts for the reporting period:

(a) depreciation charge for right-of-use assets by class of underlying asset;

(b) interest expense on lease liabilities;

(c) the expense relating to short-term leases accounted for applying paragraph 6. This expense need not

include the expense relating to leases with a lease term of one month or less;

(d) the expense relating to leases of low-value assets accounted for applying paragraph 6. This expense

shall not include the expense relating to short-term leases of low-value assets included in

paragraph 53(c);

(e) the expense relating to variable lease payments not included in the measurement of lease liabilities;

(f) income from subleasing right-of-use assets;

(g) total cash outflow for leases;

(h) additions to right-of-use assets;

(i) gains or losses arising from sale and leaseback transactions; and

(j) the carrying amount of right-of-use assets at the end of the reporting period by class of underlying

asset.

NZ IFRS 16

13

*54 A lessee shall provide the disclosures specified in paragraph 53 in a tabular format, unless another format is

more appropriate. The amounts disclosed shall include costs that a lessee has included in the carrying amount

of another asset during the reporting period.

RDR 54.1 The amounts disclosed in accordance with paragraph 53 shall include costs that a Tier 2 lessee has included

in the carrying amount of another asset during the reporting period.

55 A lessee shall disclose the amount of its lease commitments for short-term leases accounted for applying

paragraph 6 if the portfolio of short-term leases to which it is committed at the end of the reporting period is

dissimilar to the portfolio of short-term leases to which the short-term lease expense disclosed applying

paragraph 53(c) relates.

56 If right-of-use assets meet the definition of investment property, a lessee shall apply the disclosure

requirements in NZ IAS 40. In that case, a lessee is not required to provide the disclosures in paragraph 53(a),

(f), (h) or (j) for those right-of-use assets.

57 If a lessee measures right-of-use assets at revalued amounts applying NZ IAS 16, the lessee shall disclose the

information required by paragraph 77 of NZ IAS 16 for those right-of-use assets.

*58 A lessee shall disclose a maturity analysis of lease liabilities applying paragraphs 39 and B11 of NZ IFRS 7

Financial Instruments: Disclosures separately from the maturity analyses of other financial liabilities.

59 In addition to the disclosures required in paragraphs 53–58, a lessee shall disclose additional qualitative and

quantitative information about its leasing activities necessary to meet the disclosure objective in paragraph 51

(as described in paragraph B48). This additional information may include, but is not limited to, information

that helps users of financial statements to assess:

(a) the nature of the lessee’s leasing activities;

(b) future cash outflows to which the lessee is potentially exposed that are not reflected in the

measurement of lease liabilities. This includes exposure arising from:

(i) variable lease payments (as described in paragraph B49);

(ii) extension options and termination options (as described in paragraph B50);

(iii) residual value guarantees (as described in paragraph B51); and

(iv) leases not yet commenced to which the lessee is committed.

(c) restrictions or covenants imposed by leases; and

(d) sale and leaseback transactions (as described in paragraph B52).

60 A lessee that accounts for short-term leases or leases of low-value assets applying paragraph 6 shall disclose

that fact.

Lessor

Classification of leases (paragraphs B53–B58)

61 A lessor shall classify each of its leases as either an operating lease or a finance lease.

62 A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to

ownership of an underlying asset. A lease is classified as an operating lease if it does not transfer

substantially all the risks and rewards incidental to ownership of an underlying asset.

63 Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather

than the form of the contract. Examples of situations that individually or in combination would normally lead

to a lease being classified as a finance lease are:

(a) the lease transfers ownership of the underlying asset to the lessee by the end of the lease term;

(b) the lessee has the option to purchase the underlying asset at a price that is expected to be sufficiently

lower than the fair value at the date the option becomes exercisable for it to be reasonably certain, at

the inception date, that the option will be exercised;

(c) the lease term is for the major part of the economic life of the underlying asset even if title is not

transferred;

(d) at the inception date, the present value of the lease payments amounts to at least substantially all of

the fair value of the underlying asset; and

NZ IFRS 16

14

(e) the underlying asset is of such a specialised nature that only the lessee can use it without major

modifications.

64 Indicators of situations that individually or in combination could also lead to a lease being classified as a

finance lease are:

(a) if the lessee can cancel the lease, the lessor’s losses associated with the cancellation are borne by the

lessee;

(b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example,

in the form of a rent rebate equaling most of the sales proceeds at the end of the lease); and

(c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially

lower than market rent.

65 The examples and indicators in paragraphs 63–64 are not always conclusive. If it is clear from other features

that the lease does not transfer substantially all the risks and rewards incidental to ownership of an underlying

asset, the lease is classified as an operating lease. For example, this may be the case if ownership of the

underlying asset transfers at the end of the lease for a variable payment equal to its then fair value, or if there

are variable lease payments, as a result of which the lessor does not transfer substantially all such risks and

rewards.

66 Lease classification is made at the inception date and is reassessed only if there is a lease modification.

Changes in estimates (for example, changes in estimates of the economic life or of the residual value of the

underlying asset), or changes in circumstances (for example, default by the lessee), do not give rise to a new

classification of a lease for accounting purposes.

Finance leases

Recognition and measurement

67 At the commencement date, a lessor shall recognise assets held under a finance lease in its statement of

financial position and present them as a receivable at an amount equal to the net investment in the lease.

Initial measurement

68 The lessor shall use the interest rate implicit in the lease to measure the net investment in the lease. In the

case of a sublease, if the interest rate implicit in the sublease cannot be readily determined, an intermediate

lessor may use the discount rate used for the head lease (adjusted for any initial direct costs associated with

the sublease) to measure the net investment in the sublease.

69 Initial direct costs, other than those incurred by manufacturer or dealer lessors, are included in the initial

measurement of the net investment in the lease and reduce the amount of income recognised over the lease

term. The interest rate implicit in the lease is defined in such a way that the initial direct costs are included

automatically in the net investment in the lease; there is no need to add them separately.

Initial measurement of the lease payments included in the net investment in the lease

70 At the commencement date, the lease payments included in the measurement of the net investment in the

lease comprise the following payments for the right to use the underlying asset during the lease term that are

not received at the commencement date:

(a) fixed payments (including in-substance fixed payments as described in paragraph B42), less any lease

incentives payable;

(b) variable lease payments that depend on an index or a rate, initially measured using the index or rate

as at the commencement date;

(c) any residual value guarantees provided to the lessor by the lessee, a party related to the lessee or a

third party unrelated to the lessor that is financially capable of discharging the obligations under the

guarantee;

(d) the exercise price of a purchase option if the lessee is reasonably certain to exercise that option

(assessed considering the factors described in paragraph B37); and

(e) payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option

to terminate the lease.

NZ IFRS 16

15

Manufacturer or dealer lessors

71 At the commencement date, a manufacturer or dealer lessor shall recognise the following for each of its

finance leases:

(a) revenue being the fair value of the underlying asset, or, if lower, the present value of the lease

payments accruing to the lessor, discounted using a market rate of interest;

(b) the cost of sale being the cost, or carrying amount if different, of the underlying asset less the present

value of the unguaranteed residual value; and

(c) selling profit or loss (being the difference between revenue and the cost of sale) in accordance with

its policy for outright sales to which NZ IFRS 15 applies. A manufacturer or dealer lessor shall

recognise selling profit or loss on a finance lease at the commencement date, regardless of whether

the lessor transfers the underlying asset as described in NZ IFRS 15.

72 Manufacturers or dealers often offer to customers the choice of either buying or leasing an asset. A finance

lease of an asset by a manufacturer or dealer lessor gives rise to profit or loss equivalent to the profit or loss

resulting from an outright sale of the underlying asset, at normal selling prices, reflecting any applicable

volume or trade discounts.

73 Manufacturer or dealer lessors sometimes quote artificially low rates of interest in order to attract customers.

The use of such a rate would result in a lessor recognising an excessive portion of the total income from the

transaction at the commencement date. If artificially low rates of interest are quoted, a manufacturer or dealer

lessor shall restrict selling profit to that which would apply if a market rate of interest were charged.

74 A manufacturer or dealer lessor shall recognise as an expense costs incurred in connection with obtaining a

finance lease at the commencement date because they are mainly related to earning the manufacturer or

dealer’s selling profit. Costs incurred by manufacturer or dealer lessors in connection with obtaining a finance

lease are excluded from the definition of initial direct costs and, thus, are excluded from the net investment

in the lease.

Subsequent measurement

75 A lessor shall recognise finance income over the lease term, based on a pattern reflecting a constant

periodic rate of return on the lessor’s net investment in the lease.

76 A lessor aims to allocate finance income over the lease term on a systematic and rational basis. A lessor shall

apply the lease payments relating to the period against the gross investment in the lease to reduce both the

principal and the unearned finance income.

77 A lessor shall apply the derecognition and impairment requirements in NZ IFRS 9 to the net investment in

the lease. A lessor shall review regularly estimated unguaranteed residual values used in computing the gross

investment in the lease. If there has been a reduction in the estimated unguaranteed residual value, the lessor

shall revise the income allocation over the lease term and recognise immediately any reduction in respect of

amounts accrued.

78 A lessor that classifies an asset under a finance lease as held for sale (or includes it in a disposal group that is

classified as held for sale) applying NZ IFRS 5 Non-current Assets Held for Sale and Discontinued

Operations shall account for the asset in accordance with that Standard.

Lease modifications

79 A lessor shall account for a modification to a finance lease as a separate lease if both:

(a) the modification increases the scope of the lease by adding the right to use one or more underlying

assets; and

(b) the consideration for the lease increases by an amount commensurate with the stand-alone price for

the increase in scope and any appropriate adjustments to that stand-alone price to reflect the

circumstances of the particular contract.

80 For a modification to a finance lease that is not accounted for as a separate lease, a lessor shall account for

the modification as follows:

(a) if the lease would have been classified as an operating lease had the modification been in effect at the

inception date, the lessor shall:

(i) account for the lease modification as a new lease from the effective date of the modification;

and

NZ IFRS 16

16

(ii) measure the carrying amount of the underlying asset as the net investment in the lease

immediately before the effective date of the lease modification.

(b) otherwise, the lessor shall apply the requirements of NZ IFRS 9.

Operating leases

Recognition and measurement

81 A lessor shall recognise lease payments from operating leases as income on either a straight-line basis

or another systematic basis. The lessor shall apply another systematic basis if that basis is more

representative of the pattern in which benefit from the use of the underlying asset is diminished.

82 A lessor shall recognise costs, including depreciation, incurred in earning the lease income as an expense.

83 A lessor shall add initial direct costs incurred in obtaining an operating lease to the carrying amount of the

underlying asset and recognise those costs as an expense over the lease term on the same basis as the lease

income.

84 The depreciation policy for depreciable underlying assets subject to operating leases shall be consistent with

the lessor’s normal depreciation policy for similar assets. A lessor shall calculate depreciation in accordance

with NZ IAS 16 and NZ IAS 38.

85 A lessor shall apply NZ IAS 36 to determine whether an underlying asset subject to an operating lease is

impaired and to account for any impairment loss identified.

86 A manufacturer or dealer lessor does not recognise any selling profit on entering into an operating lease

because it is not the equivalent of a sale.

Lease modifications

87 A lessor shall account for a modification to an operating lease as a new lease from the effective date of the

modification, considering any prepaid or accrued lease payments relating to the original lease as part of the

lease payments for the new lease.

Presentation

88 A lessor shall present underlying assets subject to operating leases in its statement of financial position

according to the nature of the underlying asset.

Disclosure

89 The objective of the disclosures is for lessors to disclose information in the notes that, together with the

information provided in the statement of financial position, statement of profit or loss and statement

of cash flows, gives a basis for users of financial statements to assess the effect that leases have on the

financial position, financial performance and cash flows of the lessor. Paragraphs 90–97 specify

requirements on how to meet this objective.

90 A lessor shall disclose the following amounts for the reporting period:

(a) for finance leases:

(i) selling profit or loss;

(ii) finance income on the net investment in the lease; and

(iii) income relating to variable lease payments not included in the measurement of the net

investment in the lease.

*(b) for operating leases, lease income, separately disclosing income relating to variable lease payments

that do not depend on an index or a rate.

RDR 90.1 For operating leases, a Tier 2 entity shall disclose lease income.

*91 A lessor shall provide the disclosures specified in paragraph 90 in a tabular format, unless another format is

more appropriate.

92 A lessor shall disclose additional qualitative and quantitative information about its leasing activities necessary

to meet the disclosure objective in paragraph 89. This additional information includes, but is not limited to,

information that helps users of financial statements to assess:

NZ IFRS 16

17

(a) the nature of the lessor’s leasing activities; and

(b) how the lessor manages the risk associated with any rights it retains in underlying assets. In particular,

a lessor shall disclose its risk management strategy for the rights it retains in underlying assets,

including any means by which the lessor reduces that risk. Such means may include, for example,

buy-back agreements, residual value guarantees or variable lease payments for use in excess of

specified limits.

Finance leases

93 A lessor shall provide a qualitative and quantitative explanation of the significant changes in the carrying

amount of the net investment in finance leases.

94 A lessor shall disclose a maturity analysis of the lease payments receivable, showing the undiscounted lease

payments to be received on an annual basis for a minimum of each of the first five years and a total of the

amounts for the remaining years. A lessor shall reconcile the undiscounted lease payments to the net

investment in the lease. The reconciliation shall identify the unearned finance income relating to the lease

payments receivable and any discounted unguaranteed residual value.

Operating leases

95 For items of property, plant and equipment subject to an operating lease, a lessor shall apply the disclosure

requirements of NZ IAS 16. In applying the disclosure requirements in NZ IAS 16, a lessor shall disaggregate

each class of property, plant and equipment into assets subject to operating leases and assets not subject to

operating leases. Accordingly, a lessor shall provide the disclosures required by NZ IAS 16 for assets subject

to an operating lease (by class of underlying asset) separately from owned assets held and used by the lessor.

96 A lessor shall apply the disclosure requirements in NZ IAS 36, NZ IAS 38, NZ IAS 40 and NZ IAS 41 for

assets subject to operating leases.

97 A lessor shall disclose a maturity analysis of lease payments, showing the undiscounted lease payments to be

received on an annual basis for a minimum of each of the first five years and a total of the amounts for the

remaining years.

Sale and leaseback transactions

98 If an entity (the seller-lessee) transfers an asset to another entity (the buyer-lessor) and leases that asset back

from the buyer-lessor, both the seller-lessee and the buyer-lessor shall account for the transfer contract and

the lease applying paragraphs 99–103.

Assessing whether the transfer of the asset is a sale

99 An entity shall apply the requirements for determining when a performance obligation is satisfied in

NZ IFRS 15 to determine whether the transfer of an asset is accounted for as a sale of that asset.

Transfer of the asset is a sale

100 If the transfer of an asset by the seller-lessee satisfies the requirements of NZ IFRS 15 to be accounted for as

a sale of the asset:

(a) the seller-lessee shall measure the right-of-use asset arising from the leaseback at the proportion of

the previous carrying amount of the asset that relates to the right of use retained by the seller-lessee.

Accordingly, the seller-lessee shall recognise only the amount of any gain or loss that relates to the

rights transferred to the buyer-lessor.

(b) the buyer-lessor shall account for the purchase of the asset applying applicable Standards, and for the

lease applying the lessor accounting requirements in this Standard.

101 If the fair value of the consideration for the sale of an asset does not equal the fair value of the asset, or if the

payments for the lease are not at market rates, an entity shall make the following adjustments to measure the

sale proceeds at fair value:

(a) any below-market terms shall be accounted for as a prepayment of lease payments; and

(b) any above-market terms shall be accounted for as additional financing provided by the buyer-lessor

to the seller-lessee.

NZ IFRS 16

18

102 The entity shall measure any potential adjustment required by paragraph 101 on the basis of the more readily

determinable of:

(a) the difference between the fair value of the consideration for the sale and the fair value of the asset;

and

(b) the difference between the present value of the contractual payments for the lease and the present

value of payments for the lease at market rates.

Transfer of the asset is not a sale

103 If the transfer of an asset by the seller-lessee does not satisfy the requirements of NZ IFRS 15 to be accounted

for as a sale of the asset:

(a) the seller-lessee shall continue to recognise the transferred asset and shall recognise a financial liability

equal to the transfer proceeds. It shall account for the financial liability applying NZ IFRS 9.

(b) the buyer-lessor shall not recognise the transferred asset and shall recognise a financial asset equal to

the transfer proceeds. It shall account for the financial asset applying NZ IFRS 9.

NZ IFRS 16

19

Appendix A Defined terms

This appendix is an integral part of the Standard.

commencement date of

the lease

(commencement date)

The date on which a lessor makes an underlying asset available for use by a lessee.

economic life Either the period over which an asset is expected to be economically usable by one or

more users or the number of production or similar units expected to be obtained from

an asset by one or more users.

effective date of the

modification

The date when both parties agree to a lease modification.

fair value For the purpose of applying the lessor accounting requirements in this Standard, the

amount for which an asset could be exchanged, or a liability settled, between

knowledgeable, willing parties in an arm’s length transaction.

finance lease A lease that transfers substantially all the risks and rewards incidental to ownership of

an underlying asset.

fixed payments Payments made by a lessee to a lessor for the right to use an underlying asset during

the lease term, excluding variable lease payments.

gross investment in the

lease

The sum of:

(a) the lease payments receivable by a lessor under a finance lease; and

(b) any unguaranteed residual value accruing to the lessor.

inception date of the lease

(inception date)

The earlier of the date of a lease agreement and the date of commitment by the parties

to the principal terms and conditions of the lease.

initial direct costs Incremental costs of obtaining a lease that would not have been incurred if the lease

had not been obtained, except for such costs incurred by a manufacturer or dealer

lessor in connection with a finance lease.

interest rate implicit in the

lease

The rate of interest that causes the present value of (a) the lease payments and (b) the

unguaranteed residual value to equal the sum of (i) the fair value of the underlying

asset and (ii) any initial direct costs of the lessor.

lease A contract, or part of a contract, that conveys the right to use an asset (the underlying

asset) for a period of time in exchange for consideration.

lease incentives Payments made by a lessor to a lessee associated with a lease, or the reimbursement

or assumption by a lessor of costs of a lessee.

lease modification A change in the scope of a lease, or the consideration for a lease, that was not part of

the original terms and conditions of the lease (for example, adding or terminating the

right to use one or more underlying assets, or extending or shortening the contractual

lease term).

NZ IFRS 16

20

lease payments Payments made by a lessee to a lessor relating to the right to use an underlying asset

during the lease term, comprising the following:

(a) fixed payments (including in-substance fixed payments), less any lease

incentives;

(b) variable lease payments that depend on an index or a rate;

(c) the exercise price of a purchase option if the lessee is reasonably certain to

exercise that option; and

(d) payments of penalties for terminating the lease, if the lease term reflects the

lessee exercising an option to terminate the lease.

For the lessee, lease payments also include amounts expected to be payable by the

lessee under residual value guarantees. Lease payments do not include payments

allocated to non-lease components of a contract, unless the lessee elects to combine

non-lease components with a lease component and to account for them as a single

lease component.

For the lessor, lease payments also include any residual value guarantees provided to

the lessor by the lessee, a party related to the lessee or a third party unrelated to the

lessor that is financially capable of discharging the obligations under the guarantee.

Lease payments do not include payments allocated to non-lease components.

lease term The non-cancellable period for which a lessee has the right to use an underlying

asset, together with both:

(a) periods covered by an option to extend the lease if the lessee is reasonably

certain to exercise that option; and

(b) periods covered by an option to terminate the lease if the lessee is reasonably

certain not to exercise that option.

lessee An entity that obtains the right to use an underlying asset for a period of time in

exchange for consideration.

lessee’s incremental

borrowing rate

The rate of interest that a lessee would have to pay to borrow over a similar term, and

with a similar security, the funds necessary to obtain an asset of a similar value to the

right-of-use asset in a similar economic environment.

lessor An entity that provides the right to use an underlying asset for a period of time in

exchange for consideration.

net investment in the lease The gross investment in the lease discounted at the interest rate implicit in the

lease.

operating lease A lease that does not transfer substantially all the risks and rewards incidental to

ownership of an underlying asset.

optional lease payments Payments to be made by a lessee to a lessor for the right to use an underlying asset

during periods covered by an option to extend or terminate a lease that are not

included in the lease term.

period of use The total period of time that an asset is used to fulfil a contract with a customer

(including any non-consecutive periods of time).

residual value guarantee A guarantee made to a lessor by a party unrelated to the lessor that the value (or part

of the value) of an underlying asset at the end of a lease will be at least a specified

amount.

right-of-use asset An asset that represents a lessee’s right to use an underlying asset for the lease term.

short-term lease A lease that, at the commencement date, has a lease term of 12 months or less. A

lease that contains a purchase option is not a short-term lease.

sublease A transaction for which an underlying asset is re-leased by a lessee (‘intermediate

lessor’) to a third party, and the lease (‘head lease’) between the head lessor and lessee

remains in effect.

underlying asset An asset that is the subject of a lease, for which the right to use that asset has been

provided by a lessor to a lessee.

NZ IFRS 16

21

unearned finance income The difference between:

(a) the gross investment in the lease; and

(b) the net investment in the lease.

unguaranteed residual

value

That portion of the residual value of the underlying asset, the realisation of which by

a lessor is not assured or is guaranteed solely by a party related to the lessor.

variable lease payments The portion of payments made by a lessee to a lessor for the right to use an

underlying asset during the lease term that varies because of changes in facts or

circumstances occurring after the commencement date, other than the passage of

time.

Terms defined in other Standards and used in this Standard with the same meaning

contract An agreement between two or more parties that creates enforceable rights and

obligations.

useful life The period over which an asset is expected to be available for use by an entity; or the

number of production or similar units expected to be obtained from an asset by an

entity.

NZ IFRS 16

22

Appendix B Application guidance

This appendix is an integral part of the Standard. It describes the application of paragraphs 1–103 and has the same

authority as the other parts of the Standard.

Portfolio application

B1 This Standard specifies the accounting for an individual lease. However, as a practical expedient, an entity

may apply this Standard to a portfolio of leases with similar characteristics if the entity reasonably expects

that the effects on the financial statements of applying this Standard to the portfolio would not differ

materially from applying this Standard to the individual leases within that portfolio. If accounting for a

portfolio, an entity shall use estimates and assumptions that reflect the size and composition of the portfolio.

Combination of contracts

B2 In applying this Standard, an entity shall combine two or more contracts entered into at or near the same time

with the same counterparty (or related parties of the counterparty), and account for the contracts as a single

contract if one or more of the following criteria are met:

(a) the contracts are negotiated as a package with an overall commercial objective that cannot be

understood without considering the contracts together;

(b) the amount of consideration to be paid in one contract depends on the price or performance of the

other contract; or

(c) the rights to use underlying assets conveyed in the contracts (or some rights to use underlying assets

conveyed in each of the contracts) form a single lease component as described in paragraph B32.

Recognition exemption: leases for which the underlying asset is of low value (paragraphs 5–8)

B3 Except as specified in paragraph B7, this Standard permits a lessee to apply paragraph 6 to account for leases

for which the underlying asset is of low value. A lessee shall assess the value of an underlying asset based on

the value of the asset when it is new, regardless of the age of the asset being leased.

B4 The assessment of whether an underlying asset is of low value is performed on an absolute basis. Leases of

low-value assets qualify for the accounting treatment in paragraph 6 regardless of whether those leases are

material to the lessee. The assessment is not affected by the size, nature or circumstances of the lessee.

Accordingly, different lessees are expected to reach the same conclusions about whether a particular

underlying asset is of low value.

B5 An underlying asset can be of low value only if:

(a) the lessee can benefit from use of the underlying asset on its own or together with other resources that

are readily available to the lessee; and

(b) the underlying asset is not highly dependent on, or highly interrelated with, other assets.

B6 A lease of an underlying asset does not qualify as a lease of a low-value asset if the nature of the asset is such

that, when new, the asset is typically not of low value. For example, leases of cars would not qualify as leases

of low-value assets because a new car would typically not be of low value.

B7 If a lessee subleases an asset, or expects to sublease an asset, the head lease does not qualify as a lease of a

low-value asset.

B8 Examples of low-value underlying assets can include tablet and personal computers, small items of office

furniture and telephones.

NZ IFRS 16

23

Identifying a lease (paragraphs 9–11)

B9 To assess whether a contract conveys the right to control the use of an identified asset (see paragraphs B13–

B20) for a period of time, an entity shall assess whether, throughout the period of use, the customer has both

of the following:

(a) the right to obtain substantially all of the economic benefits from use of the identified asset (as

described in paragraphs B21–B23); and

(b) the right to direct the use of the identified asset (as described in paragraphs B24–B30).

B10 If the customer has the right to control the use of an identified asset for only a portion of the term of the

contract, the contract contains a lease for that portion of the term.

B11 A contract to receive goods or services may be entered into by a joint arrangement, or on behalf of a joint

arrangement, as defined in NZ IFRS 11 Joint Arrangements. In this case, the joint arrangement is considered

to be the customer in the contract. Accordingly, in assessing whether such a contract contains a lease, an

entity shall assess whether the joint arrangement has the right to control the use of an identified asset

throughout the period of use.

B12 An entity shall assess whether a contract contains a lease for each potential separate lease component. Refer

to paragraph B32 for guidance on separate lease components.

Identified asset

B13 An asset is typically identified by being explicitly specified in a contract. However, an asset can also be

identified by being implicitly specified at the time that the asset is made available for use by the customer.

Substantive substitution rights

B14 Even if an asset is specified, a customer does not have the right to use an identified asset if the supplier has

the substantive right to substitute the asset throughout the period of use. A supplier’s right to substitute an

asset is substantive only if both of the following conditions exist:

(a) the supplier has the practical ability to substitute alternative assets throughout the period of use (for

example, the customer cannot prevent the supplier from substituting the asset and alternative assets

are readily available to the supplier or could be sourced by the supplier within a reasonable period of

time); and

(b) the supplier would benefit economically from the exercise of its right to substitute the asset (ie the

economic benefits associated with substituting the asset are expected to exceed the costs associated

with substituting the asset).

B15 If the supplier has a right or an obligation to substitute the asset only on or after either a particular date or the

occurrence of a specified event, the supplier’s substitution right is not substantive because the supplier does

not have the practical ability to substitute alternative assets throughout the period of use.

B16 An entity’s evaluation of whether a supplier’s substitution right is substantive is based on facts and

circumstances at inception of the contract and shall exclude consideration of future events that, at inception

of the contract, are not considered likely to occur. Examples of future events that, at inception of the contract,

would not be considered likely to occur and, thus, should be excluded from the evaluation include:

(a) an agreement by a future customer to pay an above market rate for use of the asset;

(b) the introduction of new technology that is not substantially developed at inception of the contract;

(c) a substantial difference between the customer’s use of the asset, or the performance of the asset, and

the use or performance considered likely at inception of the contract; and

(d) a substantial difference between the market price of the asset during the period of use, and the market

price considered likely at inception of the contract.

B17 If the asset is located at the customer’s premises or elsewhere, the costs associated with substitution are

generally higher than when located at the supplier’s premises and, therefore, are more likely to exceed the

benefits associated with substituting the asset.

B18 The supplier’s right or obligation to substitute the asset for repairs and maintenance, if the asset is not

operating properly or if a technical upgrade becomes available does not preclude the customer from having

the right to use an identified asset.

NZ IFRS 16

24

B19 If the customer cannot readily determine whether the supplier has a substantive substitution right, the

customer shall presume that any substitution right is not substantive.

Portions of assets

B20 A capacity portion of an asset is an identified asset if it is physically distinct (for example, a floor of a

building). A capacity or other portion of an asset that is not physically distinct (for example, a capacity portion

of a fibre optic cable) is not an identified asset, unless it represents substantially all of the capacity of the asset

and thereby provides the customer with the right to obtain substantially all of the economic benefits from use

of the asset.

Right to obtain economic benefits from use

B21 To control the use of an identified asset, a customer is required to have the right to obtain substantially all of

the economic benefits from use of the asset throughout the period of use (for example, by having exclusive

use of the asset throughout that period). A customer can obtain economic benefits from use of an asset directly

or indirectly in many ways, such as by using, holding or sub-leasing the asset. The economic benefits from

use of an asset include its primary output and by-products (including potential cash flows derived from these

items), and other economic benefits from using the asset that could be realised from a commercial transaction

with a third party.

B22 When assessing the right to obtain substantially all of the economic benefits from use of an asset, an entity

shall consider the economic benefits that result from use of the asset within the defined scope of a customer’s

right to use the asset (see paragraph B30). For example:

(a) if a contract limits the use of a motor vehicle to only one particular territory during the period of use,

an entity shall consider only the economic benefits from use of the motor vehicle within that territory,

and not beyond.

(b) if a contract specifies that a customer can drive a motor vehicle only up to a particular number of miles

during the period of use, an entity shall consider only the economic benefits from use of the motor

vehicle for the permitted mileage, and not beyond.

B23 If a contract requires a customer to pay the supplier or another party a portion of the cash flows derived from

use of an asset as consideration, those cash flows paid as consideration shall be considered to be part of the

economic benefits that the customer obtains from use of the asset. For example, if the customer is required to

pay the supplier a percentage of sales from use of retail space as consideration for that use, that requirement

does not prevent the customer from having the right to obtain substantially all of the economic benefits from

use of the retail space. This is because the cash flows arising from those sales are considered to be economic

benefits that the customer obtains from use of the retail space, a portion of which it then pays to the supplier

as consideration for the right to use that space.

Right to direct the use

B24 A customer has the right to direct the use of an identified asset throughout the period of use only if either:

(a) the customer has the right to direct how and for what purpose the asset is used throughout the period

of use (as described in paragraphs B25–B30); or

(b) the relevant decisions about how and for what purpose the asset is used are predetermined and:

(i) the customer has the right to operate the asset (or to direct others to operate the asset in a

manner that it determines) throughout the period of use, without the supplier having the

right to change those operating instructions; or

(ii) the customer designed the asset (or specific aspects of the asset) in a way that predetermines

how and for what purpose the asset will be used throughout the period of use.

How and for what purpose the asset is used

B25 A customer has the right to direct how and for what purpose the asset is used if, within the scope of its right

of use defined in the contract, it can change how and for what purpose the asset is used throughout the period

of use. In making this assessment, an entity considers the decision-making rights that are most relevant to

changing how and for what purpose the asset is used throughout the period of use. Decision-making rights

are relevant when they affect the economic benefits to be derived from use. The decision-making rights that

NZ IFRS 16

25

are most relevant are likely to be different for different contracts, depending on the nature of the asset and the

terms and conditions of the contract.

B26 Examples of decision-making rights that, depending on the circumstances, grant the right to change how and

for what purpose the asset is used, within the defined scope of the customer’s right of use, include:

(a) rights to change the type of output that is produced by the asset (for example, to decide whether to use

a shipping container to transport goods or for storage, or to decide upon the mix of products sold from

retail space);

(b) rights to change when the output is produced (for example, to decide when an item of machinery or a

power plant will be used);

(c) rights to change where the output is produced (for example, to decide upon the destination of a truck

or a ship, or to decide where an item of equipment is used); and

(d) rights to change whether the output is produced, and the quantity of that output (for example, to decide

whether to produce energy from a power plant and how much energy to produce from that power

plant).

B27 Examples of decision-making rights that do not grant the right to change how and for what purpose the asset

is used include rights that are limited to operating or maintaining the asset. Such rights can be held by the

customer or the supplier. Although rights such as those to operate or maintain an asset are often essential to

the efficient use of an asset, they are not rights to direct how and for what purpose the asset is used and are

often dependent on the decisions about how and for what purpose the asset is used. However, rights to operate

an asset may grant the customer the right to direct the use of the asset if the relevant decisions about how and

for what purpose the asset is used are predetermined (see paragraph B24(b)(i)).

Decisions determined during and before the period of use

B28 The relevant decisions about how and for what purpose the asset is used can be predetermined in a number

of ways. For example, the relevant decisions can be predetermined by the design of the asset or by contractual

restrictions on the use of the asset.

B29 In assessing whether a customer has the right to direct the use of an asset, an entity shall consider only rights

to make decisions about the use of the asset during the period of use, unless the customer designed the asset

(or specific aspects of the asset) as described in paragraph B24(b)(ii). Consequently, unless the conditions in

paragraph B24(b)(ii) exist, an entity shall not consider decisions that are predetermined before the period of

use. For example, if a customer is able only to specify the output of an asset before the period of use, the

customer does not have the right to direct the use of that asset. The ability to specify the output in a contract

before the period of use, without any other decision-making rights relating to the use of the asset, gives a

customer the same rights as any customer that purchases goods or services.

Protective rights

B30 A contract may include terms and conditions designed to protect the supplier’s interest in the asset or other

assets, to protect its personnel, or to ensure the supplier’s compliance with laws or regulations. These are

examples of protective rights. For example, a contract may (i) specify the maximum amount of use of an asset

or limit where or when the customer can use the asset, (ii) require a customer to follow particular operating

practices, or (iii) require a customer to inform the supplier of changes in how an asset will be used. Protective

rights typically define the scope of the customer’s right of use but do not, in isolation, prevent the customer

from having the right to direct the use of an asset.

NZ IFRS 16

26 © IFRS Foundation 197166.2

B31 The following flowchart may assist entities in making the assessment of whether a contract is, or contains, a

lease.

Is there an identified asset? Consider paragraphs B13–B20.

No

No

Yes

Yes

Does the customer have the right to obtain substantially all of the economic benefits from use of the asset

throughout the period of use? Consider paragraphs B21–B23.

Does the customer, the supplier, or neither party, have the right to direct how and for what purpose the asset is

used throughout the period of use? Consider paragraphs B25–B30.

Does the customer have the right to operate the asset throughout the period of use, without the supplier

having the right to change those operating instructions? Consider paragraph B24(b)(i).

Did the customer design the asset in a way that predetermines how and for what purpose the asset will

be used throughout the period of use? Consider paragraph B24(b)(ii).

No

Yes

Supplier Customer

Neither; how and for what purpose the asset will be used is predetermined

No

The contract contains a lease The contract does not contain a

lease

Yes

NZ IFRS 16

27

Separating components of a contract (paragraphs 12–17)

B32 The right to use an underlying asset is a separate lease component if both:

(a) the lessee can benefit from use of the underlying asset either on its own or together with other

resources that are readily available to the lessee. Readily available resources are goods or services that

are sold or leased separately (by the lessor or other suppliers) or resources that the lessee has already

obtained (from the lessor or from other transactions or events); and

(b) the underlying asset is neither highly dependent on, nor highly interrelated with, the other underlying

assets in the contract. For example, the fact that a lessee could decide not to lease the underlying asset

without significantly affecting its rights to use other underlying assets in the contract might indicate

that the underlying asset is not highly dependent on, or highly interrelated with, those other underlying

assets.

B33 A contract may include an amount payable by the lessee for activities and costs that do not transfer a good or

service to the lessee. For example, a lessor may include in the total amount payable a charge for administrative

tasks, or other costs it incurs associated with the lease, that do not transfer a good or service to the lessee.

Such amounts payable do not give rise to a separate component of the contract, but are considered to be part

of the total consideration that is allocated to the separately identified components of the contract.

Lease term (paragraphs 18–21)

B34 In determining the lease term and assessing the length of the non-cancellable period of a lease, an entity shall

apply the definition of a contract and determine the period for which the contract is enforceable. A lease is no

longer enforceable when the lessee and the lessor each has the right to terminate the lease without permission

from the other party with no more than an insignificant penalty.

B35 If only a lessee has the right to terminate a lease, that right is considered to be an option to terminate the lease

available to the lessee that an entity considers when determining the lease term. If only a lessor has the right

to terminate a lease, the non-cancellable period of the lease includes the period covered by the option to

terminate the lease.

B36 The lease term begins at the commencement date and includes any rent-free periods provided to the lessee by

the lessor.

B37 At the commencement date, an entity assesses whether the lessee is reasonably certain to exercise an option

to extend the lease or to purchase the underlying asset, or not to exercise an option to terminate the lease. The

entity considers all relevant facts and circumstances that create an economic incentive for the lessee to

exercise, or not to exercise, the option, including any expected changes in facts and circumstances from the

commencement date until the exercise date of the option. Examples of factors to consider include, but are not

limited to:

(a) contractual terms and conditions for the optional periods compared with market rates, such as:

(i) the amount of payments for the lease in any optional period;

(ii) the amount of any variable payments for the lease or other contingent payments, such as

payments resulting from termination penalties and residual value guarantees; and

(iii) the terms and conditions of any options that are exercisable after initial optional periods (for

example, a purchase option that is exercisable at the end of an extension period at a rate that is

currently below market rates).

(b) significant leasehold improvements undertaken (or expected to be undertaken) over the term of the

contract that are expected to have significant economic benefit for the lessee when the option to extend

or terminate the lease, or to purchase the underlying asset, becomes exercisable;

(c) costs relating to the termination of the lease, such as negotiation costs, relocation costs, costs of

identifying another underlying asset suitable for the lessee’s needs, costs of integrating a new asset

into the lessee’s operations, or termination penalties and similar costs, including costs associated with

returning the underlying asset in a contractually specified condition or to a contractually specified

location;

(d) the importance of that underlying asset to the lessee’s operations, considering, for example, whether

the underlying asset is a specialised asset, the location of the underlying asset and the availability of

suitable alternatives; and

NZ IFRS 16

28

(e) conditionality associated with exercising the option (ie when the option can be exercised only if one

or more conditions are met), and the likelihood that those conditions will exist.

B38 An option to extend or terminate a lease may be combined with one or more other contractual features (for

example, a residual value guarantee) such that the lessee guarantees the lessor a minimum or fixed cash return

that is substantially the same regardless of whether the option is exercised. In such cases, and notwithstanding

the guidance on in-substance fixed payments in paragraph B42, an entity shall assume that the lessee is

reasonably certain to exercise the option to extend the lease, or not to exercise the option to terminate the

lease.

B39 The shorter the non-cancellable period of a lease, the more likely a lessee is to exercise an option to extend

the lease or not to exercise an option to terminate the lease. This is because the costs associated with obtaining

a replacement asset are likely to be proportionately higher the shorter the non-cancellable period.

B40 A lessee’s past practice regarding the period over which it has typically used particular types of assets

(whether leased or owned), and its economic reasons for doing so, may provide information that is helpful in

assessing whether the lessee is reasonably certain to exercise, or not to exercise, an option. For example, if a

lessee has typically used particular types of assets for a particular period of time or if the lessee has a practice

of frequently exercising options on leases of particular types of underlying assets, the lessee shall consider

the economic reasons for that past practice in assessing whether it is reasonably certain to exercise an option

on leases of those assets.

B41 Paragraph 20 specifies that, after the commencement date, a lessee reassesses the lease term upon the

occurrence of a significant event or a significant change in circumstances that is within the control of the

lessee and affects whether the lessee is reasonably certain to exercise an option not previously included in its

determination of the lease term, or not to exercise an option previously included in its determination of the

lease term. Examples of significant events or changes in circumstances include:

(a) significant leasehold improvements not anticipated at the commencement date that are expected to

have significant economic benefit for the lessee when the option to extend or terminate the lease, or

to purchase the underlying asset, becomes exercisable;

(b) a significant modification to, or customisation of, the underlying asset that was not anticipated at the

commencement date;

(c) the inception of a sublease of the underlying asset for a period beyond the end of the previously

determined lease term; and

(d) a business decision of the lessee that is directly relevant to exercising, or not exercising, an option (for

example, a decision to extend the lease of a complementary asset, to dispose of an alternative asset or

to dispose of a business unit within which the right-of-use asset is employed).

In-substance fixed lease payments (paragraphs 27(a), 36(c) and 70(a))

B42 Lease payments include any in-substance fixed lease payments. In-substance fixed lease payments are

payments that may, in form, contain variability but that, in substance, are unavoidable. In-substance fixed

lease payments exist, for example, if:

(a) payments are structured as variable lease payments, but there is no genuine variability in those

payments. Those payments contain variable clauses that do not have real economic substance.

Examples of those types of payments include:

(i) payments that must be made only if an asset is proven to be capable of operating during the

lease, or only if an event occurs that has no genuine possibility of not occurring; or

(ii) payments that are initially structured as variable lease payments linked to the use of the

underlying asset but for which the variability will be resolved at some point after the

commencement date so that the payments become fixed for the remainder of the lease term.

Those payments become in-substance fixed payments when the variability is resolved.

(b) there is more than one set of payments that a lessee could make, but only one of those sets of payments

is realistic. In this case, an entity shall consider the realistic set of payments to be lease payments.

(c) there is more than one realistic set of payments that a lessee could make, but it must make at least one

of those sets of payments. In this case, an entity shall consider the set of payments that aggregates to

the lowest amount (on a discounted basis) to be lease payments.

NZ IFRS 16

29

Lessee involvement with the underlying asset before the commencement date

Costs of the lessee relating to the construction or design of the underlying asset

B43 An entity may negotiate a lease before the underlying asset is available for use by the lessee. For some leases,

the underlying asset may need to be constructed or redesigned for use by the lessee. Depending on the terms

and conditions of the contract, a lessee may be required to make payments relating to the construction or

design of the asset.

B44 If a lessee incurs costs relating to the construction or design of an underlying asset, the lessee shall account

for those costs applying other applicable Standards, such as NZ IAS 16. Costs relating to the construction or

design of an underlying asset do not include payments made by the lessee for the right to use the underlying

asset. Payments for the right to use an underlying asset are payments for a lease, regardless of the timing of

those payments.

Legal title to the underlying asset

B45 A lessee may obtain legal title to an underlying asset before that legal title is transferred to the lessor and the

asset is leased to the lessee. Obtaining legal title does not in itself determine how to account for the transaction.

B46 If the lessee controls (or obtains control of) the underlying asset before that asset is transferred to the lessor,

the transaction is a sale and leaseback transaction that is accounted for applying paragraphs 98–103.

B47 However, if the lessee does not obtain control of the underlying asset before the asset is transferred to the

lessor, the transaction is not a sale and leaseback transaction. For example, this may be the case if a

manufacturer, a lessor and a lessee negotiate a transaction for the purchase of an asset from the manufacturer

by the lessor, which is in turn leased to the lessee. The lessee may obtain legal title to the underlying asset

before legal title transfers to the lessor. In this case, if the lessee obtains legal title to the underlying asset but

does not obtain control of the asset before it is transferred to the lessor, the transaction is not accounted for as

a sale and leaseback transaction, but as a lease.

Lessee disclosures (paragraph 59)

B48 In determining whether additional information about leasing activities is necessary to meet the disclosure

objective in paragraph 51, a lessee shall consider:

(a) whether that information is relevant to users of financial statements. A lessee shall provide additional

information specified in paragraph 59 only if that information is expected to be relevant to users of

financial statements. In this context, this is likely to be the case if it helps those users to understand:

(i) the flexibility provided by leases. Leases may provide flexibility if, for example, a lessee can

reduce its exposure by exercising termination options or renewing leases with favourable terms

and conditions.

(ii) restrictions imposed by leases. Leases may impose restrictions, for example, by requiring the

lessee to maintain particular financial ratios.

(iii) sensitivity of reported information to key variables. Reported information may be sensitive to,

for example, future variable lease payments.

(iv) exposure to other risks arising from leases.

(v) deviations from industry practice. Such deviations may include, for example, unusual or

unique lease terms and conditions that affect a lessee’s lease portfolio.

(b) whether that information is apparent from information either presented in the primary financial

statements or disclosed in the notes. A lessee need not duplicate information that is already presented

elsewhere in the financial statements.

B49 Additional information relating to variable lease payments that, depending on the circumstances, may be

needed to satisfy the disclosure objective in paragraph 51 could include information that helps users of

financial statements to assess, for example:

(a) the lessee’s reasons for using variable lease payments and the prevalence of those payments;

(b) the relative magnitude of variable lease payments to fixed payments;

NZ IFRS 16

30

(c) key variables upon which variable lease payments depend and how payments are expected to vary in

response to changes in those key variables; and

(d) other operational and financial effects of variable lease payments.

B50 Additional information relating to extension options or termination options that, depending on the

circumstances, may be needed to satisfy the disclosure objective in paragraph 51 could include information

that helps users of financial statements to assess, for example:

*(a) the lessee’s reasons for using extension options or termination options and the prevalence of those

options;

*(b) the relative magnitude of optional lease payments to lease payments;

(c) the prevalence of the exercise of options that were not included in the measurement of lease liabilities;

and

*(d) other operational and financial effects of those options.

B51 Additional information relating to residual value guarantees that, depending on the circumstances, may be

needed to satisfy the disclosure objective in paragraph 51 could include information that helps users of

financial statements to assess, for example:

*(a) the lessee’s reasons for providing residual value guarantees and the prevalence of those guarantees;

*(b) the magnitude of a lessee’s exposure to residual value risk;

(c) the nature of underlying assets for which those guarantees are provided; and

*(d) other operational and financial effects of those guarantees.

*B52 Additional information relating to sale and leaseback transactions that, depending on the circumstances, may

be needed to satisfy the disclosure objective in paragraph 51 could include information that helps users of

financial statements to assess, for example:

(a) the lessee’s reasons for sale and leaseback transactions and the prevalence of those transactions;

(b) key terms and conditions of individual sale and leaseback transactions;

(c) payments not included in the measurement of lease liabilities; and

(d) the cash flow effect of sale and leaseback transactions in the reporting period.

Lessor lease classification (paragraphs 61–66)

B53 The classification of leases for lessors in this Standard is based on the extent to which the lease transfers the

risks and rewards incidental to ownership of an underlying asset. Risks include the possibilities of losses from

idle capacity or technological obsolescence and of variations in return because of changing economic

conditions. Rewards may be represented by the expectation of profitable operation over the underlying asset’s

economic life and of gain from appreciation in value or realisation of a residual value.

B54 A lease contract may include terms and conditions to adjust the lease payments for particular changes that

occur between the inception date and the commencement date (such as a change in the lessor’s cost of the

underlying asset or a change in the lessor’s cost of financing the lease). In that case, for the purposes of

classifying the lease, the effect of any such changes shall be deemed to have taken place at the inception date.

B55 When a lease includes both land and buildings elements, a lessor shall assess the classification of each element

as a finance lease or an operating lease separately applying paragraphs 62–66 and B53–B54. In determining

whether the land element is an operating lease or a finance lease, an important consideration is that land

normally has an indefinite economic life.

B56 Whenever necessary in order to classify and account for a lease of land and buildings, a lessor shall allocate

lease payments (including any lump-sum upfront payments) between the land and the buildings elements in

proportion to the relative fair values of the leasehold interests in the land element and buildings element of

the lease at the inception date. If the lease payments cannot be allocated reliably between these two elements,

the entire lease is classified as a finance lease, unless it is clear that both elements are operating leases, in

which case the entire lease is classified as an operating lease.

B57 For a lease of land and buildings in which the amount for the land element is immaterial to the lease, a lessor

may treat the land and buildings as a single unit for the purpose of lease classification and classify it as a

finance lease or an operating lease applying paragraphs 62–66 and B53–B54. In such a case, a lessor shall

regard the economic life of the buildings as the economic life of the entire underlying asset.

NZ IFRS 16

31

Sublease classification

B58 In classifying a sublease, an intermediate lessor shall classify the sublease as a finance lease or an operating

lease as follows:

(a) if the head lease is a short-term lease that the entity, as a lessee, has accounted for applying

paragraph 6, the sublease shall be classified as an operating lease.

(b) otherwise, the sublease shall be classified by reference to the right-of-use asset arising from the head

lease, rather than by reference to the underlying asset (for example, the item of property, plant or

equipment that is the subject of the lease).

NZ IFRS 16

32

Appendix C Effective date and transition

This appendix is an integral part of the Standard and has the same authority as the other parts of the Standard.

Effective date

C1 An entity shall apply this Standard for annual reporting periods beginning on or after 1 January 2019. Earlier

application is permitted for entities that apply NZ IFRS 15 Revenue from Contracts with Customers at or

before the date of initial application of this Standard. If an entity applies this Standard earlier, it shall disclose

that fact.

NZ C1.1 RDR NZ IFRS 16 and NZ IAS 7, issued in July 2018, amended paragraphs 54, 58, 90(b), 91, B50(a),

B50(b), B50(d), B51(a), B51(b), B51(d) and B52, and added paragraphs RDR 54.1 and RDR 90.1. A Tier 2

entity may elect to apply those disclosure concessions for annual periods beginning on or after 1 January

2019. Early application is permitted.

Transition

C2 For the purposes of the requirements in paragraphs C1–C19, the date of initial application is the beginning of

the annual reporting period in which an entity first applies this Standard.

Definition of a lease

C3 As a practical expedient, an entity is not required to reassess whether a contract is, or contains, a lease at the

date of initial application. Instead, the entity is permitted:

(a) to apply this Standard to contracts that were previously identified as leases applying NZ IAS 17 Leases

and NZ IFRIC 4 Determining whether an Arrangement contains a Lease. The entity shall apply the

transition requirements in paragraphs C5–C18 to those leases.

(b) not to apply this Standard to contracts that were not previously identified as containing a lease

applying NZ IAS 17 and NZ IFRIC 4.

C4 If an entity chooses the practical expedient in paragraph C3, it shall disclose that fact and apply the practical

expedient to all of its contracts. As a result, the entity shall apply the requirements in paragraphs 9–11 only

to contracts entered into (or changed) on or after the date of initial application.

Lessees

C5 A lessee shall apply this Standard to its leases either:

(a) retrospectively to each prior reporting period presented applying NZ IAS 8 Accounting Policies,

Changes in Accounting Estimates and Errors; or

(b) retrospectively with the cumulative effect of initially applying the Standard recognised at the date of

initial application in accordance with paragraphs C7–C13.

C6 A lessee shall apply the election described in paragraph C5 consistently to all of its leases in which it is a

lessee.

C7 If a lessee elects to apply this Standard in accordance with paragraph C5(b), the lessee shall not restate

comparative information. Instead, the lessee shall recognise the cumulative effect of initially applying this

Standard as an adjustment to the opening balance of retained earnings (or other component of equity, as

appropriate) at the date of initial application.

Leases previously classified as operating leases

C8 If a lessee elects to apply this Standard in accordance with paragraph C5(b), the lessee shall:

(a) recognise a lease liability at the date of initial application for leases previously classified as an

operating lease applying NZ IAS 17. The lessee shall measure that lease liability at the present value

NZ IFRS 16

33

of the remaining lease payments, discounted using the lessee’s incremental borrowing rate at the date

of initial application.

(b) recognise a right-of-use asset at the date of initial application for leases previously classified as an

operating lease applying NZ IAS 17. The lessee shall choose, on a lease-by-lease basis, to measure

that right-of-use asset at either:

(i) its carrying amount as if the Standard had been applied since the commencement date, but

discounted using the lessee’s incremental borrowing rate at the date of initial application; or

(ii) an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease

payments relating to that lease recognised in the statement of financial position immediately

before the date of initial application.

(c) apply NZ IAS 36 Impairment of Assets to right-of-use assets at the date of initial application, unless

the lessee applies the practical expedient in paragraph C10(b).

C9 Notwithstanding the requirements in paragraph C8, for leases previously classified as operating leases

applying NZ IAS 17, a lessee:

(a) is not required to make any adjustments on transition for leases for which the underlying asset is of

low value (as described in paragraphs B3–B8) that will be accounted for applying paragraph 6. The

lessee shall account for those leases applying this Standard from the date of initial application.

(b) is not required to make any adjustments on transition for leases previously accounted for as investment

property using the fair value model in NZ IAS 40 Investment Property. The lessee shall account for

the right-of-use asset and the lease liability arising from those leases applying NZ IAS 40 and this

Standard from the date of initial application.

(c) shall measure the right-of-use asset at fair value at the date of initial application for leases previously

accounted for as operating leases applying NZ IAS 17 and that will be accounted for as investment

property using the fair value model in NZ IAS 40 from the date of initial application. The lessee shall

account for the right-of-use asset and the lease liability arising from those leases applying NZ IAS 40

and this Standard from the date of initial application.

C10 A lessee may use one or more of the following practical expedients when applying this Standard

retrospectively in accordance with paragraph C5(b) to leases previously classified as operating leases

applying NZ IAS 17. A lessee is permitted to apply these practical expedients on a lease-by-lease basis:

(a) a lessee may apply a single discount rate to a portfolio of leases with reasonably similar characteristics

(such as leases with a similar remaining lease term for a similar class of underlying asset in a similar

economic environment).

(b) a lessee may rely on its assessment of whether leases are onerous applying NZ IAS 37 Provisions,

Contingent Liabilities and Contingent Assets immediately before the date of initial application as an

alternative to performing an impairment review. If a lessee chooses this practical expedient, the lessee

shall adjust the right-of-use asset at the date of initial application by the amount of any provision for

onerous leases recognised in the statement of financial position immediately before the date of initial

application.

(c) a lessee may elect not to apply the requirements in paragraph C8 to leases for which the lease term

ends within 12 months of the date of initial application. In this case, a lessee shall:

(i) account for those leases in the same way as short-term leases as described in paragraph 6; and

(ii) include the cost associated with those leases within the disclosure of short-term lease expense

in the annual reporting period that includes the date of initial application.

(d) a lessee may exclude initial direct costs from the measurement of the right-of-use asset at the date of

initial application.

(e) a lessee may use hindsight, such as in determining the lease term if the contract contains options to

extend or terminate the lease.

Leases previously classified as finance leases

C11 If a lessee elects to apply this Standard in accordance with paragraph C5(b), for leases that were classified as

finance leases applying NZ IAS 17, the carrying amount of the right-of-use asset and the lease liability at the

date of initial application shall be the carrying amount of the lease asset and lease liability immediately before

that date measured applying NZ IAS 17. For those leases, a lessee shall account for the right-of-use asset and

the lease liability applying this Standard from the date of initial application.

NZ IFRS 16

34

Disclosure

C12 If a lessee elects to apply this Standard in accordance with paragraph C5(b), the lessee shall disclose

information about initial application required by paragraph 28 of NZ IAS 8, except for the information

specified in paragraph 28(f) of NZ IAS 8. Instead of the information specified in paragraph 28(f) of

NZ IAS 8, the lessee shall disclose:

(a) the weighted average lessee’s incremental borrowing rate applied to lease liabilities recognised in the

statement of financial position at the date of initial application; and

(b) an explanation of any difference between:

(i) operating lease commitments disclosed applying NZ IAS 17 at the end of the annual reporting

period immediately preceding the date of initial application, discounted using the incremental

borrowing rate at the date of initial application as described in paragraph C8(a); and

(ii) lease liabilities recognised in the statement of financial position at the date of initial

application.

C13 If a lessee uses one or more of the specified practical expedients in paragraph C10, it shall disclose that fact.

Lessors

C14 Except as described in paragraph C15, a lessor is not required to make any adjustments on transition for leases

in which it is a lessor and shall account for those leases applying this Standard from the date of initial

application.

C15 An intermediate lessor shall:

(a) reassess subleases that were classified as operating leases applying NZ IAS 17 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 applying this Standard. The intermediate lessor shall perform this assessment

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 NZ IAS 17 but finance leases applying

this Standard, account for the sublease as a new finance lease entered into at the date of initial

application.

Sale and leaseback transactions before the date of initial application

C16 An entity shall not reassess sale and leaseback transactions entered into before the date of initial application

to determine whether the transfer of the underlying asset satisfies the requirements in NZ IFRS 15 to be

accounted for as a sale.

C17 If a sale and leaseback transaction was accounted for as a sale and a finance lease applying NZ IAS 17, the

seller-lessee shall:

(a) account for the leaseback in the same way as it accounts for any other finance lease that exists at the

date of initial application; and

(b) continue to amortise any gain on sale over the lease term.

C18 If a sale and leaseback transaction was accounted for as a sale and operating lease applying NZ IAS 17, the

seller-lessee shall:

(a) account for the leaseback in the same way as it accounts for any other operating lease that exists at the

date of initial application; and

(b) adjust the leaseback right-of-use asset for any deferred gains or losses that relate to off-market terms

recognised in the statement of financial position immediately before the date of initial application.

Amounts previously recognised in respect of business combinations

C19 If a lessee previously recognised an asset or a liability applying NZ IFRS 3 Business Combinations relating

to favourable or unfavourable terms of an operating lease acquired as part of a business combination, the

NZ IFRS 16

35

lessee shall derecognise that asset or liability and adjust the carrying amount of the right-of-use asset by a

corresponding amount at the date of initial application.

References to NZ IFRS 9

C20 If an entity applies this Standard but does not yet apply NZ IFRS 9 Financial Instruments, any reference in

this Standard to NZ IFRS 9 shall be read as a reference to NZ IAS 39 Financial Instruments: Recognition

and Measurement.

Withdrawal of other Standards

C21 This Standard supersedes the following Standards and Interpretations:

(a) NZ IAS 17 Leases;

(b) NZ IFRIC 4 Determining whether an Arrangement contains a Lease;

(c) NZ SIC-15 Operating Leases—Incentives; and

(d) NZ SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease.

NZ IFRS 16

36

Appendix D Amendments to other Standards

This appendix describes the amendments to other Standards that were made when NZ IFRS 16 was issued. An entity

shall apply the amendments for annual periods beginning on or after 1 January 2019. If an entity applies NZ IFRS 16

for an earlier period, these amendments shall be applied for that earlier period.

*****

The amendments contained in this appendix when this Standard was issued in 2016 have been incorporated into the

text of the relevant pronouncements.

NZ IFRS 16

37

HISTORY OF AMENDMENTS

Table of Pronouncements – NZ IFRS 16 Leases

This table lists the pronouncements establishing and substantially amending NZ IFRS 16. The table is based on

amendments issued as at 12 July 2018.

Pronouncements Date

approved

Early operative

date

Effective date

(annual reporting

periods… on or

after …)

NZ IFRS 16 Leases Feb 2016 Early application

permitted as long

as NZ IFRS 9 and

NZ IFRS 15 are

adopted at the

same time

1 January 2019

RDR NZ IFRS 16 and NZ IAS 7 July 2018 Early application

permitted

1 January 2019

Table of Amended Paragraphs in NZ IFRS 16

Paragraph affected How affected By … [date]

Paragraph 54 Amended RDR NZ IFRS 16 and NZ IAS 7 [July 2018]

Paragraph RDR 54.1 Added RDR NZ IFRS 16 and NZ IAS 7 [July 2018]

Paragraph 58 Amended RDR NZ IFRS 16 and NZ IAS 7 [July 2018]

Paragraph 90 Amended RDR NZ IFRS 16 and NZ IAS 7 [July 2018]

Paragraph RDR 90.1 Added RDR NZ IFRS 16 and NZ IAS 7 [July 2018]

Paragraph 91 Amended RDR NZ IFRS 16 and NZ IAS 7 [July 2018]

Paragraph B50 Amended RDR NZ IFRS 16 and NZ IAS 7 [July 2018]

Paragraph B51 Amended RDR NZ IFRS 16 and NZ IAS 7 [July 2018]

Paragraph B52 Amended RDR NZ IFRS 16 and NZ IAS 7 [July 2018]

Paragraph NZ C1.1 Added RDR NZ IFRS 16 and NZ IAS 7 [July 2018]