Question

New Media Inc.is planning to expand its business globally. oOh!Media Ltd, an Australian advertising and media company, is among the acquisition targets New Media is evaluating. oOh!Mediahas a sizable lease portfolio. Cindy, New Media’s CFO, is concerned that under IFRS 16 oOh!Media’s financial results and leveragemay look significantly less attractive. Cindy is familiar with the new lease accounting standard for U.S. GAAP, but has not been following the IFRS standard. She has asked your team to 1) explain themajor requirement of IFRS 16, focusing on how it differs from U.S. GAAP; and 2) estimate the impact on oOh!Media’s leverage, EBITDA, net profit and cash flows.

Answer 1

1)

Requirement

when applying IFRS 16, an entity is required to consider :-

• all relevant facts and circumstances
• the terms and conditions of contracts
• applied on contracts of similar characterstics and similar circumstances

Differences

In particular, lessees no longer classify their leases between operating and finance under IFRS, but will continue to do so under US GAAP.

• IFRS 16 uses a single lessee accounting model that is similar to that of finance leases under current IAS 17. Therefore, from an income statement perspective, the IFRS model treats all leases as a financing arrangement.
• However, under US GAAP, only leases classified as finance leases are treated as financing arrangements from an income statement perspective; while the lessee will report an asset and a liability related to all leases on its balance sheet (like IFRS), the Day Two accounting for operating leases will generally continue to produce a straight-line total lease expense.

IFRS 16	ASC 842	Consideration for preparers
Effective date
The new standard is effective for annual periods beginning on or after January 1, 2019. Early adoption is permitted if the new revenue standard is also adopted.	ASC 842 is effective for annual periods beginning after December 15, 2018 for public business and certain other entities, and after December 15, 2019 for other entities. Early adoption is permitted.	Nonpublic dual reporters may decide to adopt both ASC 842 and IFRS 16 on the same date.
Transition approach and comparatives
Companies have a choice of adopting IFRS 16 by restating comparatives (retrospective approach) or without restating comparatives (modified retrospective approach). A series of exemptions or practical expedients is available for lessees, each of which may be elected independently of other elections. They apply mainly to the modified retrospective approach for leases that were operating leases under IAS 17.2	Like IFRS, lessees have a choice of adopting ASC 842 by restating comparatives (comparative method) or without restating comparatives (effective date method). Like IFRS, a series of exemptions or practical expedients is available for lessees. However, unlike IFRS, there are restrictions on the combinations of practical expedients that may be elected, and they apply equally to both transition methods.	Our original article in August 2017 highlighted that lessees were required to restate comparatives under US GAAP – a significant difference from IFRS. That has changed. In August 2018, the FASB amended ASC 842 (ASU 2018-11) to introduce the effective date method, for which comparatives are not restated. This amendment means that dual reporters no longer need to restate comparatives for US GAAP purposes, allowing consistency with IFRS. However, dual reporters will need to carefully sort through their choice of practical expedients, and consider other differences, to achieve consistency in the transition approach.
Leases recognized on the balance sheet
Lessees may elect to apply the recognition exemption for leases of ‘low-value’ assets – e.g. underlying assets with a value ≤ $5,000 when new, even if they are material in aggregate.	There is no exemption for leases of low-value assets.	Dual reporters will have to decide whether to use the low-value exemption or recognize leases of low-value assets to maintain consistency between US GAAP and IFRS reporting. When applying the exemption, dual reporters will have to identify leases of low-value assets in the entire lease population to quantify the adjustment between US GAAP and IFRS.
Lease classification
Lessees apply a single on-balance sheet lease accounting model.	There is a dual classification on-balance sheet lease accounting model for lessees: finance leases and operating leases. Lease classification affects subsequent measurement of the right-of-use asset, lease expense and income statement presentation.	Dual reporters will have to separately track leases that have a different classification between US GAAP and IFRS because their accounting will be different.
Remeasurement assessment for leases tied to an index or rate
Lessees remeasure the lease liability for changes in variable lease payments based on an index or rate on the date when there is a change in the contractually required cash flows.	Adjustments to an index or rate do not constitute a reassessment event.	Dual reporters will have to separately track the remeasurement assessment for leases that are tied to an index or rate.
Sale-leaseback transactions
If the seller-lessee has a substantive option to repurchase the underlying asset, the transfer is not a sale.	If the seller-lessee has a substantive option to repurchase an underlying asset that is not real estate, the transfer may be a sale under certain circumstances. If the leaseback would be classified as a finance lease by a seller-lessee (or as a sales-type lease by the buyer-lessor), then sale recognition is automatically precluded.	Dual reporters will have to separately track the accounting for sale-leaseback transactions.
The seller-lessee measures the right-of-use asset at the retained portion of the previous carrying amount of the underlying asset (i.e. at cost). Only the amount of any gain or loss related to the rights transferred to the buyer-lessor is recognized.	The seller-lessee measures the right-of-use asset at the present value of the lease payments in the same way as any other lease. A gain or loss is recognized for the difference between the sale proceeds and the carrying amount of the underlying asset.
Subleases
Unless the sublessor for the head lease applies the recognition and measurement exemption applicable to short-term leases, a sublessor classifies a sublease by reference to the right-of-use asset arising from the head lease.	A sublessor classifies a sublease by reference to the underlying asset.	We expect that most subleases under ASC 842 will be classified as operating leases, while most subleases under IFRS 16 will be classified as finance leases by the sublessor.

2)

if earlier the oh media is not following IFRS then now to follow will effect to following (Given Less attractive from IFRS point of view)

Leverage :- it would not effect to leverage of the company

Net Profit :- it might decrease due to some disclosures changes

EBITDA:-  it might decrease due to some disclosures changes

Cash flow :- it would not effect to cash flow of the company