Investor Presentaiton
HKAS 1.51(a)
HKAS 1.49
HK Listco Ltd
Financial statements for the year ended 31 December 2023
HKFRS 16.12-13 & 15
HKFRS 16.12-13 & 15
(m) Leased assets
(i)
At inception of a contract, the group assesses whether the contract is, or contains, a lease. This is the
case if the contract conveys the right to control the use of an identified asset for a period of time in
exchange for consideration. Control is conveyed where the customer has both the right to direct the
use of the identified asset and to obtain substantially all of the economic benefits from that use.
As a lessee
Where the contract contains lease component(s) and non-lease component(s), the group has elected
not to separate non-lease components and accounts for each lease component and any associated
non-lease components as a single lease component for all leases [other than ... name any specific
class of underlying asset to which this practical expedient does not apply] 92.
92 Paragraph 12 of HKFRS 16 states that an entity shall account for each lease component within the contract as a lease separately
from any non-lease components of the contract, unless it applies the practical expedient in paragraph 15 of HKFRS 16. This
practical expedient is available only to lessees (not lessors). It allows a lessee to elect on a class-by-class basis not to separate the
components, and instead to account for each lease component and any associated non-lease components as a single lease
component. However, embedded derivatives that meet the criteria in paragraph 4.3.3 of HKFRS 9 are explicitly excluded from
this practical expedient and have to be separated if required by HKFRS 9.
Examples of "non-lease components" would be if a contract included payments for regular maintenance activities carried out by
the lessor for the benefit of the lessee, or for other goods or services such as consumable spare parts for an underlying asset or
the provision of security and cleaning staff e.g. for a leased property. Non-lease components could also include payments
relating to the lessee's right to access to certain physical assets but such rights fail the definition of a lease as set out in
paragraphs B13-B20 of HKFRS 16, which would be the case where the lessor has a substantive substitution right, or the portion
of the asset made available to the lessee is not physically distinct. For example, an arrangement may cover both the rental of a
specific floor in an office building, and the right for a limited number of cars to park in the basement car park in spaces to be
assigned by the landlord from time to time. In this example, the rental of the specific office floor will typically be a lease
component, while the car-parking rights would be a non-lease component unless the rights were sufficient for the lessee to
occupy substantially all the spaces in the car park.
In some cases, taking the practical expedient will simplify the lessee's accounting. This will typically be when the lease is for a
relatively short period and the difference between (i) capitalising all of the consideration and depreciating the right-of-use asset,
and (ii) expensing some of the consideration as incurred and depreciating the rest, will not be worth the effort of allocating the
consideration to each lease component on the basis of relative stand-alone price of the lease components and the aggregate
stand-alone price of the non-lease components (as required by paragraph 13 of HKFRS 16). It could also be the case when the
payments for both components are fixed for the duration of the lease term, or are subject to review on the same dates as each
other. This approach could also simplify the record-keeping by the entity for the terms of the lease.
In other cases, however, separating the lease component at the inception of the lease may overall be the simpler accounting, as
well as giving better information to users of financial statements. This will typically be the case for longer-term leases with
material non-lease components, where the amount payable for the non-lease components may be subject to change on a more
frequent basis than the lease components. In such cases, if the components are not separated, then it may result in the need to
apply lease modification accounting more often, which can be complex. Instead, if the components are separated, then the
consideration for the non-lease components can continue to be expensed as incurred.
Additionally, separating the components will result in smaller lease liabilities and right-of-use assets than if the practical
expedient is used, which may be a relevant consideration for some entities, for example, those subject to gearing ratio
covenants.
Entities should therefore consider carefully the impact of taking or not taking advantage of the practical expedient on a class-by-
class basis when determining their accounting policies. As this is a class-by-class election, it is best practice to explain in the
policy note the situations in which the entity would or would not take advantage of the practical expedient.
As noted above, this practical expedient is not available to lessors. Instead, paragraph 17 of HKFRS 16 states that lessors should
apply paragraphs 73 to 90 of HKFRS 15 to allocate the consideration under the contract to the components.
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