IFRS Practice Issues: Leases of land

Transcription

1 IFRS Practice Issues: Leases of land December 2010 kpmg.com/ifrs

2 Contents 1. Overview of major changes 1 2. Introduction and background 2 3. Why does lease classification matter? Impacts on lessees Impacts on lessors 4 4. Lease classification Overall approach to lease classification Possible indicators of lease classification 6 5. Effective date and transition Existing users of IFRSs First-time adopters of IFRSs Future developments 13 About this publication 14

3 IFRS Practice Issues: Leases of land 1 1. Overview of major changes IAS IAS 17.8 IAS 17.15A IAS 17.BC8 IAS 17.69A IAS 17.68A The amendment to IAS 17 Leases (the Amendment) deletes previous guidance stating that a lease of land with an indefinite economic life normally is classified as an operating lease, unless title is expected to pass to the lessee at the end of the lease term. Under the Amendment, a lease of land is subject to the general lease classification criteria of IAS 17. That is, if a lease of land transfers substantially all of the risks and rewards incidental to ownership of the land to the lessee, then the lease is a finance lease; otherwise it is an operating lease. When a lease includes land and buildings elements, an entity determines the classification of each element based on the general guidance in IAS 17 on lease classification, taking account of the fact that land normally has an indefinite economic life. The Amendment does not include additional indicators or guidance on assessing the classification of a lease of land. However, a land lease with a term of several decades or longer may be classified as a finance lease, even if at the end of the lease term title will not pass to the lessee, because in such arrangements substantially all risks and rewards are transferred to the lessee and the present value of the residual value of the leased asset is considered negligible. The Amendment is effective for annual periods beginning on or after 1 January Earlier application is permitted. If as a result of the Amendment a lease is newly classified as a finance lease, then that classification is effected retrospectively. If, however, information necessary to apply the Amendment retrospectively is not available, then classification is determined based on the facts and circumstances as at the adoption date of the Amendment, and the asset and liability related to a lease of land are recognised at their respective fair values on that date, with any difference between those values being recognised in retained earnings. Key impacts Key impacts Changes to the accounting requirements for leases of land may result in leases being reclassified as finance leases, with recognition, presentation and measurement implications. Taking some lease terms seen commonly in practice, 150-year and 99-year leases could be reclassified as finance leases; in some markets, leases as short as 50 years may become finance leases. Even for a relatively simple lease of land that is granted for a single upfront premium, the consequences may not be limited to presentation issues.

4 2 IFRS Practice Issues: Leases of land 2. Introduction and background Classification of leases of land as finance or operating leases has proved a complex practice issue for many entities applying IFRSs, particularly in jurisdictions in which long leases of land are common. The Amendment removed from IAS 17 the rule that land normally has an indefinite economic life and therefore a lease of land in which title is not expected to pass to the lessee by the end of the lease term is classified as an operating lease. This rule was introduced into IAS 17 in December 2003, and was confirmed in an agenda decision published by the then International Financial Reporting Interpretations Committee in March Prior to the effective date of the Amendment, even very long leases of land normally were classified as operating leases. Under the Amendment, a lease of land is subject to the general lease classification criteria of IAS 17. That is, if a lease of land transfers substantially all of the risks and rewards of ownership incidental to ownership of the land to the lessee, then the lease is a finance lease; otherwise it is an operating lease. The key interpretive issue in applying the Amendment is how to determine the dividing line when assessing whether a lease of land is an operating lease or a finance lease. That is, how should one apply the general lease classification criteria of IAS 17 to leases of land, especially long leases of land. There also are practical issues in applying the Amendment for the first time to existing leases, which may have been entered into tens or even hundreds of years ago. There may be a tendency to focus unduly on the present value of minimum lease payments test in paragraph 10(d) of IAS 17. This usually involves splitting rentals between land and building elements, which in itself may require considerable judgement. This publication seeks to identify practical indicators to assist entities to apply the Amendment, focusing on the key question of whether the lease transfers substantially all of the risks and rewards of ownership of the land to the lessee.

5 IFRS Practice Issues: Leases of land 3 3. Why does lease classification matter? Whether a lease of land is classified as an operating lease or a finance lease can have a range of recognition, measurement and presentation implications for the lessee and lessor. Even for a relatively simple lease of land that is granted for a single upfront premium, the consequences may not be limited to presentation issues. 3.1 Impacts on lessees Suppose that a lessee enters into a 99-year lease of land for an upfront payment of 1,000. The lessee plans to use the land in its business. The principal consequences of classifying the lease as either a finance lease or an operating lease are as follows: Operating lease Finance lease Nature of asset recognised Prepayment Property, plant and equipment Measurement basis of asset Basis of amortisation/ depreciation expense Amortised cost, i.e. amount paid less cumulative operating lease expense recognised to date Typically straight line over the lease term of 99 years Cost model under IAS 16: cost less accumulated depreciation and impairment charges Revaluation model under IAS 16: fair value at date of most recent valuation less subsequent accumulated depreciation and impairment charges Typically straight line over the lease term of 99 years, though depreciation is based on the revalued amount under the IAS 16 revaluation model If the lease were granted for an upfront premium plus annual lease payments, then the lessee would recognise the annual lease payments: as an expense on a straight-line basis over the term of the lease, if it classified the lease as an operating lease; and as a liability on commencement of the lease, if it classified the lease as a finance lease. In this case, the lessee would recognise interest expense over the term of the lease so as to produce a constant periodic rate of interest on the remaining balance of the liability. Additional considerations would apply if the lessee assesses that its interest in the land meets the definition of investment property, as follows: If the lessee concludes that the lease is an operating lease, then the lessee may elect to classify the land interest as an investment property under paragraph 6 of IAS 40. This election is available on a property-by-property basis. However, if the lessee elects this option for any one lease, then it applies the fair value model to all its investment property. If the lessee concludes that the lease is a finance lease, then it is required to classify the land as investment property, measured in accordance with the lessee s chosen model for investment property.

6 4 IFRS Practice Issues: Leases of land Furthermore, if the lessee assesses that the lease is a finance lease but has not determined the future use of the land, then the lessee is required to classify the land as investment property. 3.2 Impacts on lessors Suppose that a lessor enters into a 99-year lease of land for an upfront payment of 1,000. The principal consequences of classifying the lease as either a finance lease or an operating lease are as follows: Nature of asset/liability recognised Measurement basis of asset Basis of amortisation/income recognition Operating lease Investment property (assuming the definition is met, otherwise property, plant and equipment) Deferred income Cost or fair value, depending on selected valuation model Typically straight-line, over the lease term of 99 years Finance lease n/a lessor derecognises land on commencement of lease, potentially recognising a gain or loss on disposal. No receivable recognised as lease payments received upfront If the lease were instead granted for an upfront premium plus annual lease payments, then the lessor would recognise the annual lease payments: as income on a straight line basis over the term of the lease, if it classified the lease as an operating lease; and as an asset (finance lease receivable) on commencement of the lease, if it classified the lease as a finance lease. In this case, the lessor would recognise interest income over the term of the lease so as to produce a constant periodic rate of interest on the remaining balance of the asset. For the lessor, classification of the lease as an operating lease results in a form of gross presentation in the statement of financial position, as the lessor recognises a tangible asset and a liability (deferred income).

7 IFRS Practice Issues: Leases of land 5 4. Lease classification 4.1 Overall approach to lease classification IAS 17.15A Under the Amendment, a lease of land is subject to the general lease classification criteria of IAS 17; the fact that land normally has an indefinite economic life is an important consideration but the Amendment does not include additional indicators or guidance on assessing the classification of a lease of land. That is, if a lease of land transfers substantially all of the risks and rewards incidental to ownership of the land to the lessee, then the lease is a finance lease; otherwise it is an operating lease. IAS 17.10, 11 IAS 17.10(c) IAS 17.10(d) IAS 17 includes indicators that normally would lead to a lease being classified as a finance lease. Generally the presence of any one indicator may point to classification as a finance lease, though more than one indicator often is present in practice. However, the indicators can be difficult to apply to a lease of land. Consider, for example, the following two quantitative indicators that often are determinative in classifying leases of other assets: l Major part of economic life. If the lease term is for the major part of the economic life of the leased asset, then the lease normally would be classified as a finance lease. Land, however, normally has an indefinite economic life but see below. l Present value of minimum lease payments. If the present value of the minimum leases payments amounts to substantially all of the fair value of the leased asset, then the agreement normally would be classified as a finance lease. However, in some markets, land has a high, often appreciating, residual value and this can make it difficult to assess the rate implicit in a lease of land, and also may mean that the lessee s incremental borrowing rate is not a good proxy for the rate implicit in the lease. In practice, it may be helpful to consider the following factors when assessing the classification of a lease of land: These indicators are discussed further below. However, ultimately, the lease classification is based on an overall assessment of whether substantially all of the risks and rewards incidental to ownership of the asset have been transferred from the lessor to the lessee.

8 6 IFRS Practice Issues: Leases of land 4.2 Possible indicators of lease classification Lease term As noted above, a lease of land typically will not cover the major part of the economic life of the land, as land normally has an indefinite economic life. However: IAS 17.BC8B IAS 17.BC8C l in a 999-year lease of land and buildings, the significant risks and rewards associated with the land during the lease term are transferred to the lessee during the lease term, regardless of whether title will be transferred; and l the present value of the residual value of the property with a lease term of several decades would be negligible and therefore accounting for the land element as a finance lease is consistent with the economic position of the lessee. It follows that a long lease term may indicate that a lease of land is a finance lease. This is not because the lease term will thereby cover the major part of the economic life of the land, but because in a long lease the risks and rewards retained by the lessor through its residual interest in the land at the end of the lease are not significant when measured at inception. Conversely, a short lease of land is unlikely to be a finance lease as the risks and rewards retained by the lessor through its residual interest in the land at the end of the lease are likely to be significant. It would not be appropriate to seek to determine a bright-line threshold lease term above which a lease of land always would be classified as a finance lease, due to the judgemental nature of the assessment. However, in our view, a 999-year lease of land (a common lease term in some jurisdictions) normally would be a finance lease, and leases of land with terms as short as 50 years also may be finance leases in some circumstances. In addition, a lease with a short minimum contractual period but a fixed price renewal option that is reasonably certain to be exercised also may be a finance lease. Example 1 Example In country X, all land is owned by the Government. Leases of land are granted to private sector entities under standard terms. The minimum contracted lease term is 50 years. The lease payments comprise a significant upfront amount payable on lease commencement, and an immaterial annual payment. At the end of the minimum contractual lease term of 50 years, the lessee may renew the lease on the same terms at its option, that is, annual lease payments continue to be immaterial and the lessee may renew the lease at the end of each subsequent renewal period. No additional premium is payable on renewal. In this case the lease term is very long, as at inception of the lease it is reasonably certain the lessee will opt to renew the lease after 50 years, indeed indefinitely. In our view, the lessee should classify the lease of land as a finance lease Present value of minimum lease payments In practice, many leases of land are granted for an upfront premium with immaterial annual lease payments. In such cases, the amount of the upfront premium generally approximates to the present value of the lease payments. However, in leases of land that include material recurring lease payments it often will be difficult to assess whether the present value of the minimum lease payments amounts to substantially all of the fair value of the land, due to difficulties in estimating the rate implicit in the lease. One approach is to discount the minimum lease payments first at a risk-free rate. In our view, if the present value of the minimum lease payments discounted at a risk-free rate amounts to less than substantially all of the fair value of the land, then this may indicate that the lease is an operating lease. The rationale for this view is that although the rate implicit in a lease of land is very difficult to estimate,

9 IFRS Practice Issues: Leases of land 7 it always will be higher than the risk-free rate, often very much higher. Therefore, if the present value of the minimum lease payments is less than substantially all of the fair value of the land when discounted at the risk-free rate, then there is little doubt that this also would be the case if the minimum lease payments were discounted at the (higher) interest rate implicit in the lease, if that rate were known. Example 2 Example Company B rents a plot of land for 30 years from a third party on an arm s length basis and pays a fixed annual rent. B is unable to determine the rate implicit in the lease reliably. However, B notes that the yield on long-dated government bonds in its jurisdiction at the inception date of the lease is 6 percent. B calculates that the present value of the minimum lease payments payable over 30 years, discounted at the risk-free rate of 6 percent, equals 87 percent of the fair value of the land at inception, which B considers to be less than substantially all of the fair value of the land. In our view, B should classify the lease as an operating lease. Applying this test using a risk-free rate will still require judgement, e.g. to determine the risk-free rate. Performing the calculation at other relevant discount rates may also provide useful evidence as to lease classification. For example, in markets in which property yields are readily ascertainable, discounting the minimum lease payments at a market property yield will help to assess lease classification. It may be helpful to perform a series of calculations to assist in the lease classification decision. For example, if calculations indicate that the present value of the minimum lease payments amounts to substantially all of the fair value of the leased land when discounted at a risk-free rate and when discounted at a market property yield, then this will indicate that the lease is a finance lease. However, if the present value of the minimum lease payments amounts to less than substantially all of the fair value of the leased land when discounted at a market property yield but more than substantially all of the fair value of the leased land when discounted at a risk-free rate, then additional indicators will need to be considered. An alternative approach is to calculate the discount rate at which the present value of the minimum lease payments equals substantially all of the fair value of the leased land, and then compare that rate to other relevant information, such as the risk-free rate, market property yields, the lessee s incremental borrowing rate etc. Again judgement will be required to interpret the results of these calculations. Taking some lease terms seen commonly in practice, our calculations show that this indicator suggests that 150-year and 99-year leases in which the rentals are set at a market rate at inception of the lease could all be classified as finance leases under this approach. In some markets, leases as short as 50 years may be finance leases, in the absence of contra-indicators such as contingent rentals and other contingent payments as discussed below Contingent rentals Contingent rentals may indicate that a lease is an operating lease, if the nature of the contingency provides evidence that the lessor has not transferred substantially all of the risks and rewards of ownership of the land. Example 3 Example Company B enters into a 99-year lease of land in country Y. The starting rent under the lease is set at the prevailing market rate. Every five years, there is a market rent review under which rentals are reset to the market rate at the date of the rent review. Historical studies show a long-term trend of significant real-terms growth in land values in country Y.

10 8 IFRS Practice Issues: Leases of land In this case, the lessor s return depends on changes in the value of the land during the lease term through the rent review mechanism. In our view, Company B should classify the lease as an operating lease, as a key risk/reward of owning land is that its value may rise or fall and the lessor retains this risk/ reward during the lease term. However, it should be noted that the presence of contingent rentals does not automatically indicate that a lease of land is an operating lease. As part of the assessment of the lease an entity also would consider whether: there are other indicators that the lease is a finance lease; the nature of the contingency and whether the contingency provides evidence as to the extent to which the lease transfers risks and rewards of ownership of the land; and the materiality of the contingency in the context of the lease as a whole. Example 4 Example Company C enters into a 99-year lease of land in country Z. The lessor is the local government authority. The lease payments comprise an upfront premium that equates to 50 percent of the fair value of the land, and annual rentals calculated initially at 3 percent of the market value of the land at inception. Subsequently the annual rentals are set at the higher of the rent for the previous year and 3 percent of the current market value of the land. Historical data on land values in county Z is limited but suggests that land values are fairly stable. In this case, the lessor again retains exposure to changes in the value of the land during the lease term, this time through the calculation of annual rentals. However, the significance of this exposure is reduced due to the size of the upfront payment, the upwards only rent review mechanism and the relative stability of land values. In addition, the lease term is long and it appears likely that the present value of the minimum lease payments will exceed substantially all of the fair value of the land. In order to assess the most appropriate classification of the lease, C should assess the significance of the contingent rentals. In our view, on the basis of the facts presented, C should classify the lease as a finance lease. Example 5 Example Company D enters into a 50-year lease of land. The starting rent is set at the prevailing market rate. During the lease term, rentals are reset every five years by adjusting the previous rent by the cumulative change in the consumer price index (CPI) during the five-year period. In the five years prior to inception of the lease, annual changes in consumer prices have varied between 20 percent per annum and 10 percent per annum. In this case, the rentals are contingent and the effect of the contingency is expected to be significant. However, the contingency relates to changes in CPI, not changes in the market value of land. In our view, the contingent rentals do not provide evidence as to the extent to which the lease transfers the risks and rewards of ownership of the land; D should assess the classification of the lease by reference to other factors Other contingent payments If there are other substantive mechanisms through which the lessor's return varies with changes in the fair value of the land during the lease term, then this may indicate that the lease is an operating lease.

11 IFRS Practice Issues: Leases of land 9 In practice, such mechanisms may include: renewal premiums based on the market value of the land at the date of renewal; purchase options for which the exercise price is the fair value of the land at the date the option is exercised; one-off payments due from the lessee to the lessor if there is a change in the planning status of the land; and the ability for the lessor to terminate the lease and enter into a new lease on more favourable terms. Similar principles apply in each of these cases as in the contingent rents discussed above. That is, it remains important to consider other potential indicators of lease classification. Example Example 6 Company E enters into a 50-year lease of land. The starting rent is set at the prevailing market rate. During the lease term, rentals are reset annually by adjusting the previous rent by CPI. E has no renewal or early termination options. However, the lessor retains an option to terminate the lease without penalty by giving six months notice. In this case, the minimum lease payments include the rentals payable by the lessee over 50 years, as this is the period over which the lessee can be required to continue to make lease payments. However, although the lessee can be required to make lease payments for 50 years, the lessor has the right to terminate the lease early. This means that if the market value of land rises faster than CPI, then the lessor has an economic motive to terminate the lease and seek to secure a new tenant or buyer at the higher market price. Through this mechanism, the lessor retains a potential reward associated with ownership of the land, being the right to participate in future increases in the fair value of the land. In our view, this right indicates that the lease may be an operating lease Economic indifference In our view, if an entity would be economically indifferent between leasing and purchasing an asset, then this indicates that the lease is a finance lease. If the entity is economically indifferent between leasing and purchasing, then prima facie the entity considers that any risks and rewards that are not transferred by the lease contract are not significant. The following examples illustrate situations that suggest that an entity is economically indifferent between leasing and purchasing an asset, such that the lease may be a finance lease: Sale vs purchase In jurisdictions in which (1) long leases of land and (2) purchases of land both are common: if the lessee/ lessor would be economically indifferent between entering into a lease or purchasing the land, then this suggests that the lease is a finance lease. Example 7 Example Company F operates in Country Q, in which both freehold and leasehold interests in land are common. F enters into a 125-year lease of land in consideration for a single lease payment of 1,000, which F pays on commencement of the lease. Title to the land does not transfer to F at the end of the lease. The market value of a freehold interest in the land is 1,000.

12 10 IFRS Practice Issues: Leases of land In our view, F should classify the lease as a finance lease notwithstanding that it never obtains title to land, as it obtains risks and rewards typically associated with ownership of the land during the lease term, and the pricing of the lease suggests that the risks and rewards associated with the residual interest in the land at the end of the lease are negligible. That is, in this case a 125-year lease is economically equivalent to an ownership interest in the land. The conclusion in this example would also follow from the guidance discussed earlier in section on lease term. However, an analysis of whether a lessee would be economically indifferent between leasing and purchasing may assist in the analysis of more complex examples. Tax effects In jurisdictions in which (1) long leases of land and (2) purchases of land both are common but attract a different tax treatment: if the lessee/lessor would be economically indifferent between entering into a lease or purchasing the land after adjusting for tax effects, then this suggests that the lease is a finance lease. Example 8 Example Modifying Example 7, assume that a sales tax of 10 percent applies to sales of land but not to leases of land. Market participants commonly enter into 125-year leases of land in order to avoid the sales tax. Company G enters into a 125-year lease of land in consideration for a single lease payment, which G pays on commencement of the lease. Title to the land does not transfer to G at the end of the lease. The difference between the market value of a freehold interest in the land and the upfront rental payable on commencement of a 125-year lease is equivalent to the sales tax. If G is economically indifferent as to whether to purchase or lease the land, then we believe that H should classify any lease arising as a finance lease. Restrictions on ownership of land In jurisdictions in which there are restrictions over foreign ownership of land: if the lessor would be economically indifferent between selling to a national or leasing to foreigner, then this suggests that the lease is a finance lease. Example 9 Example Foreign ownership of land is prohibited in Country R. Company H, a resident of Country R, is marketing a plot of land for sale to residents for 1,000 or lease to non-residents for 50 annual rental payments that, when discounted at prevailing property yields, equates to 1,000. The lease payments are fixed in amount and the lease is non-cancellable. If H is economically indifferent as to whether to transact with residents or non-residents on this basis, then we believe that H should classify any lease arising as a finance lease.

13 IFRS Practice Issues: Leases of land Effective date and transition 5.1 Existing users of IFRSs Effective date IAS 17.69A The Amendment is effective for annual periods beginning on or after 1 January Earlier application is permitted Transition requirements modified retrospective transition IAS 17.68A The transition requirements are a form of modified retrospective transition. Essentially, this means that an entity applies the Amendment retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, subject to a specific form of transition relief if the entity does not have the information necessary to apply the amendments retrospectively. Retrospective application in accordance with IAS 8 involves the following steps: Reassess lease classification on the basis of the information existing at lease inception. If a lease is to be reclassified from an operating lease to a finance lease, then: calculate the balances that would have been recognised if the lease always had been classified as a finance lease; recognise the balances arising in the opening statement of financial position of the earliest period presented; and recognise any adjustment directly in equity. IAS 17.68A IAS 1.39 If, however, the information necessary to apply the Amendment retrospectively in accordance with IAS 8 is not available, then lease classification is determined based on the facts and circumstances as at the adoption date of the Amendment. In this case, the asset and the finance lease liability are recognised initially at their respective fair values, with any difference between these values being recognised in retained earnings. Typically, if application of the Amendment results in a material change to the financial statements, then the entity will be required to present a statement of financial position at the beginning of the earliest comparative period presented. Conversely, if the Amendment is not adopted retrospectively, then this additional statement of financial position will not be required. 5.2 First-time adopters of IFRSs The Amendment did not introduce any additional reliefs into IFRS 1 First-time Adoption of International Financial Reporting Standards. IFRS 1.10 IFRS 1.D5 Therefore, an entity adopting IFRSs for the first time applies the general requirements of IFRS 1 and IAS 17 (including the Amendment) to leases existing at its transition date. That is, the entity assesses the classification of leases existing at its transition date based on the information existing at the dates of inception of the leases. The entity then recognises in its opening statement of financial position at its transition date the assets and liabilities arising from its lease contracts. In our view, the IFRS 1 deemed cost exemption for property, plant and equipment also may be applied to an asset acquired under a finance lease. Therefore, an entity may measure a finance lease interest in land classified as property, plant and equipment and recognised in its opening statement of financial position at its transition date at either: the initial cost determined in accordance with IAS 17 at lease inception, adjusted subsequently in accordance with IAS 16; or

14 12 IFRS Practice Issues: Leases of land the deemed cost determined in accordance with IFRS 1. An entity may elect which of the above valuation bases to apply on an asset-by-asset basis.

15 IFRS Practice Issues: Leases of land Future developments In August 2010, the IASB and FASB published a joint exposure draft on leases (the ED). The ED proposes that IAS 17 be replaced by a new standard on lease accounting under which: a lessee would recognise an asset representing its right to use the leased asset for the lease term and a liability for its obligation to make lease payments; and a lessor would recognise an asset for its right to receive lease payments and either: continue to recognise the underlying leased asset and an a liability representing its obligation to permit the lessee to use the underlying leased asset (the performance obligation approach); or derecognise the portion of the underlying leased asset representing the cost of the right-of-use conveyed to the lessee and reclassify the remaining portion as a residual asset representing its right to the underlying leased asset at the end of the lease term (the derecognition approach). Leases of land would be subject to the general requirements of the new standard; that is, there would be no exemptions or special rules for leases of land. However, the ED contains a number of exemptions and scope exclusions that may affect leases of land. In particular: lessors and lessees would not apply the new standard to a transaction in the legal form of a lease that is assessed to be an in-substance purchase or sale of the underlying asset; and lessors would not apply the new standard to leases of investment property measured at fair value. The ED is discussed in detail in our publication New on the Horizon: Leases, which can be downloaded free of charge from kpmg.com/ifrs.

16 14 IFRS Practice Issues: Leases of land About this publication This publication has been produced by the KPMG International Standards Group part of KPMG IFRG Limited. Our IFRS Practice Issues publications address practical application issues that an entity may encounter when applying a specific International Financial Reporting Standard (IFRS). They include discussion of selected requirements, and interpretive guidance and illustrative examples to elaborate and clarify the practical application of the requirements. Content This edition of IFRS Practice Issues considers the requirements of IAS 17 Leases in respect of leases of land, including the land elements of combined leases of land and buildings, focusing on the significant amendments to those requirements introduced by the Improvements to IFRSs published by the IASB in In this publication the changes to IAS 17 published by the IASB in 2009 are referred to as the Amendment. The text of this publication is referenced to IFRSs in issue as at 1 December References in the left hand margin identify the relevant paragraphs of the IFRSs. Whilst considering some of the key issues that an entity may encounter when applying the Amendment, this publication is not a comprehensive analysis of the requirements of IFRSs for leases of land. In most cases further analysis will be necessary in order for an entity to apply IFRSs to its own facts, circumstances and individual transactions. When preparing financial statements in accordance with IFRSs, an entity should have regard to its local legal and regulatory requirements. This publication does not consider any requirements of a particular jurisdiction. IFRSs and their interpretation change over time. Accordingly, neither this publication nor any of our other publications should be used as a substitute for referring to the standards and interpretations themselves. Abbreviations IASB: International Accounting Standards Board FASB: US Financial Accounting Standards Board Other KPMG publications A more detailed discussion of the general accounting issues that arise from the application of IFRSs can be found in our publication Insights into IFRS. In addition to Insights into IFRS, we have a range of publications that can assist you further, including: IFRS compared to US GAAP Illustrative financial statements IFRS Handbooks, which include extensive interpretative guidance and illustrative examples to elaborate or clarify the practical application of a standard New on the Horizon publications, which discuss consultation papers Newsletters, which highlight recent developments, including IFRS Leases Newsletter IFRS Practice Issue publications, which discuss specific requirements of pronouncements First Impressions publications, which discuss new pronouncements Disclosure checklist. IFRS-related technical information is available at kpmg.com/ifrs.

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18 Acknowledgements We would like to acknowledge the principal authors of this publication. They are Hagit Keren, Brian O Donovan and Jeremy Sage of the KPMG International Standards Group. We would also like to thank the contributions made by other reviewers, which include other members of KPMG s global IFRS Topic Team on Leases, Investment Property and Service Concessions: Rajesh Arora Kimber Bascom Judit Boros Una Curtis Heather De Jongh Colin Graham Wolfgang Laubach Sylvie Leger Mun Wai Lo Kris Peach Gabriel Soifer KPMG in India KPMG in the US KPMG in Hungary KPMG in Ireland KPMG in South Africa KPMG in the UK KPMG in Germany KPMG in Canada KPMG in Singapore KPMG in Australia KPMG in Argentina The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. Publication name: IFRS Practice Issues: Leases of land Publication number: Publication date: December 2010 KPMG International Standards Group is part of KPMG IFRG Limited. KPMG International Cooperative ( KPMG International ) is a Swiss entity that serves as a coordinating entity for a network of independent firms operating under the KPMG name. KPMG International provides no audit or other client services. Such services are provided solely by member firms of KPMG International (including sublicensees and subsidiaries) in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any other member firm, nor does KPMG International have any such authority to obligate or bind KPMG International or any other member firm, nor does KPMG International have any such authority to obligate or bind any member firm, in any manner whatsoever. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.