BLM52030 - IFRS 16 leases: IFRS 16 lessees: The spreading rules: Example 2

The leases and portfolio of leases, and their remaining terms, are as in Example 1 (BLM52015),

On 14 August 2021 the lessee, Primus Ltd, disposes of its portfolio of leases to two connected companies. There are 13 leases in the portfolio.

Four leases over plant and machinery with a book value of £6 million are transferred to Alpha Ltd.

Nine leases over plant and machinery with a book value of £8 million are transferred to Beta Ltd.

Both Alpha Ltd and Beta Ltd prepare accounts with a 31 December year end.

Primus Ltd’s trade ceases on 31 December 2021.

Primus Ltd has treated an adjustment as arising to it of £4,679,487 in its accounting period ending 31 December 2019 and £4,692,307 in its accounting period of 31 December 2020.

But for the transfer and cessation, it would treat an adjustment of £4,679,487 as arising to it in its accounting period ending 31 December 2021.

The transitional accounting adjustment relating to the portfolio of leases that has been transferred represented 52.63% of the total transitional accounting adjustments. The part of the amount that would be treated as arising to Primus Ltd which relates to the portfolio of leases is therefore 52.63% x £4,679,487, ie £2,462,814.

The leases were transferred on 14 August 2021. For the period up to the day before the transfer (13 August 2021), 225 days, the adjustment relating to the portfolio of leases is treated as arising to Primus Ltd. For the remaining period beginning on the day of the transfer (14 August 2021), 140 days, the adjustment relating to the portfolio of leases is treated as arising to Alpha Ltd and Beta Ltd, apportioned on a just and reasonable basis.

Of the adjustment of £2,462,814:

  • £1,518,173 (being £2,462,814 x 225/365) is treated as arising to Primus Ltd,
  • £944,641 (being £2,462,814 x 140/365) is treated as arising to Alpha Ltd and Beta Ltd,

It is just and reasonable to apportion the leases transferred based on the value of the underlying assets. So 6/14 of the adjustment is treated as arising to Alpha Ltd, and 8/14 of the adjustment is treated as arising to Beta Ltd. So:

  • £401,955 (being £937,894 x 6/14) is treated as arising to Alpha Ltd, and
  • £535,939 (being £937,894 x 8/14) is treated as arising to Beta Ltd,

in their periods of account ending 31 December 2021.

As the trade of Primus Ltd ceased on 31 December 2021, any amounts that have not, at that date, been treated as arising to Primus Ltd are treated as arising to it immediately before the cessation.

The further amount of £3,948,719 which would, apart from the transfer and cessation, have been treated as arising to Primus Ltd in the period ending 31 December 2022 also needs to be apportioned, as it relates to both the leases retained and the leases transferred to Alpha Ltd and Beta Ltd.

Using the same apportionment percentage as above (52.63%),

  • £1,870,509 (being £3,948,719 x 47.37%) is treated as arising to Primus Ltd,
  • £2,078,210 (being £3,948,719 x 52.63%) is treated as arising to Alpha Ltd and Beta Ltd.

Again using the same apportionment as above,

  • £890,661 (being £2,078,210 x 6/14) is treated as arising to Alpha Ltd, and
  • £1,187,549 (being £2,078,210 x 8/14) is treated as arising to Beta Ltd.

The £1,870,509 treated as arising to Primus Ltd is treated as arising in the company’s accounting period ending 31 December 2021, as a result of the cessation.

The amounts treated as arising to Alpha Ltd and Beta Ltd are treated as arising to them in their accounting periods ending 31 December 2022.