Presentation of Long-Term Liabilities and Share-based Compensation

Presentation and Disclosure of Leases

Both IFRS and US GAAP state that the purpose of lease disclosures is to provide financial statement users with information to evaluate the amount, timing, and uncertainty of cash flows related to leases.

On the balance sheet, the non-current assets section typically includes a “right of use” asset, while the non-current (long-term) liabilities section usually includes the lease liability. However, some companies might not have separate line items for leases due to the size of leased assets and obligations and may report leases under “Other assets” or “Other liabilities.”

Additionally, lessees and lessors must disclose quantitative and qualitative information about their leases, including significant judgments made to comply with lease accounting standards. They must also disclose the amounts recognized in the financial statements related to leases and their locations on those statements.

Lessee Disclosure

Under IFRS 16, lessee disclosures include the following for the current reporting period:

• Carrying amount of right-of-use assets by asset class and the end of the reporting
  period by class of underlying asset.
• Total cash outflows for leases
• Interest expense on lease liabilities
• Depreciation charges for right-of-use assets by asset class
• Additions to right-of-use assets

Additionally, lessees should disclose a maturity analysis of lease liabilities separately from other financial liabilities such as bonds and loans. They should also provide additional quantitative and qualitative information about their leasing activities to help users of financial statements assess the nature and future cash outflows of these activities. This analysis should include:

• the nature of the lessee’s leasing activities.
• future cash outflows to which the lessee is potentially exposed but are not reflected in the measurement of lease liabilities.
• restrictions or covenants imposed by leases.
• sale and leaseback transactions.

Lessor Disclosure

IFRS 16 specifies different disclosure requirements for lessors. Like lessees, lessors must provide information either in the notes or the financial statements that allow users to assess the impact of leases on the lessor’s financial position, performance, and cash flows.

At a minimum, lessors should disclose the following regarding finance leases:

• Finance income on the net investment in the lease.
• Income relating to variable lease payments not included in the measurement of the lease.

For the operating leases, the lessor should disclose lease income, with separate disclosure for income related to variable lease payments not based on an index or rate.

Additionally, lessors must provide qualitative and quantitative information about their leasing activities, helping users understand the nature of these activities and how the lessor manages risks associated with any rights retained in the underlying leased assets.

For instance, regarding finance leases, lessors should explain significant changes in the carrying amount of the net investment and provide a maturity analysis of receivable lease payments. This analysis should show undiscounted lease payments to be received annually for at least the first five years and a total amount for any remaining years.

On the other hand, regarding the operating leases, lessors should disclose disaggregated information about each class of property, plant, and equipment subject to operating leases. They should also provide a maturity analysis of lease payments, showing undiscounted lease payments to be received annually for at least the first five years and a total amount for the remaining years.

Presentation and Disclosure of Postemployment Plans

Disclosures for defined benefit and defined contribution pension plans are typically provided in the notes to the financial statements, with disclosures for defined benefit plans being more detailed.

International Accounting Standard 19 (IAS 19) requires issuers to disclose the amount recognized on the income statement during the period for defined contribution plans. However, regulators may mandate more extensive disclosures.

IAS 19 outlines the following objectives for disclosures of defined benefit pension plans:

• Explain the characteristics and associated risks of the defined benefit plans.
• Identify and explain the amounts in the financial statements related to the defined benefit plans (i.e., the net pension asset or liability).
• Explain how the defined benefit plans might affect the entity’s future cash flows in terms of amount, timing, and uncertainty.

While IAS 19 is principles-based and allows issuers discretion in meeting disclosure objectives, it specifies several required disclosures, such as:

• The nature of the benefits provided, the regulatory framework of the plan, governance, and risks associated with the plan.
• A reconciliation from the opening to the closing balance of the net pension asset or liability, with separate reconciliations for plan assets and the present value of the defined benefit obligation, including service costs, interest income or expense, remeasurements, past service costs, contributions to the plan, and other components.
• A sensitivity analysis indicating how changes in significant assumptions, like the discount rate used to measure the defined benefit obligation, would affect the financial statements.
• The composition of plan assets by category, such as equity securities, fixed-income securities, and real estate.
• Indications of how the defined benefit pension plans impact the entity’s future cash flows.

Presentation and Disclosures of Share-Based Compensation

Companies are mandated to disclose information about their share-based compensation programs to help users of the financial statements understand the nature and scope of these arrangements, including current and expected future cash flows and expenses.

These disclosures are typically included in the notes to the financial statements. According to IFRS 2, required disclosures include:

• Description of Share-Based Payment Arrangements: Covers general terms and conditions, such as vesting requirements, the maximum term of options granted, and the method of settlement (cash or equity).
• Details on Options: Specifically, the number and weighted average exercise price of options, including:
  • Number outstanding at the beginning of the period.
  • Number granted during the period.
  • Number forfeited during the period.
  • Number exercised during the period.
  • Number expired during the period.
  • Number outstanding at the end of the period.
  • Number exercisable at the end of the period.
• Other Equity Instruments:
  • The number and weighted average fair value of other equity instruments (besides share options) granted during the period.
  • Information on how the fair value of these equity instruments was measured.

Question #1

Which of the following disclosures is required for lessees under IFRS 16?

1. The details of net interest expense on lease liabilities.
2. The depreciation charges for right-of-use assets by asset class.
3. The future market value projections of leased assets.

Solution

The correct answer is B.

Under IFRS 16, lessees are required to disclose depreciation charges for right-of-use assets by asset class as part of their current reporting period disclosures.

Question #2

Which of the following is generally a goal of a share-based compensation plan?

1. Recruiting new staff members
2. Increasing executive pay
3. Aligning employees’ interests with managerial objectives

Solution

The correct answer is A.

Share-based compensation plans are typically designed to attract new employees by offering them a share in the company’s future success as part of their compensation package. These plans also aim to retain and motivate existing employees by aligning their interests with the goals of the company. By giving employees a stake in the company, share-based compensation plans encourage employees to contribute to the company’s growth and profitability, benefiting both the employees and the company in the long term.