Asset recognition and business reorganization. Concept 396 of 2018

Leasing contracts can be classified as financial or operational, depending on the characteristics of the contract. To determine how the entity should classify and recognize leasing, it must take into account the characteristics described in paragraphs 20.4 to 20.7 and 20.9 to 20.15 of Section 20 of the IFRS for SMEs.

CONSULTATION (TEXTUAL)

  1. 1- According to the new accounting regulatory framework, it is mandatory that the company recognize assets in its accounting even if it does not appear in the deed and registration in its name, if the conditions of use, control, and expected to have future benefits of the (sic)? Specific case the goods acquired by leasing. Should the asset be recognized for the total value of the contract, as well as the obligation for its total value, so that the good remains in register on behalf of the leasing company until the total cancellation of the contract?
  2. 2- In the Business Reorganization processes, even when the liabilities of the leasing obligations are recorded by their total value, only the due canons owed at the time of admission will be part of the reorganization process?

CONSIDERATIONS AND RESPONSE

Within the aforementioned character, the CTCP responses are of a general and abstract nature, since their mission is not to solve specific problems that correspond to a particular case.

Given that the consultant does not establish which group is classified for the purpose of applying the accounting regulations, this query will be answered from the accounting regulations applicable to group 2.

ASSETS ACQUIRED UNDER LEASING

Leasing contracts can be classified as financial or operational, depending on the characteristics of the contract. To determine how the entity should classify leasing, it must take into account the characteristics described in paragraphs 20.4 to 20.7 of Section 20 of the IFRS for SMEs.

“20.4 A lease shall be classified as financial when it substantially transfers all the risks and advantages inherent to the property. A lease will be classified as operating if it does not transfer substantially all the risks and advantages inherent to the property.

Now, section 20 of leases mentions examples of situations that, individually or in combination, would normally lead to classifying a lease as financial 1:

May information in paragraphs 20.5 and 20.6 of the IFRS for SMEs

According to the above, if one (or more) of the above is fulfilled in a lease, then it should be treated as a financial lease.

For the classification of the rights of use of the asset, the guidelines of the technical frameworks for financial information, goods of similar nature and use will be taken into account. In operating leases, the rights of use are not recognized.

The following paragraphs stipulate the paragraphs of the IFRS for SMEs, related to the recognition of lease agreements:

“Tenant financial statements – financial leases Initial recognition

20.9 At the beginning of the financial lease term, a lessee will recognize its use rights and obligations under the finance lease as assets and liabilities in its statement of financial position for the amount equal to the fair value of the leased asset, or at the present value of the payments minimum for the lease, if this was less, determined at the beginning of the lease. Any initial direct costs of the lessee (incremental costs that are directly attributed to the negotiation and agreement of the lease) will be added to the amount recognized as assets.

20.10 The present value of the minimum payments for the lease must be calculated using the interest rate implicit in the lease. If it can not be determined, the incremental interest rate on the tenant’s loans will be used.

Subsequent measurement

20.11 A lessee shall allocate the minimum lease payments between the financial charges and the reduction of the outstanding debt using the effective interest method (see paragraphs 11.15 to 11.20). The lessee will distribute the financial burden to each period throughout the term of the lease, so that a constant interest rate is obtained, in each period, on the balance of the debt pending amortization. A tenant will charge contingent fees as expenses in the periods in which they are incurred.

20.12 A lessee will depreciate an asset leased under a finance lease in accordance with the corresponding section of this Standard for that asset type, ie, Section 17 Property, Plant and Equipment, Section 18 or Section 19 Business Combinations and Goodwill. If there is no reasonable certainty that the lessee will obtain the property at the end of the term of the lease, the asset will be fully depreciated over its useful life or over the term of the lease, whichever is less. A lessee will also assess on each reporting date whether the value of a leased asset has been impaired through a financial lease (see Section 7 Impairment of Assets).

Financial statements of tenants – operating leases Recognition and measurement

20.15 A lessee will recognize lease payments under operating leases (excluding costs for services such as insurance or maintenance) as an expense over the term of the lease in a straight line unless:

  • (a) another systematic basis is more representative of the time pattern of the User’s benefits, even if the payments are not made on that basis; or
  • (b) the payments to the lessor are structured in such a way that they increase in line with the expected general inflation (based on published indexes or statistics) to compensate for the cost increases for inflation expected from the lessor.

If the payments to the lessor vary due to factors other than general inflation, condition (b) will not be fulfilled. “(Bold out of the text)

OBLIGATIONS IN BUSINESS REORGANIZATION PROCESSES

In front of the liabilities with the financial institution for a leasing contract, at the time of carrying out the business reorganization process, it must be recognized as established in the contractual agreement that has been reached with the creditors of the entity. The measurement of the liability must take into account the new existing conditions, which include interest rate, term, etc .; if there is any difference with the carrying amount recognized prior to the reorganization process, this should be recognized in the period results as a gain or loss.

In relation to the restructuring of the obligations for leases, the provisions of Law 1116 of 2016 will be taken into account (see Article 22); in any case, the negotiations for the payment of the debt must consider the amount of the total liability, and not only the due fees, and the rights of use recognized by the entity in its assets.

Finally, it is important to remember that when an entity has ceased to meet the business-as-business hypothesis, it must observe the provisions of Annex 50 of Decree 2420 of 201 5, which deals with the topic of the Financial Technical Regulation Framework for Entities that do not meet the Business in Progress Hypothesis.

In the above terms, the consultation is absolved, stating that in order to do so, this body adhered to the information presented by the consultant and the effects of this writing are those set forth in article 28 of Law 1755 of 2015, the concepts issued by the Authorities as responses to requests made in exercise of the right to make inquiries will not be mandatory compliance or enforcement.

In order to establish the validity of the concepts issued by the Technical Council of Public Accounting, it is necessary to review in context the applicable regulations on the date of issue of the query response. Additionally, it must be taken into account that a later concept modifies the concepts that have been previously issued and that refer to the same topic, even if no specific reference has been made to the new concept.

 

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