Brief facts of enquiry:

The Accounting Standards Board (the Board) received following enquiries relating to the application of IFRS 16 Leases:

•Whether discount rate shall be reviewed / reassessed at any specific time, other than at the time of lease modification?

•Whether existing leases are subject to re-measurement in case of change in interest rates by the State Bank of Pakistan (SBP) under the monetary policy?

•Whether a company shall re-assess discount rate at a specific frequency, when as a practical expedient a single discount rate is used for a portfolio of leases?

Opinion:

The Board based on the enquired fact pattern discussed the following matters:

A.Requirement for reassessment / review of discount rate under IFRS 16

B.Impact of changes in SBP policy interest rate on the discount rate under IFRS 16

C.Frequency of reassessment of discount rate for leases measured using portfolio approach under IFRS 16

A.Requirement for reassessment / review of discount rate under IFRS 16

The Board noted that IFRS 16 outlines specific scenarios (paragraphs 40 – 43 and 45 of IFRS 16) under which a lessee shall re-measure the lease liability using a revised discount rate.

These scenarios, in addition to lease modification, include:

•a change in the lease term;

•a change due to reassessment of an option to purchase the underlying asset;

•a change in amount payable under residual value guarantee; and

•a change in floating interest rates.

B.Impact of changes in SBP Policy Interest Rate on the discount rate under IFRS 16

The Board observed that a mere change in the policy interest rate by the SBP would not require reassessment of the discount rate or re-measurement of existing lease liability. However, the Board noted that if the change in policy interest rate by the SBP results in a change in the floating rate used to determine lease payments, then the lessee would be required to use revised discount rate and accordingly re-measure the lease liability.

C.Frequency of reassessment of discount rate for leases measured using portfolio approach

The Board noted that IFRS 16 as a practical expedient permits that its requirements can be applied at a portfolio level (i.e. leases with similar characteristics). Accordingly, an entity can establish and apply a single discount rate to all leases in a portfolio, provided that using single discount rate would not result in a materially different answer than using a discount rate determined for each individual lease.

The Board also noted that under the portfolio approach any reassessment or review of discount rate shall be required under the scenarios outlined in paragraph 1, above.

Moreover, in such a case a lessee would also be required to assess whether the specific circumstances triggering reassessment of discount rate and re-measurement of lease liability are relevant for the entire lease portfolio as a whole or for any particular lease within that portfolio. Where the specific circumstances are valid only for a particular lease within the portfolio then such lease shall be singled out and excluded from the portfolio and a revised discount rate shall be determined for re-measurement of that particular lease only.

(Issued in August, 2020)