How to classify lease payments on lessees’ cash flow statements
AASB 16 Check: Cash flow statement impacts for lessees
While a lot of the focus on applying the leases standard is around the recognition on the balance sheet and the nature of the expenses recognised in the statement of profit or loss, questions also arise on the classification of the amounts in the cash flow statement. Here we respond to the common question we are hearing on the classification of cash payments for lessees in the statement of cash flows, under AASB 16 Leases.
Scenario
Let’s pose a scenario that a company has four lease arrangements:
- Leases five floors in an office building. Lease payments are $1,000,000 per year – for the current year, based on the amortisation schedule, $995,000 is for reducing the lease liability and $5,000 is the interest portion.
- Rents two cars for use by employees. Rental payments are variable and based on kilometres travelled. Rental payments for the year are $40,000.
- Hires two buses for three-months and applies the short-term exemption for these leases. Payments for the hire of the buses amounted to $30,000 for the year.
- Embedded leases of laptops for its employees as part of an IT service arrangement. The company applies the low-value lease exemption to the laptop leases. Payments relating to these low-value leases are $75,000 per annum.
Question: How are the various lease payments classified in the statement of cash flows?
Interpretive response: In the application of AASB 16, there are flow on impacts to the classification of lease payments in the statement of cash flows. The explicit requirements in the standard (see “In technical speak” below) mean that entities need to consider the classification of lease payments.
For the office space lease, the amount allocated - $995,000 - for the repayment of the principal portion is included in cash outflows of financing activities.
Consistent with the company’s existing policy of classifying interest paid in the cash flow statement, cash payment for the interest portion - $5,000 - of the office lease liability is presented either as operating or financing activities.
However, variable lease payments, amounts paid for low-value leases and short-term leases that are not capitalised as part of lease liability are included in cash outflows of operating activities. The company includes a total of $145,000 in cash outflows of operating activities.
In technical speak
In the statement of cash flows, a lessee shall classify:
(a) cash payments for the principal portion of the lease liability within financing activities
(b) cash payments for the interest portion of the lease liability applying the requirements in AASB 107 Statement of Cash Flows for interest paid; and
(c) short-term lease payments, payments for leases of low-value assets and variable lease payments not included in the measurement of the lease liability within operating activities [AASB 16: 50].
If you would like to discuss the application of the standard for your organisation, please contact us.
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