Page tree

Versions Compared

Key

  • This line was added.
  • This line was removed.
  • Formatting was changed.

Challenges in financial accounting of a lessor related to finance lease are linked to the calculation of the

  • “Interest rate implicit in the lease (EIR)” and the
  • “Probability weighted expected credit losses (ECL)”.


Expand
titleData Delivery

The solution expects the delivery of the following information:

Contractual data:

The financial leasing contract is to be delivered similar to an annuity loan to the solution.

This entails information such as:

  • Leasing period
  • Selling price / Fair value
  • Carrying amount of the leased object
  • Direct Costs
  • Guaranteed amount
  • Expected value of the lease object and term date of leasing contract
  • Interest rate (if available)
  • Unguaranteed amount
  • Amount of Leasing rate
  • Payment frequency

Customer data

The lessee is delivered as customer.

Market data

Depending on the currency and agreed interest, currency rates and interest rate structure curves need to be provided to the solution.


Expand
titleValuations incl. Interest rate implicit in the lease

Based on the information provided, the solution generates / calculates for financial leases:

  • Estimated cash flow plan: Based on parameters provided, the solution calculates the estimated cash flow plan which forms the underlying for the calculation of
    • Discount rate / Interest rate implicit in the lease
    • Expected Credit losses
  • Initial capital: The initial capital of the financial leasing contract is equal to the Fair value of the leased object (machine).
  • Discount rate / Interest rate implicit in the lease: For lessors, the discount rate will always be the interest rate implicit in the lease. The interest rate implicit in the lease is defined in IFRS 16 as ‘the rate of interest that causes the present value of (a) the lease payments and (b) the unguaranteed residual value to equal the sum of (i) the fair value of the underlying asset and (ii) any initial direct costs of the lessor.’
    The interest rate implicit in the lease can be compared with the effective interest rate of an annuity loan, taking ) the lease payments, the unguaranteed residual value, the fair value of the underlying asset as well as initial direct costs of the lessor into account.
  • Amortisation schedule: The amortisation schedule is based on the applied discount factor and contains for each period the information about periodical amortisation as well as open amortisation for further periods.
  • Expected credit losses: The calculation of expected credit losses for financial leasing follows IFRS 9 and is in in general similar to the calculation of probability weighted expected credit losses for loans, taking various macroeconomic scenarios into account. For details please refer to the section “IFRS 9 Impairment Blueprint". If requested, for leasing deals specific segmentation and staging rules can be applied and also specific models for PD, LGD and EAD calculation can be provided.


Expand
titleExpected Credit Losses

The solution covers for finance lease the entire process chain which is necessary to calculated probability weighted expected credit losses (pwECL).

This includes 

  • Calculation of the exposure at default (EAD) based on the estimated cash flow plan
  • For stage 1 and stage 2
    • Usage of the EIR to discount the EAD (stage 1 and stage 2) or discounting the expected recoveries (stage 3) while calculating the recoverable amount
    • Calculation of PD and LGD based on historic payment information
    • Calculation of a probability weighted ECL taking macroeconomic parameters in alternativ scenarios into account
  • For stage 3:
    • Applying a significance test
    • Calculation of the probability weighted ECL taking 
      • for Lump Sum specific Provision macroeconomic parameters in alternativ scenarios into account
      • for Specific Provisioning alternativ expectations about individual expected regular/irregular recvoveries into account
      • Consideration of ECL and unwinding for financial accounting

From this point of view for financial leasing contracts the IFRS process chain is applied similar to loan contracts.