Instruction No. 08/2016 of August 8, 2016: Leases

INSTRUCTION NO. 08/2016 of August 8
SUBJECT: LEASES

Given the need to establish a set of procedures for the application of appropriate accounting policies and disclosures for leases, within the scope of the provisions established in Notice No. 06/2016, of June 22, regarding the general principles to be observed by Banking Financial Institutions, on the full adoption of International Accounting Standards/International Financial Reporting Standards.

Considering that this Instruction does not intend to make any interpretations of the International Accounting Standards/International Financial Reporting Standards, as such interpretations are developed exclusively by the IFRS Interpretations Committee and issued by the International Accounting Standards Board (IASB).

In these terms and under the combined provisions of Article 21 and Article 51, both of Law No. 16/10 of July 15 – Law of the National Bank of Angola, and Article 93 of Law No. 12/15 of June 17 – Law of the Bases of Financial Institutions.

I DETERMINE:

1. Object
   This Instruction establishes the procedures that Banking Financial Institutions must observe in the application of appropriate accounting policies and disclosures for leases, as provided for by International Accounting Standard 17 - Leases, hereinafter abbreviated as IAS 17.

2. Scope
   This Instruction is intended for Banking Financial Institutions under the supervision of the National Bank of Angola, under the terms and conditions provided for in the Law of the Bases of Financial Institutions, hereinafter designated as Institutions.

3. Definitions
   Without prejudice to the definitions established in the Law of the Bases of Financial Institutions, for the purposes of this Instruction, the following are understood:

3.1 Commencement date of the lease: the date from which the lessee has the right to exercise its right to use the leased asset. It is the date of initial recognition of assets, liabilities, income, or expenses resulting from the lease, as appropriate.

3.2 Initial direct costs: incremental costs that are directly attributable to the negotiation and conclusion of a lease, except for costs incurred by manufacturer or seller lessors.

3.3 Inception of the lease: the earlier of the date of the lease agreement and the date of commitment by the parties to the principal provisions of the lease.

3.4 Gross investment in the lease: the aggregate of:
a) the minimum lease payments receivable by the lessor under a finance lease; and b) the unguaranteed residual value accruing to the lessor.

3.5 Net investment in the lease: gross investment in the lease discounted at the interest rate implicit in the lease.

3.6 Fair value: the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

3.7 Lease: an agreement whereby the lessor conveys to the lessee the right to use an asset for an agreed period of time in exchange for a payment or series of payments.
Finance lease: a lease that transfers, substantially, all the risks and benefits incidental to ownership of an asset to the lessee. Title may or may not eventually be transferred.

3.8 Operating lease: a lease that is not a finance lease;

3.9 Non-cancellable lease: a lease that is cancellable only:
a) upon the occurrence of some remote contingency; b) with the permission of the lessor; c) if the lessee enters into a new lease for the same asset or for an equivalent asset with the same lessor; or d) after the lessee has paid an additional amount such that, at the inception of the lease, continuation of the lease is reasonably certain.

3.10 Minimum lease payments: payments during the lease term that are or may be required to be made by the lessee, excluding contingent rent, costs for services, and taxes paid by the lessor and reimbursed to it subsequently, together with:
a) for the lessee, any amounts guaranteed by the lessee or by a party related to the lessee; or b) for the lessor, any residual value guaranteed to the lessor by:
i. the lessee;
ii. a party related to the lessee; or
iii. a third party unrelated to the lessor who is financially capable of discharging the obligations under the guarantee.

3.11 Lease term: the non-cancellable period for which the lessee has contracted the lease together with any further terms for which the lessee has the option to continue the lease, with or without additional payment, when at the inception of the lease it is reasonably certain that the lessee will exercise the option.

3.12 Contingent rent: that portion of the lease payments that is not fixed in amount but is based on the future amount of a factor that changes other than the passage of time. These factors include, percentage of future sales, quantity of future use, future price indices, future market interest rates.

3.13 Unearned finance income: is the difference between:
a) the gross investment in the lease; and b) the net investment in the lease.

3.14 Sublease: an agreement whereby the lessee conveys to a third party the right to use an asset for an agreed period of time in exchange for a payment or series of payments.

3.15 Interest rate implicit in the lease: the discount rate that, at the inception of the lease, causes the aggregate present value of the minimum lease payments and the unguaranteed residual value to be equal to the sum of the fair value of the leased asset and the initial direct costs of the lessor.

3.16 Lessee's incremental borrowing rate: the interest rate that the lessee would have to pay on a similar lease or, if the same is not determinable, the interest rate at which, at the inception of the lease, the lessee would incur to borrow funds necessary to purchase an asset, for the same term and providing similar collateral.

3.17 Sale and leaseback transaction: a sale transaction of a certain asset followed by the lease of the same.

3.18 Guaranteed residual value: being that:
a) for a lessee, it corresponds to the portion of the residual value that is guaranteed by the lessee or by a party related to the lessee; b) for a lessor, it corresponds to the portion of the residual value that is guaranteed by the lessee or by a third party unrelated to the lessor who is financially capable of satisfying the obligations covered by the guarantee.

3.19 Unguaranteed residual value: part of the residual value of the leased asset, the realization of which by the lessor is not assured or is guaranteed only by a party related to the lessor.

3.20 Economic life: corresponds to the:
a) period during which an asset is expected to be economically usable by one or more users; or b) number of units of production or similar that are expected to be obtained from the asset by one or more users.

3.21 Useful life: period from the commencement of the lease term, not conditioned by the lease term, during which economic benefits embedded in the asset are expected to be consumed by the entity.

4. Application
   4.1 This Instruction must be applied in the recognition and measurement of all leases that are not:
   a) leases to explore or use minerals, oil, natural gas, and similar non-renewable resources; and b) licensing agreements for items such as:
   i. motion picture films;
   ii. video recordings;
   iii. plays;
   iv. manuscripts;
   v. patents; and
   vi. copyrights.

4.2 This Instruction must not be applied as a measurement basis for:
a) property held by lessees that is accounted for as investment property; b) investment property provided by lessors in the form of operating leases; c) biological assets held by lessees under finance leases; or d) biological assets provided by lessors under operating leases.

4.3 This Instruction applies to agreements that transfer the right to use assets even if the lessor is required to provide substantial services in connection with the operation or maintenance of the assets.

5. Classification of Leases
   5.1 A lease is classified as a finance lease if it transfers, substantially, all the risks and benefits incidental to ownership of a leased asset to the lessee, and as an operating lease if the transfer does not occur.

5.2 The classification of a lease is carried out at the inception of the lease, taking into account the substance of the transaction and not the form of the contract.

5.3 Institutions must consider the guidelines for the classification and reclassification of leases described in Annex I of this Instruction.

6. Minimum Lease Payments
   6.1 For the purposes of determining minimum lease payments, Institutions must consider the periodic lease rent, and the following components:
   a) security deposit, whenever the lessee is required to provide a deposit at the inception of the lease that is refundable at the end of the lease term, the payment and refund must be considered in the calculation of the present value of minimum lease payments; b) early termination penalty, whenever the lease includes a condition of early termination penalty by the lessee and it is not reasonably certain that the full lease contract period will be fulfilled; c) lessee incentives, incentives granted by the lessor must be deducted in the calculation of minimum lease payments, even if they are not an integral part of the formalized lease contract; d) rent review, variations in rents that are fixed at the beginning of the contract and do not therefore assume a contingent character must be part of the minimum lease payments; and e) purchase option, whenever the lessee has the option to purchase the asset at a price that should be sufficiently lower than the fair value at the date the option becomes exercisable, so that it is reasonably certain that the option will be exercised, the minimum lease payments must consider the minimum payments during the lease term until the expected date of exercise of this purchase option, as well as the payment necessary to exercise this option.

6.2 For the purposes of determining minimum lease payments, Institutions must not consider the following components:
a) contingent rents; b) maintenance costs; c) administrative costs; d) early termination penalty, whenever the lease includes a condition of early termination penalty of the contract by the lessee and there is an expectation of full fulfillment of the lease period; and e) rent review, whenever the variation in lease payments is carried out in accordance with prevailing market conditions.

7. Lessor's Perspective – Finance Leases
   7.1 At initial recognition, Institutions assuming the role of lessors must consider the following requirements:
   a) recognize the asset as a receivable, for an amount equal to the net investment in the lease; b) recognize lease payments receivable as repayment of capital and finance income; c) include initial direct costs in the initial measurement of the finance lease receivable in situations where Institutions are not manufacturers or sellers of the leased asset, and exclude these costs in situations where they are manufacturers or sellers of the leased asset, with the same being recognized as an expense when profit is recognized. These costs include commissions, legal fees, and internal costs that are incremental and directly attributable to the negotiation and acceptance of the lease and exclude expenses related to sales and marketing teams.

7.2 In the subsequent measurement of finance leases, Institutions must consider the following requirements:
a) minimum lease payments must be divided between finance income and repayment of capital. Finance income must be recognized in a way that reflects a constant periodic rate of return on the net investment in the finance lease; b) estimated unguaranteed residual values used in the calculation of gross investment must be regularly reviewed. Whenever there is a reduction in the estimated unguaranteed residual value, the allocation of income during the lease term must be reviewed and any reduction with respect to amounts added must be recognized immediately; and c) whenever Institutions are manufacturer or seller lessors, they must recognize sales profits or losses in the period, according to the policy followed for sales without special conditions. If interest rates are set relatively low compared to interest rates that would be applied by the market for similar transactions, the sales profit must be restricted to what would apply if a market interest rate were applied. Costs incurred by Institutions related to the negotiation and acceptance of a lease must be recognized as an expense when the sales profit is recognized.

7.3 Receivables arising from finance lease operations must be subject to impairment analysis during the validity of the contract as established in Instruction No. 05/16, regarding impairment losses for the credit portfolio.

7.4 For the purposes of this number, Institutions must make disclosures according to the provisions in Part 1 of Annex II of this Instruction.

8. Lessor's Perspective – Operating Leases
   8.1 At initial recognition, Institutions assuming the role of lessors must consider the following requirements:
   a) assets subject to operating leases must be presented in the balance sheet according to the nature of the leased asset; b) lease income from operating leases must be recognized on a straight-line basis over the lease term, even if payments are not made on a straight-line basis, except if another systematic basis is more representative of the time pattern in which the benefit of the use of the leased asset decreases; c) initial direct costs incurred by the institution must be added to the amount by which the leased asset is registered, and recognized as an expense over the lease term on the same basis on which lease income is recognized; and d) depreciation of the leased asset must be carried out on a basis consistent with the institution's normal depreciation policy for similar assets and must be calculated according to the provisions in IAS 16 – Property, Plant and Equipment, hereinafter abbreviated as IAS 16, and IAS 38 – Intangible Assets, hereinafter abbreviated as IAS 38.

8.2 Receivables relating to operating leases that are registered in the balance sheet must be subject to impairment analysis as established in Instruction No. 05/16, regarding impairment losses for the credit portfolio.

8.3 Leased assets must be subject to impairment loss analyses, in accordance with the provisions of IAS 36 – Impairment of Assets, hereinafter abbreviated as IAS 36.

8.4 Institutions that are manufacturer or seller lessors must not recognize any sales profit when concluding an operating lease.

8.5 For the purposes of this number, Institutions must make disclosures according to the provisions in Part 2 of Annex II of this Instruction.

9. Lessee's Perspective – Finance Leases
   9.1 At initial recognition, Institutions assuming the role of lessees must consider the following requirements:
   a) recognize operations as assets and liabilities, in their balance sheet, for an amount equivalent to the fair value of the leased asset, or, if lower, the present value of the minimum lease payments; b) use the interest rate implicit in the lease to calculate the present value of the minimum payments thereof. If it is not possible to determine said rate, the lessee's incremental borrowing rate must be used; c) add initial direct costs to the amount by which the asset is registered.

9.2 At the commencement of the lease term, the asset and the liability for future lease payments must be recognized in the balance sheet for the same amounts, except in the case of any initial direct costs of the lessee that are added to the recognized amount of the leased asset.

9.3 In subsequent recognition, it must be considered that:
a) minimum lease payments must be divided between financial charge and reduction of capital debt. The financial charge must be allocated to each period during the lease term according to a constant periodic interest rate on the outstanding capital balance; b) contingent rents must be recorded as an expense in the periods in which they occur; and c) depreciation of the leased asset must be carried out on a basis consistent with the Institution's normal depreciation policy for similar assets, and must be calculated according to the provisions in IAS 16 and IAS 38. In situations where there is no reasonable certainty regarding the exercise of the purchase option by the lessee at the end of the lease, the asset must be fully depreciated over the shorter period between the lease term and its useful life.

9.4 Leased assets must be subject to impairment loss analyses, in accordance with the provisions of IAS 36.

9.5 For the purposes of this number, Institutions must make disclosures according to the provisions in Part 1 of Annex III of this Instruction.

10. Lessee's Perspective – Operating Leases
    10.1 Lease payments for operating leases must be recognized as an expense, on a straight-line basis, over the lease term, even if payments are not made on that basis, except if another systematic basis is more representative of the time model of the lessee's benefit.

10.2 For the purposes of this number, Institutions must make disclosures according to the provisions in Part 2 of Annex III of this Instruction.

11. Sale and Leaseback Transactions
    11.1 Institutions must proceed with the accounting treatment of a sale and leaseback transaction according to the classification of the lease involved, as defined in this Instruction.

11.2 In sale and leaseback transactions that result in a finance lease, any gain or loss on the disposal of the asset must be deferred and amortized over the lease term.

11.3 In sale and leaseback transactions that result in an operating lease, the fair value of the leased asset must be determined and compared with the contractually established selling price. The comparison between the fair value of the leased asset and the contractual selling price may result in the following situations:
a) the selling price is equal to the fair value: the gain or loss determined between the difference of the fair value and the carrying amount must be immediately recognized in the results of the period; b) the selling price is higher than the fair value: the difference between the fair value and the carrying amount must be recognized immediately in the results of the period, with the excess of the selling price over the fair value being deferred and amortized during the period during which the asset is expected to be used; c) the selling price is lower than the fair value: the difference must be immediately recognized in the results of the period, except if the determined loss is compensated by future lease payments below market price. In this situation, the difference between the selling price and the fair value of the leased asset must be deferred and amortized in proportion to the lease payments during the period during which the asset is expected to be used.

11.4 In sale and leaseback transactions that result in a finance lease, the recognition of loss described in the previous point is not necessary unless an impairment in the value of the asset has occurred. In this situation, Institutions must reduce the carrying amount of the asset to the recoverable amount according to IAS 36.

11.5 The disclosure requirements applicable to lessors and/or lessees must also be used in sale and leaseback transactions.

12. Guarantees Received
    To be accepted as mitigants of credit risk, guarantees received by Institutions on lease operations in which Institutions assume the role of lessors must be in compliance with the terms provided for in Notice No. 10/2014, of December 10, regarding guarantees received for prudential purposes.

13. Transitional Provision
    13.1 Institutions that meet at least one of the criteria provided for in number 2 of Article 5 of Notice No. 06/2016, of June 22, on the full adoption of International Accounting Standards/International Financial Reporting Standards, must be in compliance with the provisions of this Instruction from the 2016 financial year, inclusive.

13.2 Institutions that are not in the conditions provided for in the previous point must observe the provisions of number 3 of Article 5 of Notice No. 06/2016, of June 22, on the full adoption of International Accounting Standards/International Financial Reporting Standards.

14. Final Provisions
    14.1 This Instruction does not dispense with the consultation of International Accounting Standards/International Financial Reporting Standards or International Accounting Standards/International Financial Reporting Standards, designated as IAS/IFRS.

14.2 Whenever there are discrepancies between this Instruction and IAS/IFRS, the standards issued by the IASB must prevail.

15. Doubts and Omissions
    Doubts and omissions raised in the interpretation and application of this Instruction will be resolved by the National Bank of Angola.

16. Revocation
    All regulation that contradicts the provisions of this Instruction is hereby revoked.

17. Entry into Force
    This Instruction enters into force on the date of its publication.

PUBLISH
Luanda, August 8, 2016

THE GOVERNOR
VALTER FILIPE DUARTE DA SILVA

ANNEX I
Classification of Leases

1. For a lease to be classified as a finance lease, there is a set of relevant situations/indicators that, individually or together, point towards this c