Lease accounting as lessee (branch network and premises)

Nearly all branch, ATM, and premises leases land on the balance sheet as a right-of-use asset and lease liability under IFRS 16, so for a bank with an extensive branch network this materially grows total assets and liabilities, shifts operating lease expense into depreciation and interest, and changes EBITDA-based and leverage metrics, none of which reflects a change in the bank's actual economics, only in how a long-standing lease footprint is now presented.

Does the contract convey the right to control an identified branch premises or asset for a period in exchange for consideration, meeting the IFRS 16 lease definition? For long-standing branches with informal, historically-always-renewed terms, has the lease term been determined by assessing renewal options reasonably certain to be exercised, rather than only the formal contractual term? Is the discount rate applied specific to the currency, term, and economic environment of each lease rather than a single group-wide rate? Has the right-of-use asset been tested for impairment separately from routine depreciation where a branch underperforms or is earmarked for closure?

1. Confirm the arrangement is a lease: it conveys the right to control the use of an identified branch premises or asset for a period in exchange for consideration.
2. Determine the lease term including renewal or termination options that are reasonably certain to be exercised, paying particular attention to long-standing branches with informal, historically-always-renewed terms.
3. Recognize a right-of-use asset and lease liability at commencement for all leases unless the short-term (12 months or less) or low-value asset exemptions apply.
4. Reassess the lease term when a significant event or change in circumstances (e.g., a branch renovation investment, a strategic decision to exit a location) affects the likelihood of exercising renewal or termination options.
5. Test the right-of-use asset for impairment when a branch underperforms or is earmarked for closure, separate from the routine depreciation charge.

Measure the lease liability at the present value of remaining lease payments, discounted using the rate implicit in the lease where readily determinable, or otherwise the bank's incremental borrowing rate adjusted for the currency, term, and economic environment of the specific lease (not a single group-wide rate applied uniformly); measure the right-of-use asset at cost (initial lease liability plus initial direct costs, prepayments, less incentives received), subsequently depreciated on a straight-line basis over the lease term and tested for impairment when indicators exist.

Disclose: (1) right-of-use assets by class (branches, ATM sites, IT equipment) either on the face or in the notes; (2) lease liability maturity analysis; (3) depreciation charge on right-of-use assets and interest expense on lease liabilities, separately from any remaining short-term/low-value lease expense; (4) judgments in determining the incremental borrowing rate and lease term, particularly for renewal options; (5) total cash outflow for leases during the period.

• Excluding branch leases with informal or automatically renewing terms from the lease term assessment simply because there is no long formal written renewal commitment
• using a single group-wide discount rate without adjusting for currency, term, and branch-specific credit risk factors
• failing to reassess right-of-use assets for impairment when a branch is closed or underperforming
• applying the short-term lease exemption to a lease that is renewed repeatedly in substance functioning as a longer-term arrangement
• omitting variable lease payments that should be included in the measurement where they depend on an index or rate.