Ministerial Resolution No. (197) of 2024 Concerning the Regulation of Accounting Treatment for Finance Leases

Minister of State for Financial Affairs

Having perused:

• The Constitution;
• Federal Law No. (1) of 1972 Concerning the Competencies of Ministries and the Powers of Ministers, as amended;
• Federal Law No. (6) of 1985 Promulgating the Civil Transactions Law, as amended;
• Federal Decree-Law No. (32) of 2023 on Finance Lease;
• Ministerial Resolution No. (76) of 2020 Concerning the Accounting Standards for Finance Lease;
• and based on the public interest,

Hereby Resolves:

Article (1) Definitions

The definitions contained in Federal Decree-Law No. (32) of 2023 referred to shall apply to this Resolution. In addition, the following words and expressions shall have the meanings assigned to them unless the context otherwise requires:

Article (2) Scope of Application

The provisions of this Resolution shall apply to lease contracts subject to the provisions of the Decree-Law.

Article (3) Lessor’s Obligations for Accounting Measurement upon Initial Recognition

The Lessor shall comply with the following conditions for accounting measurement upon initial recognition:

1. Record and disclose in its financial statements, the assets held under the lease contract at the commencement date as receivables in an amount equal to the Net Investment in the Lease.
2. Use the implicit interest rate in the lease contract to measure the Net Investment in the Lease. In the case of a sublease where the implicit interest rate cannot be determined, the Sublessor may use the discount rate used in the head lease (adjusted for the value of any initial direct costs related to the sublease) to measure the Net Investment in the Sublease.
3. If the Lessor incurs initial direct costs, such as commissions, legal fees, and initial direct costs for negotiating the lease arrangement, such costs shall be included in the initial measurement of the Net Investment in the Lease, whereby the recognized lease income is reduced over the lease term. The implicit interest rate in the lease contract shall be defined in a manner that automatically includes initial direct costs in the Net Investment in the Lease, without the need to add each separately.
4. The initial measurement of lease payments included in the Net Investment in the Lease shall be from the commencement date of the lease contract, which consists of the following:
   • a. Fixed lease payments, less any lease incentives payable.
   • b. Variable lease payments that depend on an index or a rate, measured initially using the index or rate at the commencement date of the lease contract.
   • c. Any guaranteed residual values provided to the Lessor by a party related to the Lessee or an unrelated third party with the financial capacity to fulfill the guaranteed obligations.
   • d. The exercise price of a purchase option if the Lessee is reasonably certain to exercise that option.
   • e. Payments for lease termination penalties if the lease contract grants the Lessee that option.
5. The manufacturer or dealer Lessor shall recognize the following for each of its finance leases:
   • a. Revenue based on the fair value of the asset or the present value of the lease payments due to the Lessor discounted using the prevailing market interest rate, whichever is less.
   • b. Cost of sales, which represents the original cost or the carrying amount of the asset if different from the original cost, less the present value of the unguaranteed residual value.
   • c. Profit or loss on the sale, which represents the difference between revenue and cost of sales, in accordance with its policy for direct sales to which IFRS 15 (Revenue from Contracts with Customers) applies. The Lessor must recognize profit or loss on the sale from the finance lease at the commencement date, regardless of whether the Lessor transferred the asset to the Lessee as described in IFRS.

Article (4) Lessor’s Obligations for Accounting Measurement upon Subsequent Measurement

The Lessor shall comply with the following conditions for accounting measurement upon subsequent measurement:

1. Recognize finance income in a way that reflects a constant periodic rate of return on the Net Investment recognized as an asset.
2. Allocate finance income over the lease term on a systematic and rational basis, provided that lease payments for the relevant period are allocated to the Gross Investment in the Lease to reduce both the original lease amount and the unearned finance income.
3. Regularly review the estimated unguaranteed residual values of lease payments used in calculating the Gross Investment in the Lease. If there is a decrease in the estimated unguaranteed residual value of the lease payments, the Lessor must adjust the income allocation over the lease term and immediately recognize any reduction in the amounts due.

Article (5) Lease Modifications

1. The Lessor shall treat lease modifications as a separate lease contract for accounting purposes if the modification results in all of the following:
   • a. An increase in the scope of the lease contract by adding the right-of-use of one or more assets.
   • b. An increase in the lease consideration at a value commensurate with the stand-alone price for increasing the scope of the contract and any necessary adjustments to that stand-alone price to reflect the circumstances of the specific contract.
2. The requirements of IFRS 9 (Financial Instruments) shall apply to lease modifications that are not treated as a separate lease for accounting purposes.

Article (6) Recording

The Lessee shall, at the commencement date of the lease, record both the right-of-use and the obligations arising from the lease contract in its financial statements.

Article (7) Lessee’s Obligations for Measuring the Right-of-Use Asset upon Initial Recognition

1. The Lessee shall comply with the following conditions for measuring the right-of-use asset upon initial recognition:
   • a. Measure the right-of-use asset recognized in its financial statements at cost as of the commencement date of the lease contract.
   • b. The cost of the right-of-use asset shall include the following:
     • (1) The initial measurement of the lease liability as set out in Article (9)(1) of this Resolution.
     • (2) Any lease payments made on or before the commencement date, less any lease incentives received.
     • (3) Any initial direct costs incurred by the Lessee.
     • (4) An estimate of the costs to be incurred by the Lessee to dismantle and remove the underlying asset, or to restore the underlying asset to the condition required by the terms and conditions of the lease, unless those costs are incurred to produce inventories. The Lessee is obligated to incur those costs either at the commencement date of the lease or as a consequence of having used the asset during a particular period.
   • c. Recognize the costs set out in paragraph (b)(4) of item (1) of this Article as part of the cost of the right-of-use asset when there is an obligation to incur those costs.
2. The Lessee shall apply IAS 2 (Inventories) to the costs incurred during a particular period as a consequence of having used a right-of-use asset to produce inventories during that period. Obligations relating to those costs shall be recognized in accordance with IAS 37 (Provisions, Contingent Liabilities and Contingent Assets).

Article (8) Lessee’s Obligations for Subsequent Measurement of the Right-of-Use Asset

1. The Lessee shall comply with the following conditions for the subsequent measurement of the right-of-use asset:
   • a. Measure the right-of-use asset at cost by:
     • (1) Deducting the accumulated depreciation and impairment losses, provided that depreciation and impairment losses are recognized in the statement of profit or loss and other comprehensive income.
     • (2) Adjusting the accounting entries to reflect the remeasurement of the lease liability as specified in Article (9)(2)(a)(3).
   • b. Apply depreciation requirements commensurate with the lease term (useful life of the asset) in accordance with IAS 16 (Property, Plant and Equipment) to depreciate the right-of-use asset, taking into account the requirements set out in paragraph (c) of item (1) of this Article. If the lease provides for the transfer of ownership of the asset to the Lessee at the end of the lease term, or if the cost of the right-of-use asset indicates that the Lessee will exercise the purchase option, the Lessee shall depreciate the right-of-use asset from the commencement date of the lease until the end of the useful life of the asset.
   • c. If the lease does not include a transfer of ownership or a purchase option, the Lessee shall depreciate the right-of-use asset from the commencement date of the lease until the end of the useful life of the right-of-use asset or the end of the lease term, whichever is earlier.
2. The Lessee shall assess impairment in accordance with the requirements of IAS 36 (Impairment of Assets) and determine whether the right-of-use asset has been impaired, taking into account any identified losses resulting from the impairment of the right-of-use asset.

Article (9) Accounting Measurement of the Lease Liability

1. The following provisions shall apply to unpaid lease payments for initial measurement purposes:
   • a. The Lessee shall, at the commencement date, measure the lease liability at the present value of the lease payments that are not paid at that date. The Lessee shall discount the unpaid lease payments using the interest rate implicit in the lease, if that rate is readily determinable. If that rate is not readily determinable, the Lessee shall use the incremental borrowing rate to discount the unpaid lease payments.
   • b. The lease payments unpaid at the commencement date comprise the following payments or amounts, which are included in measuring the lease liability for the right-of-use asset during the lease term:
     • (1) Fixed lease payments, less any lease incentives receivable.
     • (2) Variable lease payments that depend on an index or a rate, initially measured using the index or rate at the commencement date. These include, for example, payments linked to a consumer price index or to an interest rate, or payments that vary to reflect changes in market rental rates.
     • (3) Amounts expected to be payable by the Lessee under residual value guarantees.
     • (4) The exercise price of a purchase option if the Lessee is reasonably certain to exercise that option.
     • (5) Payments of penalties for terminating the lease, if the lease terms grant the Lessee that option.
2. The following provisions shall apply to the lease contract for subsequent measurement purposes:
   • a. The Lessee shall measure the lease liability after the commencement date as follows:
     • (1) Increase the carrying amount to reflect interest on the lease liability.
     • (2) Decrease the carrying amount to reflect the lease payments made.
     • (3) Remeasure the carrying amount to reflect any reassessment or modifications to the lease contract or to reflect adjusted fixed lease payments.
   • b. The interest on the lease liability for all periods during the lease term shall be the periodic interest rate set out in paragraph (a) of item (1) of this Article, or the adjusted discount rate set out in Article (11)(3) and (5) or in Article (12)(2)(c) of this Resolution, as applicable.
   • c. The Lessee shall, after the commencement date, recognize the following costs in its financial statements: (1) Interest on the lease liability. (2) Variable lease payments not included in the measurement of the lease liability if such payments result from an event or circumstance subsequent to the signing of the lease contract, unless such payments have been included in the carrying amount of another asset in accordance with other applicable accounting standards.

Article (10) Other Measurement Models

1. If the asset is classified as investment property and the Lessee applies the fair value model, the Lessee shall also apply the fair value model to right-of-use assets that meet the definition of investment property under IFRS, in accordance with IAS 40 (Investment Property).
2. If the right-of-use asset relates to a class of property, plant and equipment to which the Lessee applies the revaluation model for accounting and reporting purposes in accordance with IAS 16 (Property, Plant and Equipment), the Lessee may elect to apply the revaluation model to all right-of-use assets related to that class of property, plant and equipment.

Article (11) Remeasurement of the Lease Liability

1. The Lessee shall apply the provisions of items (2) and (3) of this Article after the commencement date of the lease for the purposes of remeasuring the lease liability to reflect any changes in lease payments, and shall recognize such remeasured changes as an adjustment to the value of the right-of-use asset. If the carrying amount of the right-of-use asset is reduced to zero and there is a further reduction in the measurement of the lease liability, the Lessee shall recognize any remaining amounts from the remeasurement in the statement of financial performance that includes profit or loss and other comprehensive income.
2. The Lessee shall remeasure the lease liability by discounting the revised lease payments using the adjusted discount rate in either of the following cases:
   • a. A change in the lease term occurs. In this case, the Lessee shall determine the revised lease payments based on the revised lease term.
   • b. A change in the assessment of the option to purchase the asset occurs. In this case, the Lessee shall determine the revised lease payments to reflect the change in amounts payable under the purchase option.
3. When applying item (2) of this Article, the Lessee shall determine the adjusted discount rate to be the interest rate implicit in the lease for the remaining term of the lease if that rate is readily determinable, or the Lessee’s incremental borrowing rate at the date of remeasurement if the interest rate implicit in the lease is not readily determinable.
4. The Lessee shall remeasure the lease liability by discounting the revised lease payments using a constant discount rate in either of the following cases:
   • a. A change in the amounts expected to be payable under the residual value guarantee occurs. In this case, the Lessee shall determine the revised lease payments to reflect the change in the amounts expected to be payable under the residual value guarantee.
   • b. A change in future lease payments occurs as a result of a change in any of the indices or discount rates used to determine those payments (e.g., in the case of a change in market rental rates). In this case, the Lessee shall remeasure the lease liability to reflect only the revised lease payments when there is a change in cash flows (i.e., when the adjustment applies to lease payments). The Lessee shall determine the revised lease payments for the remaining term of the lease based on the revised contractual payments.
5. When applying item (4) of this Article, the Lessee shall use a constant discount rate unless the change in lease payments results from variable interest rates. In this case, the Lessee shall use the adjusted discount rate.

Article (12) Lease Modifications for the Lessee

1. The Lessee shall consider lease modifications as a separate lease if the modification results in both of the following:
   • a. An increase in the scope of the lease contract by adding the right-of-use of one or more assets to the lease contract.
   • b. An increase in the value of the lease contract commensurate with the specified price for the increase in the scope of the lease contract.
2. For a lease modification that is not treated as a separate lease for accounting purposes, the Lessee shall, at the effective date of the modification, do the following:
   • a. Determine the lease value in the modified lease contract.
   • b. Determine the lease term for the modified lease contract.
   • c. Remeasure the lease liability by discounting the revised lease payments using the adjusted discount rate. The adjusted discount rate shall be determined as the interest rate implicit in the lease for the remaining term of the lease if that rate is readily determinable, or the Lessee’s incremental borrowing rate at the effective date of the modification if the interest rate implicit in the lease is not readily determinable.
3. If a lease modification is not treated as a separate lease, the Lessee shall account for it for the purposes of remeasuring the lease liability as follows:
   • a. Decrease the carrying amount of the right-of-use asset to reflect the partial or full termination of the lease resulting from a reduction in the scope of the lease. The Lessee shall recognize any profit or loss relating to the partial or full termination of the lease in the statement of financial performance.
   • b. Make the necessary adjustments to the right-of-use asset to reflect all other modifications to the lease contract.

Article (13) Subleases

The Sublessor shall apply IFRS 16 (Leases) to all sublease contracts for right-of-use assets. The Lessee (Sublessor) shall treat the head lease and the sublease as two separate contracts, applying the relevant accounting requirements to each contract as a Lessor in one and a Lessee in the other.

Article (14) Sale and Leaseback Transactions

1. If the Seller transfers ownership of the asset to the Buyer and then leases it back from the Buyer, both the Seller and the Buyer shall make accounting entries for the sale contract and the lease contract in accordance with item (2) of this Article.
2. Both the Seller and the Buyer shall apply the requirements of IFRS 15 (Revenue from Contracts with Customers) when preparing their respective financial statements to determine whether the transfer of the asset is treated as a sale, as follows:
   • a. If the transfer of the asset by the Seller meets the requirements of IFRS 15 (Revenue from Contracts with Customers) and is treated as a sale of the asset, the following shall apply:
     • (1) The Seller (Lessee) shall measure the right-of-use resulting from the leaseback compared to the previous carrying amount of the asset relating to the right-of-use retained by it. As a result, the Seller (Lessee) shall recognize only the amount of any profit or loss relating to the rights transferred to the Buyer (Lessor) without recognizing any profit or loss relating to the retained right-of-use.
     • (2) The Buyer shall account for the purchase of the asset by applying IAS 16 (Property, Plant and Equipment) relevant to the nature of the asset or in accordance with IAS 38 (Intangible Assets), where applicable.
   • b. If the transfer of the asset by the Seller does not meet the requirements of IFRS 15 (Revenue from Contracts with Customers) to be treated as a sale of the asset, the following shall apply:
     • (1) The Seller shall continue to recognize the sold asset and shall recognize a financial liability equal to the proceeds of the transfer of ownership. This liability shall be accounted for in accordance with IFRS 9 (Financial Instruments).
     • (2) The Buyer shall not recognize the sold asset in its financial statements and shall recognize a financial liability equal to the proceeds of the transfer of ownership in accordance with IFRS 9 (Financial Instruments).

Article (15) Lessor’s Disclosures

1. In accordance with the requirements of IFRS, the Lessor shall disclose the following in its financial statements:
   • a. Profit or loss resulting from lease transactions, finance income on the Net Investment in the Lease, and income relating to variable lease payments not included in the measurement of the Net Investment in the Lease.
   • b. Any additional qualitative and quantitative information about leasing activities. This additional information shall include, for example, information that helps users of the Lessor’s financial statements assess the following:
     • (1) The nature of the Lessor’s leases.
     • (2) How the Lessor manages the risks associated with any rights retained in the asset. The risk management strategy for retained right-of-use assets includes any means of mitigating those risks. These means may include, for example, repurchase agreements, residual value guarantees, or variable lease payments resulting from usage exceeding the limits agreed upon in the lease contract.
2. The Lessor shall analyze expected and due lease payments in a manner that shows undiscounted lease payments receivable annually for each of the first five years and the total amounts for the remaining years of the lease term. The Lessor shall also reconcile undiscounted lease payments with the Net Investment in the Lease, including unearned finance income relating to collectible lease payments and any discounted unguaranteed residual value.

Article (16) Lessee’s Disclosures

1. In accordance with the requirements of IFRS, the Lessee shall disclose the following in its financial statements:

• a. Depreciation expense for right-of-use assets by asset class.
• b. Interest expense on lease liabilities.
• c. Expenses relating to short-term leases, excluding leases with a lease term of one month or less.
• d. Expenses relating to leases of low-value assets, excluding expenses relating to short-term leases of low-value assets as described in paragraph (c) of this item.
• e. Expenses relating to variable lease payments not included in the measurement of lease liabilities.
• f. Lease income from subleases of right-of-use assets.
• g. Total cash outflows for leases.
• h. Additions to right-of-use assets.
• i. Profits or losses resulting from sale and leaseback transactions.
• j. The carrying amount of right-of-use assets at the end of the reporting period by asset class.
• k. Amounts of short-term lease commitments.

2. The Lessee shall disclose additional qualitative and quantitative information about its leasing activities when preparing its financial statements. This additional information shall include, for example, information that helps users of its financial statements assess the following:
   • a. The nature of the Lessee’s leases.
   • b. Potential future cash outflows that the Lessee may incur that are not recognized in the measurement of lease liabilities. This includes cash outflows resulting from each of the following:
     • (1) Variable lease payments.
     • (2) Extension and termination options.
     • (3) Residual value guarantees.
     • (4) Leases signed by the Lessee that have not yet commenced.
     • (5) Restrictions and commitments stipulated in the lease contract.
     • (6) Sale and leaseback transactions.

Article (17) Short-Term Leases and Leases of Low-Value Assets

1. As an exception to the option granted to the Lessee regarding short-term leases under IFRS 16 (Leases), the Lessee shall, for the purposes of this Resolution and the Decree-Law, treat short-term leases as finance leases and apply the provisions of this Resolution to such leases.

2. Item (1) of this Article does not require a change in the accounting policy followed and consistent with IFRS 16 (Leases), but requires, in the case of litigation, the preparation of an accounting reconciliation consistent with the provisions of this Resolution.

3. The Lessee is granted the option to exempt leases of low-value assets from the requirements of finance lease accounting in accordance with IFRS 16 (Leases). A lease is considered a lease of a low-value asset only in the cases defined in that Standard, as follows:

   • a. The assessment of whether the asset is of low value shall be made on a stand-alone basis, irrespective of whether the leases are material to the Lessee. The assessment should not be affected by the Lessee’s size, nature or circumstances; i.e., different lessees should reach the same conclusion about whether a particular asset is low-value.
   • b. An asset shall be considered low-value if it meets both of the following conditions:
     • (1) The Lessee can benefit from the use of the asset either on its own or together with other resources readily available to the Lessee.
     • (2) The asset is not highly dependent on, or highly interrelated with, other assets.
   • c. A lease of an asset shall not be considered a lease of a low-value asset if the asset is new.
   • d. If the Lessee subleases, or expects to sublease, an asset, the head lease is not a lease of a low-value asset.

4. For the purposes of item (3) of this Article, low-value assets include, for example, tablets, personal computers, small items of office furniture, and telephones.

Article (18) Accounting Treatment in Cases of Liquidation, Bankruptcy, or Insolvency

1. In the event of liquidation, bankruptcy, or insolvency of the Lessor, the Lessee shall comply with the following:
   • a. The requirements of the IFRS relating to impairment of assets to account for the right-of-use asset.
   • b. The requirements of the IFRS relating to financial instruments to account for the lease liability.
2. In the event of liquidation, bankruptcy, or insolvency of the Lessee, the Lessor shall comply with the requirements of the IFRS relating to financial instruments to account for the asset relating to the amounts receivable.

Article (19) Updates to IFRS

For the purposes of this Resolution, any updates to IFRS 16 (Leases) issued from time to time shall be applied.

Article (20) Repeals

1. Ministerial Resolution No. (76) of 2020 Concerning the Accounting Standards for Finance Lease is hereby repealed.
2. Any provision that contradicts or conflicts with the provisions of this Resolution is hereby repealed.

Article (21) Publication and Commencement

This Resolution shall be published in the Official Gazette and shall come into force on the day following the date of its publication.

Mohammed bin Hadi Al Hussaini

Minister of State for Financial Affairs

Issued on 30 Safar 1446 AH

Corresponding to 03/09/2024 AD