I got most of my best ideas when I was chilling out in coffee shops enjoying my morning coffee. As an interior designer, nothing is more important than the ambience of a place. Therefore, I want to bring the best sentiment to all customers in our shops. - Jacklyn Wong, owner of Lazy Coffee Limited Founded in 2018 by Jacklyn Wong, Lazy Coffee Limited (Lazy Coffee, or the company) owned and operated a restaurant chain of five stylishly designed coffee shops in Hong Kong. Wong started her career 15 years earlier as an interior designer working at an internationally renowned design house. With an entrepreneurial spirit and enough experience, Wong opened her own design house in 2000 . Her design house became regionally renowned with local and overseas customers coming from the mainland and Taiwan. Wong had a team of four in-house designers working for her. Since opening her own design house, Wong had been flying abroad every other month to look for design ideas. No matter where she was, she would spend an hour before work scribbling on her iPad while enjoying a cup of coffee in a nice coffee shop. Wong's desire had always been to open her own coffee shop chain. With her design house's business running well, Wong was tempted to start her entrepreneurial journey again, so in 2018, she founded Lazy Coffee. Situated on the Peak with a stunning view of Hong Kong and the grandest design a coffee shop could have, the first Lazy Coffee made a great entrance to Hong Kong and became the talk of the "in crowd." Food and drinks were all priced at the high end, targeting young, lifestyleseeking customers who were not price sensitive. People visited the shop to enjoy its premium coffee and take photos of the beautiful shop. To ride on the novelty of the shop and to promote the brand, Wong launched various social media marketing campaigns, such as checking in on Instagram in exchange for coupons. The shop became a well-known internet site. Over the next two years, Wong opened two more shops in Stanley and Taikoo Place. Wong had an aggressive plan to expand locally. Her target was to open another five shops in both shopping and commercial districts within two years. Given such a plan, the leasing and other members of the management team for discussion. However, following a change in the accounting standard IFRS 16 Leases effective in 2019 , Jan Lo, the financial controller of the company, informed Wong and the management team that leases would be presented differently company, informed Wong and the management team that leases would be presented differently on the financial statement and that a retrospective restatement had to be done to account for the business people alike, and Jo believed that the new standard reduced the complexity of lease business people alike, and Jo believed that the new standard reduced the complexity of lease the new standard also introduced the complexity of calculating lease liabilities based on present values. Lo was preparing a detailed presentation to discuss the impact during the upcoming management meeting. Existing Leases of the Company Currently, Lazy Coffee had the following leasing arrangements: - Kents are paid in advance. New Leases of the Company Lazy Coffee had entered into a new lease agreement for a space inside an international bank's headquarters to service the bank's staff. The lease term was for five years starting from the first of January, although the company had the right to terminate the contract after three years by a payment in lieu equal to three months' rent. The annual rent was HKD 360,000, payable in advance on first of each January, and would increase by 8% annually. Payment had to be made annually in advance. Lazy Coffee expected an implicit interest rate of 3.8% per annum for the whole lease term. The company also expected a 55% chance of ending the lease early. Lazy Coffee paid HKD 20,000 to the property agent in order to secure the contract with the bank. On the other hand, the bank agreed to pay the first three months of the management fee (HKD1,500 monthly) on behalf of Lazy Coffee as an incentive for the company to enter into the contract. Lazy Coffee was also in discussion with the Hong Kong International Airport (the airport) to enter into a contract to operate within the boarding zone for a period of two years. Under the contract in discussion, Lazy Coffee had to arrange its own movable kiosk to sell its goods, and to move to any location specified by the airport in its sole discretion allocated to the company. Lazy Coffee was considering whether to either purchase or rent a food kiosk for the airport business. There were two kiosks under consideration: a simple food kiosk (Model A) with a market price of HKD38,000, and a new model of food kiosk with a refrigerator (Model B) with a market price of HKD48,000. Both models allowed Lazy Coffee to fit in its own coffee machine and POS machine. The vendor offered an option for Lazy Coffee to purchase the rented kiosk any time after one year of rental. Model A could be rented at HKD2,000 monthly and purchased at HKD20,000 after one year of rental. It had a useful life of approximately five years. Model B could be rented at HKD2,200 monthly and purchased at HKD25,000 afterward. It had a useful life of approximately three years. Wong and her management team considered that purchasing after a year was a better option for the company, as this could not only ease their cash flow but also allow them to better assess the business potential of the airport business before investing in a bulky asset. An initial deposit equal to three months' rent had to be made upon signing of contract. Changes in Accounting Policies: IFRS 16/HKFRS 16 vs. IAS 17 The change in the accounting standard for leases from IAS 17 to IFRS 16 significantly impacted lessees on how they reported leases on their financial statements. Under the old standard, IAS 17, a lessee was required to account for leases under a dual lease accounting model: leases were classified either as finance leases, where ownership of the relevant property was transferred to the lessee at the end of the lease term, or as operating leases, where ownership was retained by the lessor throughout and after the lease term. IFRS 16 introduced a single lessee accounting model and required a lessee to recognize assets and liabilities for all leases with a term of more than 12 months unless the underlying asset was classified as low value. A lessee was required to recognize a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. IFRS 16 The new standard, IFRS 16 , came into effect for annual reporting periods beginning on or after 1 January 2019. IFRS 16 introduced a single lease accounting model. According to the IFRS Foundation, the objective of IFRS 16 was to report information that (a) faithfully represented lease transactions and (b) provided a basis for users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. 2 The new standard applied to most general leases, including sublease arrangements, except for the following: - Service concession arrangements within the scope of IFRIC 12 Service Concession Arrangements - Leases to explore for or use minerals, oil, natural gas, and similar nonregenerative resources - Leases of biological assets held by a lessee within the scope of IAS 41 Agriculture - Licenses of intellectual property granted by a lessor within the scope of IFRS 15 Revenue from Contracts with Customers - Rights of intangible assets for items such as films, videos, manuscripts, patents, and copyrights held by a lessee under licensing arrangements within the scope of IAS 38 Intangible Assets Comparison of Accounting Treatment Under IAS 17, operating leases were not reported on a lessee's balance sheet, with future commitments referred to only in the footnotes. Only lease payments were recorded accordingly: IAS 17 operating lease for lessee: Under IFRS 16, operating leases were recognized on the balance sheet as assets and liabilities, which were expensed off as depreciation and interest, respectively, over the term of lease: IFRS 16 for lessee: For the lessor, the accounting treatments of the lease under the new standard were similar to the practice under IAS 17 , that is, to classify the lease into a finance lease or an operating lease based on the substance-over-form concept. Effect on the Company's Financial Performance The changes in accounting for leases had made substantial differences to our financial position as lessee. We have to restate retrospectively our accounts to reflect the requirements of IFRS 16. - Jan Lo, Financial Controller of Lazy Coffee Limited To meet Wong's aggressive plan to expand locally, the leasing and operation manager of the company had sent a proposal of lease renewal and new rental to the management team. Jan Lo, the financial controller of the company, informed Wong thata new accounting standard, IFRS 16 Leases, came into effect in 2019. Wong was wary about the impact to the financial statement of the company and wanted to understand it in depth. Lo was responsible for preparing a presentation to discuss the impact in detail in the upcoming management meeting. Lo was closing the accounts for the financial year ending 31 December 2019. Although retrospective restatement had to be done for the figures in financial year 2018 and this involved a lot of work, Lo believed a full understanding of the application and implications of IFRS 16 could benefit the company. Management would gain a clearer view and better awareness of the company's lease management. This would allow them to make better business decisions and be more efficient when allocating capital. I got most of my best ideas when I was chilling out in coffee shops enjoying my morning coffee. As an interior designer, nothing is more important than the ambience of a place. Therefore, I want to bring the best sentiment to all customers in our shops. - Jacklyn Wong, owner of Lazy Coffee Limited Founded in 2018 by Jacklyn Wong, Lazy Coffee Limited (Lazy Coffee, or the company) owned and operated a restaurant chain of five stylishly designed coffee shops in Hong Kong. Wong started her career 15 years earlier as an interior designer working at an internationally renowned design house. With an entrepreneurial spirit and enough experience, Wong opened her own design house in 2000 . Her design house became regionally renowned with local and overseas customers coming from the mainland and Taiwan. Wong had a team of four in-house designers working for her. Since opening her own design house, Wong had been flying abroad every other month to look for design ideas. No matter where she was, she would spend an hour before work scribbling on her iPad while enjoying a cup of coffee in a nice coffee shop. Wong's desire had always been to open her own coffee shop chain. With her design house's business running well, Wong was tempted to start her entrepreneurial journey again, so in 2018, she founded Lazy Coffee. Situated on the Peak with a stunning view of Hong Kong and the grandest design a coffee shop could have, the first Lazy Coffee made a great entrance to Hong Kong and became the talk of the "in crowd." Food and drinks were all priced at the high end, targeting young, lifestyleseeking customers who were not price sensitive. People visited the shop to enjoy its premium coffee and take photos of the beautiful shop. To ride on the novelty of the shop and to promote the brand, Wong launched various social media marketing campaigns, such as checking in on Instagram in exchange for coupons. The shop became a well-known internet site. Over the next two years, Wong opened two more shops in Stanley and Taikoo Place. Wong had an aggressive plan to expand locally. Her target was to open another five shops in both shopping and commercial districts within two years. Given such a plan, the leasing and other members of the management team for discussion. However, following a change in the accounting standard IFRS 16 Leases effective in 2019 , Jan Lo, the financial controller of the company, informed Wong and the management team that leases would be presented differently company, informed Wong and the management team that leases would be presented differently on the financial statement and that a retrospective restatement had to be done to account for the business people alike, and Jo believed that the new standard reduced the complexity of lease business people alike, and Jo believed that the new standard reduced the complexity of lease the new standard also introduced the complexity of calculating lease liabilities based on present values. Lo was preparing a detailed presentation to discuss the impact during the upcoming management meeting. Existing Leases of the Company Currently, Lazy Coffee had the following leasing arrangements: - Kents are paid in advance. New Leases of the Company Lazy Coffee had entered into a new lease agreement for a space inside an international bank's headquarters to service the bank's staff. The lease term was for five years starting from the first of January, although the company had the right to terminate the contract after three years by a payment in lieu equal to three months' rent. The annual rent was HKD 360,000, payable in advance on first of each January, and would increase by 8% annually. Payment had to be made annually in advance. Lazy Coffee expected an implicit interest rate of 3.8% per annum for the whole lease term. The company also expected a 55% chance of ending the lease early. Lazy Coffee paid HKD 20,000 to the property agent in order to secure the contract with the bank. On the other hand, the bank agreed to pay the first three months of the management fee (HKD1,500 monthly) on behalf of Lazy Coffee as an incentive for the company to enter into the contract. Lazy Coffee was also in discussion with the Hong Kong International Airport (the airport) to enter into a contract to operate within the boarding zone for a period of two years. Under the contract in discussion, Lazy Coffee had to arrange its own movable kiosk to sell its goods, and to move to any location specified by the airport in its sole discretion allocated to the company. Lazy Coffee was considering whether to either purchase or rent a food kiosk for the airport business. There were two kiosks under consideration: a simple food kiosk (Model A) with a market price of HKD38,000, and a new model of food kiosk with a refrigerator (Model B) with a market price of HKD48,000. Both models allowed Lazy Coffee to fit in its own coffee machine and POS machine. The vendor offered an option for Lazy Coffee to purchase the rented kiosk any time after one year of rental. Model A could be rented at HKD2,000 monthly and purchased at HKD20,000 after one year of rental. It had a useful life of approximately five years. Model B could be rented at HKD2,200 monthly and purchased at HKD25,000 afterward. It had a useful life of approximately three years. Wong and her management team considered that purchasing after a year was a better option for the company, as this could not only ease their cash flow but also allow them to better assess the business potential of the airport business before investing in a bulky asset. An initial deposit equal to three months' rent had to be made upon signing of contract. Changes in Accounting Policies: IFRS 16/HKFRS 16 vs. IAS 17 The change in the accounting standard for leases from IAS 17 to IFRS 16 significantly impacted lessees on how they reported leases on their financial statements. Under the old standard, IAS 17, a lessee was required to account for leases under a dual lease accounting model: leases were classified either as finance leases, where ownership of the relevant property was transferred to the lessee at the end of the lease term, or as operating leases, where ownership was retained by the lessor throughout and after the lease term. IFRS 16 introduced a single lessee accounting model and required a lessee to recognize assets and liabilities for all leases with a term of more than 12 months unless the underlying asset was classified as low value. A lessee was required to recognize a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. IFRS 16 The new standard, IFRS 16 , came into effect for annual reporting periods beginning on or after 1 January 2019. IFRS 16 introduced a single lease accounting model. According to the IFRS Foundation, the objective of IFRS 16 was to report information that (a) faithfully represented lease transactions and (b) provided a basis for users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. 2 The new standard applied to most general leases, including sublease arrangements, except for the following: - Service concession arrangements within the scope of IFRIC 12 Service Concession Arrangements - Leases to explore for or use minerals, oil, natural gas, and similar nonregenerative resources - Leases of biological assets held by a lessee within the scope of IAS 41 Agriculture - Licenses of intellectual property granted by a lessor within the scope of IFRS 15 Revenue from Contracts with Customers - Rights of intangible assets for items such as films, videos, manuscripts, patents, and copyrights held by a lessee under licensing arrangements within the scope of IAS 38 Intangible Assets Comparison of Accounting Treatment Under IAS 17, operating leases were not reported on a lessee's balance sheet, with future commitments referred to only in the footnotes. Only lease payments were recorded accordingly: IAS 17 operating lease for lessee: Under IFRS 16, operating leases were recognized on the balance sheet as assets and liabilities, which were expensed off as depreciation and interest, respectively, over the term of lease: IFRS 16 for lessee: For the lessor, the accounting treatments of the lease under the new standard were similar to the practice under IAS 17 , that is, to classify the lease into a finance lease or an operating lease based on the substance-over-form concept. Effect on the Company's Financial Performance The changes in accounting for leases had made substantial differences to our financial position as lessee. We have to restate retrospectively our accounts to reflect the requirements of IFRS 16. - Jan Lo, Financial Controller of Lazy Coffee Limited To meet Wong's aggressive plan to expand locally, the leasing and operation manager of the company had sent a proposal of lease renewal and new rental to the management team. Jan Lo, the financial controller of the company, informed Wong thata new accounting standard, IFRS 16 Leases, came into effect in 2019. Wong was wary about the impact to the financial statement of the company and wanted to understand it in depth. Lo was responsible for preparing a presentation to discuss the impact in detail in the upcoming management meeting. Lo was closing the accounts for the financial year ending 31 December 2019. Although retrospective restatement had to be done for the figures in financial year 2018 and this involved a lot of work, Lo believed a full understanding of the application and implications of IFRS 16 could benefit the company. Management would gain a clearer view and better awareness of the company's lease management. This would allow them to make better business decisions and be more efficient when allocating capital