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IFRS 16 Notes

The document discusses IFRS 16 Leases. It defines a lease as a contract that provides the right to use an asset for a period of time in exchange for consideration. The lessor provides the asset use rights and the lessee receives them in exchange for consideration. For a contract to be considered a lease, the customer must be given substantially all economic benefits from the identified asset and have the right to direct its use. The document then outlines lessee accounting requirements, including initial recognition of a lease liability and right-of-use asset, and subsequent measurement of these items over the lease term. It provides an example calculation.

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282 views4 pages

IFRS 16 Notes

The document discusses IFRS 16 Leases. It defines a lease as a contract that provides the right to use an asset for a period of time in exchange for consideration. The lessor provides the asset use rights and the lessee receives them in exchange for consideration. For a contract to be considered a lease, the customer must be given substantially all economic benefits from the identified asset and have the right to direct its use. The document then outlines lessee accounting requirements, including initial recognition of a lease liability and right-of-use asset, and subsequent measurement of these items over the lease term. It provides an example calculation.

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Amana
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Global Development In Finance – BA (hons) International Business and Finance – Year 3 Semester 2

IFRS 16 – Leases

Lease is a contract that provides rights to use an underlying asset for a period of time in exchange
for a consideration

Lessor is the entity that provides the rights to use asset in exchange for receiving consideration.

Lessee is the entity that receives the rights to use asset whilst transferring/ providing consideration.

A lease is identified only if it gives the customer;

The right to substantially all of the economic benefits from use of the identified asset and the right
to direct the use of the identified asset.

Lessee Accounting

Initial recognition/ measurement

Lease liability and rights to use asset should be initially recognised at the commencement date

1) Lease Liability
Lease liability is initially recognised at the present value of
Fixed Payment,
Variable Payments,
Residual Value guarantees,
Purchase options,
Termination penalties.
2) Rights to use of Asset is initially measured at the
Value of initial lease liability + lease payments made on or before commencement date +
any direct cost associated + any costs associated with the asset (Dismantling cost)

Subsequent measurement

1) Lease liability is subsequently measured by adding any interest charge and reducing any re-
payments.
*The interest charge is transferred to SOPL (Finance Cost)

2) Rights to use of asset is subsequently measured in accordance to IAS-16 Cost model basis;

If lessee owns the asset

Depreciation on rights to use of asset is calculated based on the useful economic life of the
asset where, depreciation = Rights to use of asset (initial measurement)/useful economic life

If lessee do not own the asset

Depreciation on rights to use of asset is calculated based on the shorter of useful economic
life of the asset and lease period where, depreciation = Rights to use of asset (initial
measurement)/shorter of useful economic life or lease period.
Example Question.

Useful economic life 10 years

Fixed Payment - $ 10 000 per year

Lease period 3 years

Option price reasonably certain $ 15 000

Interest 5%

Direct costs $ 3 000 (W3)

Initial Measurement

Lease Liability

Present value of

Year Cash Flow Discount Factor 5% Present Value


0 - 1 -
1 10 000 0.952 9520
2 10 000 0.907 9070
3 15 000 (Option price) 0.864 12960
Lease Liability 31 550 (W1)

Rights to use of Assets

Lease Liability 31 550

Direct Costs 3 000 (W3)

34 550 (W2)

Double Entry

DR Rights to use of Assets 34 550 (W2)

CR Lease Liability 31 550 (W1)

CR Cash 3 000 (W3)

Subsequent Measurement

Lease Liability

Y1 - 31 550 + (31550*5%) – 10 000 = 23 128

Y2 - 23 128 + (23128*5%) – 10 000 = 14 284

Y3- 14 284 + (14284*5%) – 15 000 = 0


Double Entry

Y1

Lease Liability CR 1578 (31550*5%)

Interest Expense (SOPL) DR 1578

Lease Liability DR 10 000

Cash CR 10 000

Y2

Interest Expenses DR 1156 (23128*5%)

Lease Liability CR 1156

Lease Liability DR 10 000

Cash CR 10 000

Y3

Interest Expense DR (SOPL) 714

Lease Liability CR 714

Lease Liability DR 10 000

Cash CR 15 000

Rights to use of Asset

Lessee owns the asset

-Depreciation should be calculated based on the assets useful economic life

Rights to use of Assets 34 550/10 = 3455 p.a

Y1 – NBV = 34550-3455= 31095

Y2 – NBV = 31095-3455 = 27640

Double entry (Y1)

DR SOPL 3455

CR Rights to use of Assets 3455


Lessee do not own the asset

-Depreciation should be calculated based on shorter of assets useful economic life and lease period

Rights to use of assets 34 550/3 = 11516 p.a

Y1 NBV = 34 550 – 11 516 = 23 034

Double entry (Y1)

DR SOPL 11 516

CR Rights to use of Assets 11 516

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