International Financial Reporting Standards (IFRS 16)
Leases
Proshanta Saha, ACA,ACMA
AGM-Accounts, MGI
Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: [Link] 0
Overview of the Standard
IFRS 16 specifies how an IFRS reporter will recognise, measure, present
and disclose leases.
The standard provides a single lessee accounting model, requiring lessees
to recognise assets and liabilities for all leases unless the lease term is 12
months or less or the underlying asset has a low value.
Lessors continue to classify leases as operating or finance, with IFRS 16’s
approach to lessor accounting substantially unchanged from its
predecessor, IAS 17.
Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: [Link] 1
Objective of the Standard
This Standard sets out the principles for the recognition,
measurement, presentation and disclosure of leases. The
objective is to ensure that lessees and lessors provide
relevant information in a manner that faithfully
represents those transactions. This information gives a
basis for users of financial statements to assess the
effect that leases have on the financial position,
financial performance and cash flows of an entity.
Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: [Link] 2
Identifying a lease:
A contract is, or contains, a lease if it conveys the right to
control the use of an identified asset for a period of time in
exchange for consideration.
Control is conveyed where the customer has both the right to
direct the identified asset’s use and to obtain substantially all
the economic benefits from that use.
An asset is typically identified by being explicitly specified in
a contract, but an asset can also be identified by being
implicitly specified at the time it is made available for use by
the customer.
Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: [Link] 3
Identifying a lease:
However, where a supplier has a substantive right of substitution
throughout the period of use, a customer does not have a right to
use an identified asset. A supplier’s right of substitution is only
considered substantive if the supplier has both the practical
ability to substitute alternative assets throughout the period of
use and they would economically benefit from substitution.
A capacity portion of an asset is still an identified asset if it is
physically distinct (e.g. a floor of a building). A capacity or other
portion of an asset that is not physically distinct (e.g. a capacity
portion of a fibre optic cable) is not an identified asset, unless it
represents substantially all the capacity such that the customer
obtains substantially all the economic benefits from using the
asset.
Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: [Link] 4
Defination:
Interest rate implicit in the lease
The interest rate that yields a present value of
(a) the lease payments and
(b) the unguaranteed residual value equal to the sum of
(i) the fair value of the underlying asset and
(ii) any initial direct costs of the lessor.
Lease term
The non-cancellable period for which a lessee has the right to use an underlying asset, plus:
a) periods covered by an extension option if exercise of that option by the lessee is reasonably
certain; and
b) periods covered by a termination option if the lessee is reasonably certain not to exercise
that option
Lessee’s incremental borrowing rate
The rate of interest that a lessee would have to pay to borrow over a similar term, and with a
similar security, the funds necessary to obtain an asset of a similar value to the right-of-use
asset in a similar economic environment.
Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: [Link] 5
Accounting for leases
Upon lease commencement a lessee recognises a right-of-use
asset and a lease liability.
The right-of-use asset is initially measured at the amount of the
lease liability plus any initial direct costs incurred by the lessee.
Adjustments may also be required for lease incentives, payments
at or prior to commencement and restoration obligations or similar.
After lease commencement, a lessee shall measure the right-of-
use asset using a cost model, unless:
i) the right-of-use asset is an investment property and the lessee
fair values its investment property under IAS 40; or
ii) the right-of-use asset relates to a class of PPE to which the
lessee applies IAS 16’s revaluation model, in which case all right-
of-use assets relating to that class of PPE can be revalued.
Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: [Link] 6
Accounting for leases
• Under the cost model a right-of-use asset is measured at cost less
accumulated depreciation and accumulated impairment.
The lease liability is initially measured at the present value of the lease
payments payable over the lease term, discounted at the rate implicit in
the lease if that can be readily determined. If that rate cannot be readily
determined, the lessee shall use their incremental borrowing rate.
Variable lease payments that depend on an index or a rate are included in
the initial measurement of the lease liability and are initially measured
using the index or rate as at the commencement date. Amounts expected
to be payable by the lessee under residual value guarantees are also
included.
Variable lease payments that are not included in the measurement of the
lease liability are recognised in profit or loss in the period in which the
event or condition that triggers payment occurs, unless the costs are
included in the carrying amount of another asset under another Standard.
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The lease liability is subsequently remeasured to reflect changes in:
the lease term (using a revised discount rate);
the assessment of a purchase option (using a revised discount rate);
the amounts expected to be payable under residual value guarantees (using
an unchanged discount rate); or
future lease payments resulting from a change in an index or a rate used to
determine those payments (using an unchanged discount rate).
The remeasurements are treated as adjustments to the right-of-use asset.
Lease modifications may also prompt remeasurement of the lease liability
unless they are to be treated as separate leases.
Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: [Link] 8
Examples# 1
Commencement Date: January 1, 2021
Lease Term: 10 years
Lease Payment (paid in arrears): $10,000 annually
Lessee’s Incremental Borrowing Rate: 6%
Useful Life of Underlying Asset: 25 years
[Link] the initial lease liability as the present value of the total remaining lease payments as of the commencement date.
[Link] the initial right-of-use asset as the lease liability at commencement plus or minus any necessary adjustments.
[Link] the lease liability over the lease term to reflect both lease payments and interest on the liability using the effective interest
method.
[Link] the ROU asset in a systematic and rational manner over the useful life of the underlying asset or the lease term, whichever
is shorter.
Interest Expense Dr. (73,601*6%) 4,416
Lease liability Cr. 4,416
Lease liability Dr. 10,000
Cash/Bank cr. 10,000
Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: [Link] 9
Solution
To calculate the present value of the future lease payments, apply
the lessee’s incremental borrowing rate of 6%.
Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: [Link] 10
Thank You!!!
Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: [Link] 11
