IFRS 16

TYU 1 TYU 2

ROU asset Dr 34,552 Sub

Lease liab Cr 31,552 LL
Bank Cr 3,000 Yr Opening
1 31,552
Lease liab 2 23,129
Yr Payments DF @5% Total 3 14,286
1 10,000 0.952 9,524
2 10,000 0.907 9,070 ROU
3 15,000 0.864 12,958 Cost 34,552
31,552 Dep -11,517
23,034

Illustration 1

ROU asset Dr 5,710

Lease liab Cr 5,710

Subsequent measurement

Lease liab SOFP

Yr Opening Finance cost - Payment Closing Asset
1 5,710 857 -2000 4,567
2 4,567 685 -2000 3,251 ROU 4,283
3 3,251 488 -2000 1,739
4 1,739 261 -2000 0 Eq and liab

NCL : LL 3,251
ROU asset
Cost 5,710 CL : LL 1,315
Dep -1,428
4,283

Illustration 2

1st 2,000 Rent exp Dr 9,000

2nd 8,000 Prepaid rent Dr 1,000
3rd 8,000 Bank Cr 10,000
18,000
P.a 9,000 Rent exp Dr 9,000
Prepaid rent cr 1,000
Bank Cr 8,000
In Q
1 apr to 31 dec
9 months

1 year 9,000
9m 6750

Illustration 3

ROU asset Dr 700,000

Lease liab Cr 700,000

Lease liab FY : 1 April to 31 March

Yr Opening -Payment Subtotal Finance cost Closing

1 700,000 -200,000 500,000 25000 525,000
2 525,000 -200,000 325,000 CL 200,000
3
4

ROU
Cost 700,000
Dep -87500
CV 612,500

TYU 3

Bank Dr 1,000,000
ROU Dr 520,000
NCA Cr 800,000
Lease liab Cr 650,000
Profit Cr (bal) 70,000

TYU 5-2

Yr Opening -Payment Subtotal Finance cost Closing

1 27,355 -10,000 17,355 1736 19,091
2 19,091 -10,000 9,091

NCL 9,091
CL 10,000

TYU 5-5

Yr Opening Finance cost - Payment Closing bal

1 80,000 6,344 -20,000 66,344 31-Dec-07
2 66,344 5,261 -20,000 51,605 31-Dec-08 Closing
3 51,605 4,092 -20,000 35,697 NCL
15,908 CL
Finance cost - payment Closing
1,578 -10000 23,129
1,156 -10000 14,286
714 -15000 -

SOPL

Finance cost 857

Depreciation 1,428
IFRS 16 : LEASES

Definition
Lease
- Contract between 2 parties
- gives right to use of asset A
- for a period LESSOR
- in exchange of consideration

Lessor
- Entity giving right to use
Asset -
Lessee
- Entity obtaining right to use

ACCOUNTING IN THE BOOKS OF LESSEE 1

2
Initial Recognition 3
ROU Asset Dr 4
Lease Liability Cr 5
5
Lease liability
PV of future lease payments:
- Fixed payments
- Amount payable under RGV (Residual value guarantee)
- Purchase price (if reasonable certain to exercise option)
- Termination penalties (if expected to be incurred)

Discount rate
1. Interest rate implicit in the lease
2. If not available, incremental borrowing rate
ROU
ROU Asset Direct exp
- Initial lease liability
- Lease payments made before commencement date Incentive
- Initial direct costs Incentive
- Esmitated cost of removing/dismantling
NOTE: Incentive received must be deducted from the initial value of ROU

Lease term
Non-cancellable period
+ Option to extend (if reasonably certain)
+ Option to terminate (only if certain to NOT terminate)

Subsequent measurement

Lease Liability
 Add: Finance cost (O/s balance * discount rate)
Less: Lease payments

i) Payment in arrears - payment made at the end of the year

Year Bal b/d Interest - Payment Closing

ii) Payment in advance

Year Bal b/d - Payment Subtotal Interest Closing

Classification of closing liability:

NCL - what is left after payment next year
CL - residual
1
ROU Asset 2
Cost Model

Cost
Less: Acc. Dep 1
Less: Impairment loss 2

Depreciation:
Ownership transferred - useful life of asset
Otherwise - useful life or lease term whichever is shorter

Mid-year entry
Time-apportion:
- Finance charges
- Depreciation

Exception
1. Short life (12m or less)
2. Low value assets (value when new, not second hand)
Lease payments to be recorded in SOPL

SALE AND LEASE BACK

Seller is also the Lessee
Buyer is also the Lessor

One entity sold asset and took it back on lease

Apply provisions of IFRS 15 to ascertain whether it is an actual sale

Case 1 : Transfer is not a sale

i) Seller will continue to show the asset
ii) Transaction will be treated as a loan

Case 2 : Transfer is a sale

i) Seller will derecognise asset and recognise ROU asset
ii) Initial measure of ROU = Lease liability * Previous carrying value
Sale proceeds

Bal b/d - Payment Subtotal Interest Closing

340,000 -90,000 250,000 25000 275,000
SOPL

SOPL
Interest 25,000
Depreciation 68,000
Rent 13,500
106,500
 Bal b/d Interest - Payment Closing
Year1 45,000 3,150 -10,975 37,175 Total liab
Year2 37,175 2,602 -10,975 28,802 NCL

ROU asset Dr 479,200 ROU

Bank Dr 2,000,000 Lease liability * Previous carrying value
Lease libility Cr 599,000 Sale proceeds
Profit Cr 280,200 479200
NCA Cr 1,600,000

Depreciation 95,840

Finance cost 47,920

Bal b/d Interest - Payment Closing

Y1 23,000,000 2,300,000 -6,000,000 19,300,000 Total Liab
Y2 19,300,000 1,930,000 -6,000,000 15,230,000 NCL
4,070,000 CL
5years

rents building
B
100,000 LESSEE

LEASE

ROU Asset Dr 397,709 WHAT IS LEFT AFTER PAYMENT NEXT YEAR

Lease Liability Cr 397,709
PAYMENT IN ARREARS - at the end of the year
Lease payment DF @ 10% PV Opening Finance cost Payment Closing
100,000 0.909 90,909 379,079 37,908 -100,000 316,987
100,000 0.826 82,645 316,987 31,699 -100,000 248,686
100,000 0.751 75,131 248,686 24,869 -100,000 173,554
100,000 0.683 68,301 173,554 17,355 -100,000 90,910
100,000 0.621 62,092 90,910 9,090 -100,000 0
30,000 0.621 18,630
397,709
PAYMENT IN ADVANCE - at the start of the year
Opening Payment subtotal Finance cost
Value 300,000 379,079 -100,000 279,079 27,908
RV 270,000 306,987 -100,000 206,987 20,699
30,000

379,079 ROU Asset Dr 384,079

5,000 Lease Liability Cr 379,079
384,079 Provision for dismant. Cr 5,000
-2,000
Lessor >>>> pay >>>> Lessee

NCP 5 years Total 5 years

Option to extend 3years Option 3years cancel

Certain - Yes 8 Certain - Yes 3

Certain - No 5 Certain - No 5
 10%
-25,000

Arrears
Opening Interest Total Payment Closing
100,000 10000 110,000 -25000 85,000 TOTAL
85,000 8500 93,500 -25000 68,500 NCL
16,500 CL
Advance
Opening Payment Subtotal Interest Closing
100,000 -25000 75,000 7500 82,500 TOTAL
82,500 -25000 57,500 5750 63,250

82,500 TOTAL
57,500 NCL
25,000 CL

SALE AND LEASEBACK

LOAN
a - b sell : 10L IFRS 15 -
A B
seller b - a rent : 1L buyer YES NO
lessee lessor Useful life 20yrs S&LB Loan
Lease 2 yrs

A B
receiving receiving
10L 1 L per annum

Bank Dr 10l
Loan Cr 10l

Sale & lease back SALE

Bank Dr (sale proceeds) Bank Dr
ROU Dr (lease liab * CV / sale proceeds) Asset Cr
Asset Cr (carrying amount) LEASE
Lease liab Cr (PV of future payments) ROU Dr
Profit Cr (bal figure) Lease liab Cr

SOPL?
Lease 1 Finance cost
Lease 2 rent
ROU Dep
 SALE and LEASEBACK
* Previous carrying value
Bank Dr 2,000,000
ROU Dr 479,200
NCA Cr 1,600,000
Lease liab Cr 599,000
Profit Cr 280,200

Finance cost 47,920

Depreciation 95,840
 Closing liab
316,987
Split this as NCL and CL
248,686 NCL
68,301 CL

Closing
306,987 Closing liab
227,686 306,987
Split this as NCL and CL
206,987 NCL
100,000 CL
20yrs
18yrs
IFRS 15 : Revenue from Contracts with Customers

5-step approach
1. Identify the contract
2. Identify separate performance obligations
3. Determine the transaction price
4. Allocate transaction price to performance obligations
5. Recognise revene when / as performance obligation is satisfied

1. Identify the contract

- agreement between 2 parties
- creates rights and obligations

Record revenue ONLY if:

i) Parties have approved and committed to the contract
ii) Each party's rights are identied
iii) payment terms are identified
iv) contract has commercial substance
v) probable that entity will receive consideration

2. Identify separate performance obligations

- A promise to transfer distinct goods / services
(Air conditioner + warranty)
- may not be explicitly stated in the contract

In step 2, entity must decide nature of PO:

i) Entity is principal
ii) Entity is agent : selling on behalf of others

Agent - recognise fee / commission as revenue, not sale proceeds

3. Determine the transaction price

- Consideration which entity EXPECTS
- in exchange of goods/services
- may include fixed / variable consideration

To be considered:
i) Variable consideration
ii) Significant financing component
iii) Non-cash consideration
iv) Consideration payable to a customer

ii) Significant financing component

Receivable should be discounted to the present value if:
- Difference between promised consideration and sale price
- Significant time gap between transfer of goods/services and payment date

iv) Consideration payable to a customer

Two instances possible
- Paid for distinct good / service : Treated as purchase transaction
 - Otherwise : Reduction in transaction price

4. Allocate transaction price to performance obligations

- In proportion to stand-alone selling price (SSP)

Discount
In bundled sale:
- Allocate across each component
- Unless a specific component is separately sold at a discount

5. Recognise revene when / as performance obligation is satisfied

- Only when Performance Obligation is satisfied
- Goods and services have been transferred

At inception, determined whether

i) PO satisfied at a point in time
ii) PO satisfied over time

i) PO satisfied at a point in time

Recognise revenue when customer obtains CONTROL

CONTROL : ability to direct use / obtain substantial benefits

Indicators of control
a) entity has right to payment
b) customer has legal title
c) physical possession is transferred
d) customer has risks and rewards of ownership
e) customer has accepted the asset

Cases:
Case 1 : Consignment
- One party owns the inventory
- Another entity keeps it on their premises
- Check which entity has maximum indicators of control

Case 2 : Repurchase agreements

- Right to repurchase
- Obligation to repurchase at customer's request

i) Obligation to repurchase
Account it as:
- Lease : If repurchase price is less than original selling price
- Loan : If repurchase price is more than original selling price

ii) Likely - no obligation

In third instance, if customer is not likely to exercise the right
- Account it as sale with right to return

Case 3 : Bill and hold arrangements

Entity bills a customer but retains possession
Cutomer must have obtained control (only except possesion)
That is:
- Customer has requested for this arrangement
- Product belonging to the customer can be identified
- Product is ready for physical transfer
- Entity cannot use / sell the product to someone else

If custodial fee is charged - then separate PO satisfied over time

ii) PO satisfied over time

Criteria:
a) Entity performs and customer simultaneously receives benefits
b) Entity creates / enhances asset controlled by the customer
c) Asset has no alternative use and entity has right to payment for work done till date

- Recognise revenue by measuring progress

Output method : time spent / total duration
Input method : costs incurred / total cost

Steps for PO satisfied over period

Step 1 Identify overall profit / loss

Contract price
Less: Cost incurred till date
Less: Cost to complete
Profit / Loss

Step 2 % of Progress
(Input or output method)
- If cannot be measured: recognise revenue to the extent of costs incurred

Step 3 SOPL

IF PROFIT IN STEP 1
Revenue (contract price * % of progress)
Less: Cost till date
Profit

IF LOSS IN STEP 1
Revenue (contract price * % of progress)
Less: Cost till date
Less: Additional loss (Provision)
Total Loss

Step 4 SOFP
Revenue recognised to date
Less: Amounts invoiced to date
Contract asset / (liability)
Questions
 Section A 74-86
100,000 Section B 326-345
Air conditioner 90,000
Warranty 1 year 10,000

Revenue
Prachi Prachi gives

sells 100,000 Vanshika 10,000 - Vanshika

Customer sells 100000 - PRACHI

Customer

Principal Revenue 100,000

Agent Revenue 10,000

1-Jan 100,000 PV Revenue

10,000 Finance income

31-Dec 110,000
 100,000 SSP Discount TP
Air conditioner 90,000 8,182 81,818
Warranty 1 year 20,000 1,818 18,182
110,000 10,000 100,000

100,000 SSP Discount TP

Air conditioner 90,000 82,000
Warranty 1 year 20,000 -2,000 18,000
110,000

AC 81,000
War 18,000

Air conditioner

sells
60,000
A B
repurchase
40,000

LEASE LOAN
Org. Selling price 60,000 60,000

Repurchase price 40,000 80,000

Air conditioner 100,000
Storage 2,000 2 months

Warranty

Coaching
Construction on land
Customised satellite

Customised Satellite 10cr 20hrs

100hrs
70% 7cr
Cancel CANCEL 10cr
7cr
RIGHT
100,000 7CR
-50,000
-60,000
-10,000

50%

50000
-50,000
-10,000 Additional loss provision
-10,000
Org SP 500,000
Repurchase 665,500
LOAN

Bank Dr 500,000
Loan Cr 500,000

Finance cost 50,000

Option D

HOMEWORK

SSP Discount TP
Machine 75 25 50 At a point
Installation 30 10 20 At a point
1yr service 45 15 30 Over a period
150 50 100

Revenue on 31st Dec

Machine 50
Installation 20
Service 20 (For 1 year starting 1 may)
90

Step 1 : Overall profit / Loss

Contract price 1,000,000
Less: Cost incurred -500,000
Less: Cost to complete -300,000
Profit 200,000

Step 2: % of progress
Cost incurred 500,000
Total cost 800,000
% 63%

Step 3: SOPL (Step 1 - profit)

Revenue 625,000
Less: Cost incurred -500,000
125,000

Step 4: SOFP
Revenue 625,000
Less: Billed 600,000
Contract asset 25,000
20%

70%
ACCRUAL AND PREPAYMENT
RENT IS MY EXPENSE
Accrued expense - (outstanding) expense incurred but not yet paid

Rent Dr 9,000
Bank Cr 4,000
Accrued rent Cr 5,000 CURRENT LIAB

Prepaid expense - expense not yet incurred but paid

Rent Dr 9,000
Prepaid ren 6,000 CURRENT ASSET
Bank Cr 15,000

RENT IS MY INCOME

Accrued income - Income earned but not yet received

Bank Dr 4,000
Accrued in 5,000 CURRENT ASSET
Rent Cr 9,000

Prepaid income - Income recived but not yet earned

Bank Dr 15,000
Prepaid rent income C 6,000 CURRENT LIAB
Rent Cr 9,000
 SUMMARY

Topic 1 IFRS 16 IFRS 15

LEASES REVENUE (Repurchase agreements)

Option 1 SALE AND LEASEBACK Option 1 LEASE

Bank Dr Useful life Repurchase price < Org selling price
ROU Dr 10yrs
NCA Cr No revenue recognition
Lease liab Cr Lease
Profit Cr 3yrs

or

Option 2 LOAN Option 2 LOAN

Bank Dr Useful life Repurchase price > Org selling price
Loan Cr 5yrs
No revenue recognition
Lease
5yrs
Option 3 SALE WITH RIGHT TO RETURN
No obligation to repurchase

Recognise revenue

Topic 2 Margin Markup

20% 20%
Profit is 20% of sales Profit is 20% of cost
(% of SALES) (% of COST)

COST 10,000 80 COST 10,000

PROFIT 2500 20 PROFIT 2000
SALE 12,500 100 SALE 12,000
Lease liab 1,263,000
Finance cost 75,780

Bal b/d Interest - Payment Closing

1,263,000 75,780 -300,000 1,038,780 Total Liab
1,038,780 62,327 -300,000 801,107 NCL
237,673 CL
or 238000 to the nearest '000s

ROU asset 1,263,000

Dep -210,500
Carrying value 1,052,500

This is a loan transaction, hence asset will not be derecognised

1-Jan-06 10,000,000
Less: Dep -500,000
31-Dec-06 9,500,000 CV

Answer
Both false
Answer
A&C

Answer
B

Q343
SSP Discount TP
Equipment 1,750,000 105,091 1,644,909 At a point
3yr service 165,000 9,909 155,091
1,915,000 115,000 1,800,000
 Revenue recognised 1,657,833
Less: Billed -1,800,000
Contract liability -142,167

Revenue recognised (31st Dec 2006)

Equipment 1,644,909
Service 12,924 (3 yrs from 1 oct 2006)
1,657,833

Answer
B

Answer

1-Dec-06 Bank Dr 200,000

Liability Cr 200,000