IFRS 16 Leases
IFRS 16 removed distinction between operating and financial leases - All leases now show up on Balance sheet
as ROU Asset and Lease liability
Exceptions
1. Lease with a lease term of 12 months or less containing no purchase options This election can be made by class of assets
2. Leases where the underlying asset has low value when new - less than $5,000 This election can be made on lease-by-lease basis
The accounting for low value or short term leases is done through expensing the rental in P&L or on straight line basis
Example 1
Total Rental Expense =2,000*4 -2,000= 6,000.00
Rental Expense on straight line basis 1,500.00
Year 1 Dr. Rental Expense 1,500.00
Cr. Rental Expense Accrued 1,500.00
Year 2-4 Dr. Rental Expense 1,500.00
Dr. Rental Expense Accrued 500.00
Cr. Cash 2,000.00
Identifying when a lease contract exists
A contract contains a lease when it conveys the right to control the use of identified asset for a period of time in exchange for consideration
Key Terms Entity has: Control Entity has the right to direct the use and obtain all economic benefits from such use.
Identified Asset
For a period of time
In exchange for consideration
If the supplier has a substantial right to substitute the asset with another identical asset - then customer
does not have control and thus there is no lease.
Lease and Non lease components
If the payment involves part for additional services by the lessor - then the lessee needs to split the rental into lease component and non lease component
Non lease component is expensed through P&L on straight line basis or on provision of services
Total Payments = $100,000 PA
Lease component =$100,000*95/105 = 90,476.19
Non Lease Component =$100,000*10/105 = 9,523.81
Total 100,000.00
Accounting
Lessee Accounting
Initial Recognition
Right of Use Asset
Measured at the amount of lease liability less any initial direct costs
Add PV of costs of dismantling if substantial
Lease Liability
PV of lease payments over the lease term - discounted at rate implicit in the lease
include penalty for early termination if reasonably certain
include exercise price of purchase option if reasonably certain
Subsequent Measurement
Right of Use Asset
Carried at costs less accumulated depreciation
Depreciation is based on earlier of useful life or lease term
Lease Liability
Financial liability at amortised cost
Corresponding changes in lease liability if the liability is linked to variable price index - opposing entry to ROU asste
Example: Dr. ROU Asset 1M
Cr. Lease Liability 1M
PV of Lease Liability 22730
Subsequent treatment
Year Bal B/F Payments Interest Bal C/f
1 22,730 5000 887 18,617
2 18,617 5000 681 14,297
3 14,297 5000 465 9,762
4 9,762 5000 238 5,000
5 5,000 5000 0 0
ROU Asset Initial Recogntion =22,730-500+1,000 = 23,230
Subsequqnt Measurement
Year Bal B/F Depreciation Bal C/F
1 23,230 4,646 18,584
2 18,584 4,646 13,938
3 13,938 4,646 9,292
4 9,292 4,646 4,646
5 4,646 4,646 -
Lessor Accounting
1. Derecgonise the asset and recognise a receivable at Net investment in Lease
2. Record financial lease receipts as a reduction in the receeivable
3. Record interest income on the receivable
Net Investment in Lease = Gross Investment in Lease discounted at implicit rate of interest
Gross investment in lease = Minimum Lease payments receivable + unguaranteed residual value
Minimum Lease receivables 25000
Unguaranteed residual Value 400
Gross investment in lease 25400
Net Investment in lease 23,478
Sale and Leaseback
