FINANCIAL REPORTING GUIDE TO IFRS 16: LEASES

Helping lessees navigate the standard

CONTENTS
Section 1
Introduction 4

Section 2
Will more contracts be accounted for as leases under IFRS 16? 6

Section 3
When and what should be recognised at the commencement date? 8

Case Study Part 1

Measurement of the lease liability and right-of-use asset 10

Section 4
When and what should be recognised in subsequent years? 12

Case Study Part 2

Subsequent measurement of the lease liability and right-of-use asset 13

Section 5
How are modifications treated? 14

Case Study Part 3

Subsequent measurement and accounting for change in the lease term 16

Section 6
Are there any exceptions and practical expedients? 18

Section 7
What are the new disclosure requirements? 19

Section 8
What are the transition models and are there any reliefs? 20

How can RSM help? 22

2 3
 How will the changes affect the financial position and performance?
For companies with leases classified as operating leases under IAS 17, there may be a significant
impact on the Statement of Financial Position as these assets and corresponding liabilities will have
to be recognised. This will impact on current gearing levels and potentially on covenants provided to
lenders and others. It is important to determine the impact sufficiently early to ensure that stakeholder
expectations are managed.

There will also be an impact on the profit or loss. On adoption of IFRS 16, EBITDA is likely to rise because
the lease expense (ie the rent) under IAS 17 for operating leases will be removed and replaced with

1
additional depreciation and finance costs. The profit profile of the business will also change as more
expense is recognised in earlier periods and less in later periods compared to the constant amount which
was usually recognised under IAS 17.

ACCOUNTING TREATMENT FOR LESSEES

Financial IAS 17 IFRS 16

INTRODUCTION statement

IFRS 16 comes into effect for periods commencing on or after 1 January 2019. Lessees with Operating leases Statement of •• No liability recognised •• Lease liability is recognised at
contracts that are currently treated as operating leases in their financial statements (ie the Financial Position the present value of the future
•• No asset recognised
business pays rent) will definitely be affected by the forthcoming changes. lease payments
•• Corresponding right-of-use asset
This guide will take you step by step through the lessee accounting provisions that will apply to current is recognised
operating lease contracts when IFRS 16 is adopted for the first time, along with the new disclosures
which will need to be made.

This guide focusses solely on the changes that will affect lessees as changes arising from IFRS 16 for Income •• Total rentals are expensed
lessors are minor. If you are also a lessor you may want to seek advice on the additional information to be Statement (usually on a straight line basis)
disclosed in financial statements. over the life of the lease
Why the change?
The International Accounting Standards Board (“the IASB”) believes that the leasing of assets is of
importance to many entities. Leases can be used to provide access to assets without significant upfront
costs, and the use of those assets is of value to the entity. Without entities recognising these leased
assets in their financial statements (along with the corresponding liability) users can neither see all the Finance leases Statement of •• Lease liability is recognised at
assets that the entity is benefiting from, nor easily compare their financial position to entities which have Financial Position the present value of the future
chosen to either buy the asset outright, or have entered into alternative financing arrangements. lease payments
What are the main changes? •• Actual asset recognised at the
IAS 17 Leases, the predecessor to IFRS 16, requires entities to classify their contracts as either operating inception of the lease
leases or finance leases, based on the extent to which risks and rewards incidental to ownership of the
leased asset lie with the lessor or the lessee. However, IFRS 16 removes the ‘operating’ and ‘finance’
lease classifications and replaces them with the concept of ‘right-of-use’ assets and associated financial
liabilities. Put simply, this change results in the recognition of a lease liability on the balance sheet for Income •• Interest expense in relation to the
operating leases (which reflects the present value of the future rental payments) and a corresponding Statement lease liability is allocated using the
asset which is referred to in the standard as a right-of-use asset. effective interest method
•• The asset is depreciated over
the shorter of the lease term
and the useful economic life
•• Interest expense in relation to the lease
liability is allocated using the effective
interest method
•• Depreciation is charged over the
shorter of the lease term and the useful
economic life
•• Lease liability is recognised at the present
value of the future lease payments
•• Corresponding right-of-use asset
is recognised
•• Interest expense in relation to the lease
liability is allocated using the effective
interest method
•• The right-of-use asset is depreciated
over the shorter of the lease term and
the useful economic life

4 5
 No Is there an identified asset?
The asset may be explicitly or implicitly specified.

Yes

Does the customer have the right to obtain

2
substantially all the economic benefits from the use
No
of the asset throughout the period of use?
Economic benefits can be obtained directly or indirectly, for
example through use of, holding or sub-leasing the asset.

Yes

Supplier Who has the right to direct how and for what purpose Customer
the asset is used throughout the period of use?
WILL MORE CONTRACTS BE ACCOUNTED Consider who can make the decisions which could affect the
FOR AS LEASES UNDER IFRS 16? economic benefits that can be derived from use of the asset.

IFRS 16 largely retains the definition of a lease given in IAS 17. However, the guidance ie how and for what purpose
Neither the asset will be used is
setting out how to apply that definition has changed. This means that potentially more predetermined.

contracts will be brought into the scope of the new Standard, and some contracts
which were considered to contain a lease under IAS 17 may be scoped out. Does the customer have the right to operate
the asset throughout the period of use, without Yes
As illustrated in the following flowchart, whether a contract is, or contains, a lease is now driven much the supplier having the right to change those
more by the question of which party to the contract controls the usage of the underlying asset for the operating instructions?
period of use. It is not sufficient for a customer to have the right to obtain substantially all the benefits This also includes the right to direct others to operate the asset in
from the use of an asset any more, the customer must also have the ability to direct the use of the asset. a manner that it determines.

No

Did the customer design the asset in a way that

No predetermines how and for what purpose the asset Yes
will be used throughout the period of use?
A contract, or part of a contract, that conveys the This also applies if the customer designed specific aspects of the
asset which predetermines the use.
right to use an asset (the underlying asset) for a
period of time in exchange for consideration.

Definition of a lease
under IFRS 16

The contract does The contract

NOT contain a lease contains a lease

6 7
3
WHEN AND WHAT SHOULD BE RECOGNISED
AT THE COMMENCEMENT DATE?
At the commencement date (the date on which a lessor makes the underlying asset available for use by
a lessee) you need to recognise:
•• A lease liability for the present value of future lease payments made over the lease term that are
economically unavoidable (‘lease liability’); and
•• a right-of-use asset at cost.
Step 1: Calculating the lease term
Non-cancellable period of the lease
Period covered by an option to extend the lease
(if reasonably certain)
Period covered by an option to terminate the
lease (if reasonably certain not to exercise
the option)
Lease Term
8
What is ‘reasonably certain’?
In determining whether an option to extend or
terminate a lease will be exercised, an entity must
X assess all facts and circumstances that create a
financial/economic incentive to do so.
X The following are examples, but not an exhaustive
list, of factors that may create a financial/economic
incentive for the lessee to exercise an option to
extend the lease or not to exercise an option to
X
terminate:
•• Leasehold improvements made to a rental
X property;
•• prohibitive costs to exit the lease (such as
exit fees, relocation costs, costs of sourcing a
replacement asset etc);
•• favourable costs, including rental payments,
of extending the lease compared to equivalent
anticipated market rates if entering a new lease;
•• asset is significant to your operations;
•• lack of availability (and convenience of) an
equivalent or replacement asset; and
•• conditions attaching to the options are
likely to be fulfilled.
Step 2: Calculating the future lease payments
Fixed lease payments (made over the lease
term) (including variable payments that are in
substance fixed)
Receivable lease incentives
Optional payments that are likely to be made
(such as fees to take an option to extend
a lease)
Variable payments that rely on an index or rate
Future lease payments
Discount to reflect the time value
Lease liability at commencement date
Step 3: Calculating the right-of-use asset at cost:
Lease liability at commencement date
Payments made before commencement date
Initial estimate of any restoration costs
Any lease incentives received
Cost of right-of-use asset
Variable payments that are in substance fixed
Some payments are labelled as or appearing to
be variable (in form), may in substance be fixed
because, realistically, they are unavoidable.
Examples include:
•• Payments that are dependent on the right-
of-use asset operating throughout the lease;
•• payments that only occur if a certain event
happens, but that event has no genuine
possibility of not occurring; and
X
•• the provision of more than one set of
payments but only one of those sets is
(X)
realistic and the payments flowing from that
set are fixed.
Variable payments which are not included in the
measurement of the lease liability:
X
•• Payments linked to production output or
usage, such as a fee per unit produced or mile
driven; and
X
•• payments linked to performance, such as
rental payments for a property based on a
X percentage of sales made from that property.
(X) What discount rate do I use for the lease liability?
If there is a discount rate implicit in the lease, use that
(the rate of interest which reconciles the present
X
value of the lease payments and any residual
guaranteed value to the fair value of the underlying
asset and any initial direct costs of the lessor).
If that rate cannot be readily determined, use your
X incremental borrowing rate (the rate of interest that
you would have to pay to borrow a similar amount
of money to fund a similar right-of-use asset for a
similar length of time with similar securities).
X
X
(X)
X
9
 CASE STUDY PART 1 – MEASUREMENT OF THE
LEASE LIABILITY AND RIGHT-OF-USE ASSET
Lessee A enters into a 5 year lease on a building.
To obtain the lease, Lessee A incurs initial costs of
£30,000. £20,000 relates to a payment made to
a former tenant occupying the property and the
remaining £10,000 is paid to the estate agent for
arranging the lease.
The contract sets out a minimum lease term of 5 years
with the option to extend it for a further 5 years.
The payment schedule is as follows:
•• First 5 years - £50,000 per annum in advance
•• Optional 5 year period - £55,000 per annum
in advance
In practice, such payments are likely to be payable
quarterly in advance. However for the purposes of
this case study, payments are assumed to be paid
annually in advance for simplicity of illustration.
Step 1:
Determine the lease liability at commencement date by determining the
present value of the remaining minimum lease payments, discounted at
an interest rate of 5%.
YEAR CASH FLOW DISCOUNT FACTOR
2 50,000 0.952
3 50,000 0.907
4 50,000 0.864
5 50,000 0.823
10
Step 2:
Determine the right-to-use asset at the commencement date.
At the commencement date, Lessee A concludes
that it is not reasonably certain to exercise Lease liability £177,300
the option to extend the lease and, therefore,
determines that the lease term is 5 years. First lease payment £ 50,000
Initial direct costs £ 30,000
The interest rate implicit in the lease is not readily Incentives received £ (5,000)
determinable, however, Lessee A’s incremental
borrowing rate is 5 per cent per annum, which Right-of-use asset £252,300
reflects the fixed rate that Lessee A would pay,
should it borrow an amount equivalent to the value Lessee initially recognises assets and liabilities in relation to the lease as follows.
of the right-of-use asset, in the same currency, for
a 5 year term, and with similar collateral.
DR CR
At the commencement date, Lessee A also receives
Right-of-use asset £252,300
£5,000 of lease incentives from the Lessor.
The initial costs of £30,000 are added to the cost Lease liability £177,300
of the right-of-use asset as the costs incurred
are initial direct costs defined as “the incremental Cash (lease payment) £50,000
costs of obtaining a lease that would not have been
incurred if the lease had not been obtained”.
Cash (initial direct costs) £30,000
Cash (lease incentive) £5,000
PRESENT VALUE
47,600
45,350
43,200
41,150
177,300
11
 CASE STUDY PART 2 - SUBSEQUENT MEASUREMENT
OF THE LEASE LIABILITY AND RIGHT-OF-USE ASSET
The example assumes no modifications to the lease or reassessments

4
of assumptions made at commencement of lease.

LEASE LIABILITY RIGHT-OF-USE ASSET

INTEREST DEPRECIATION
PERIOD B/F LIABILITY PAYMENTS C/F LIABILITY B/F ASSET C/F ASSET
AT 5% CHARGE

£ £ £ £ £ £ £

1 177,300 0 8,865 186,165 252,300 (50,460) 201,840

2 186,165 (50,000) 6,808 142,973 201,840 (50,460) 151,380

WHEN AND WHAT SHOULD BE RECOGNISED
3 142,973 (50,000) 4,647 97,620 151,380 (50,460) 100,920
IN SUBSEQUENT YEARS? 4 97,620 (50,000) 2,380 50,000 100,920 (50,460) 50,460

You will need to continue to recognise the right-of-use asset (using either 5 50,000 (50,000) 0 0 50,460 (50,460) 0

the cost or fair value model) and the carrying amount of the lease liability.
Right-of-use asset
COST MODEL FAIR VALUE MODEL
•• Cost less any accumulated depreciation and any •• An entity that has a fair value through profit and loss
accumulated impairment losses; accounting policy for its investment properties must
measure any right-of-use asset that meets the
•• Adjusted for any re-measurement of the lease liability in
definition of an investment property at fair value.
respect of a modification (see page 14).
•• If right-of-use assets relate to a class of PPE to which
•• Depreciated from the commencement date to the end
the revaluation model applies, an entity may elect to
of the useful life if:
apply the revaluation model to all of the right-of-use
»» Ownership of the underlying asset is transferred to assets that relate to that particular class.
the lessee by the end of the lease term; or
»» the cost of the right-of-use asset reflects that the
lessee will exercise a purchase option.
•• Depreciated over the lease term in other
circumstances in accordance with IAS 16 Property,
Plant and Equipment (PPE).

Lease Liability
Carrying amount:
•• Increased to reflect interest on the lease liability; and
•• reduced to reflect the lease payments made.
•• Re-measured to reflect:
»» Any reassessment; or
»» certain lease modifications; or
»» revised in-substance fixed lease payments (see page 9).
Note:
•• Interest on the lease liability is calculated to be the
amount that produces a constant periodic rate of interest
on the outstanding lease liability.
•• The periodic rate of interest applied is the interest
rate implicit in the lease, unless that cannot be readily
determined. In such circumstances, the lessee’s incremental
borrowing rate should be used. Guidance on determination
of this rate is given below. Additional guidance is provided if
the lease is re-assessed (see page 9).
•• Interest on the lease liability is recognised in profit
and loss unless the costs are included in the carrying
value of another asset in accordance with another
accounting standard.
•• Variable lease payments not included in the
measurement of the lease liability are recognised in profit
and loss in the period in which the event or condition
that triggers those payments occurs, unless the costs
are included in the carrying value of another asset in
accordance with another accounting standard.

12 13
 How is the lease liability remeasured?
If there is a reassessment of the lease liability, either because the assumptions
made about the lease term or the lease costs have changed, or because there has
been a modification (which is not indicative of a new lease) then the liability will be

5
remeasured as follows:

HOW ARE MODIFICATIONS TREATED? Change in lease term? Determine the lease payments Determine a revised discount
eg option to extend that was based on the revised lease term. rate and apply this rate to
IFRS 16 distinguishes lease modifications from a reassessment of a lease (eg whether previously reasonably certain don’t forget to remove any option calculate the present value
to be taken is now unlikely to be fees that were previously included of the recalculated lease
or not you are reasonably certain to exercise an option to extend an existing lease). taken or an option to terminate in the lease payments calculation. payments.
the lease that was expected to
Lease modifications change the scope of the lease or change the consideration for the lease by
be taken has not been.
comparison with that detailed in the original terms and conditions of the contract. If the modifications,
in substance, mean that the original lease has been terminated and a new lease created, then the lessee
will account for the revised terms as a new lease.

A lease modification should be accounted for as a separate lease if:

•• The modification adds the right to use one or more underlying assets; and
•• the consideration for the lease increases by an amount that is proportionate to the stand-alone price
of the additional asset(s).

What about modifications that don’t need to be accounted for as a separate lease? Change to the lease payments? Determine the revised lease Apply the original discount
When assessing the lease, a number of decisions must be made. For example, is an option to extend eg a change to lease payments payments based on the rate to calculate the present
the lease reasonably certain to be taken? Are we reasonably certain that we won’t want to exercise the based on an index or rate used remaining lease term. value of the recalculated
option to terminate the lease? As time goes by, the answers to those questions may change. to determine the payment, such if changes are based on an index lease payments.
as a market rent review, or a movement or rate revisit the
Changes to the contract may also be made. Maybe a rent review takes place, and the fixed rental change in the amount to be paid forecast movements included in
payments increase going forward? Or an extension to the lease is successfully negotiated? under a residual value guarantee. this calculation to make sure they
continue to be appropriate.
Where these changes do not indicate a new lease agreement, the amount recognised for the lease
liability and the right-of-use asset will need to be revisited.

After initial recognition, the right-of-use asset (unless it is an investment property or within a class of
property, plant and equipment which is measured at fair value) is measured at cost less depreciation and
any impairment in line with IAS 16 Property, Plant and Equipment. However, the cost will also be adjusted
for any remeasurement of the lease liability.

14 15
 CASE STUDY PART 3 —SUBSEQUENT MEASUREMENT
AND ACCOUNTING FOR A CHANGE IN THE LEASE TERM
Subsequent measurement of the lease liability and right-of-use asset following re-assessment.
At the end of year 3, Lessee A starts considering location and at the end of year 3 concludes that it
whether he should extend the existing lease or is now reasonably certain that the option to extend
move to new premises. The area surrounding the the lease for a further 5 years will be exercised. LEASE LIABILITY RIGHT-OF-USE ASSET
property has become very trendy over the last Lessee A’s incremental borrowing rate at the end INTEREST DEPRECIATION
couple of years and this has been reflected in of year 3 is 7% reflecting the fixed rate of interest PERIOD B/F LIABILITY PAYMENTS C/F LIABILITY B/F ASSET C/F ASSET
AT 7% CHARGE
the rental prices of similar properties in the area. that a bank would lend at for a similar amount in
£ £ £ £ £ £ £
To manage overheads, Lessee A has to choose the same currency, for a 7 year period and with the
whether to stay in the current location and benefit similar collateral. Lessee A expects to continue to 3 142,973 (50,000) 4,647 97,620 151,380 (50,460) 100,920
from reduced rentals in comparison to other market consume the right-of-use asset’s future economic (original at 5%) 209,867 209,867
rentals or move location. For business purposes, benefits evenly over the lease term. 307,487 310,787
Lessee A believes it is beneficial to stay in the same 4 307,487 (50,000) 18,025 275,512 310,787 (44,398) 266,389

5 275,512 (50,000) 15,785 241,297 266,389 (44,398) 221,991

The lease liability and the right-of-use asset from period 1 to 3 is as follows:
6 241,297 (55,000) 13,040 199,337 221,991 (44,398) 177,593
LEASE LIABILITY RIGHT-OF-USE ASSET
7 199,337 (55,000) 10,104 154,441 177,593 (44,398) 133,195
B/F INTEREST C/F DEPRECIATION
PERIOD PAYMENTS B/F ASSET C/F ASSET 8 154,441 (55,000) 6,961 106,402 133,195 (44,398) 88,797
LIABILITY AT 5% LIABILITY CHARGE
9 106,402 (55,000) 3,598 55,000 88,797 (44,398) 44,399
£ £ £ £ £ £ £
10 55,000 (55,000) 0 0 44,399 (44,399) 0
1 177,300 0 8,865 186,165 252,300 (50,460) 201,840

2 186,165 (50,000) 6,808 142,973 201,840 (50,460) 151,380

3 142,973 (50,000) 4,647 97,620 151,380 (50,460) 100,920

The lease liability is re-measured by calculating the present value (PV) of the future lease payments at the
new incremental borrowing rate of 7%. The previous carrying value (CV) of the lease liability is then increased
to the re-measured amount, with a corresponding adjustment to the right-of-use asset to reflect the cost
of the additional right of use, as follows:

PERIOD CASH FLOW DISCOUNT FACTOR AT 7% PRESENT VALUE

£ £

4 and 5 50,000 1.935 96,729*

6 to 10 55,000 3.832 210,758*

PV of future lease payments at new incremental borrowing rate 307,487

Previous CV of lease liability 97,620

Adjustment to CV of liability and right-of-use asset 209,867

*These numbers have been calculated using the discount factor which hasn't been rounded.

16 17
6EXEMPTION

Short-term
lease
ARE THERE ANY EXCEPTIONS AND PRACTICAL EXPEDIENTS?
Not all leases need to be calculated using the lease liability and right-of-use asset
method. There are some exemptions available as well as some practical expedients.

DETAILS

Short-term leases are

leases of 12 months or less
with no purchase option at
the end.
CONDITIONS TO
USE EXEMPTION

•• Election must be made;

•• election will apply by
class of underlying asset
to which the right of use
relates; and
•• any subsequent change or
modification of the lease is
treated as a new lease.
POSSIBLE EXAMPLES

•• Hire vehicle for use

while main vehicle is
being repaired.
•• 3 month storage lease to
expand capacity to hold
stock in advance of peak
season.
•• Lease of equipment
specifically for a one
off project that will be
completed in 6 months.
TREATMENT

Recognise the lease

payments associated with
the lease as an expense in
the income statement on
7
WHAT ARE THE NEW DISCLOSURE REQUIREMENTS?
The objective of the disclosure requirements in IFRS 16 is for lessees to provide information
that will assist users of the financial statements to assess the effect that leases have on
the financial position, performance and cash flows of the business.
The following information is required to be presented in a tabular format unless another format is
considered to more appropriate:

•• By class of underlying asset:

»» Depreciation expense
»» Carrying value of right-of-use assets
•• Additions to right-of-use assets
•• Interest expense on lease liabilities
•• Other expenses relating to:
Low value ‘Low value’ is not defined •• Election must be made; •• Mobile phone contract. a straight-line (or other »» Short-term leases where the practical expedient has been applied (need not include leases with a
underlying but a value of less than systematic) basis. This is the
•• election must be made on •• Office equipment rental. same treatment as applies
lease term of one month or less);
assets US$5,000 was anticipated
in the Basis of Conclusions a lease-by-lease basis; to an operating lease under
and •• PC or tablet rental. »» leases of low-value assets; and
to IFRS 16. IAS 17.
•• assets must not be »» variable lease payments not included in the lease liability.
dependent on, or highly
interrelated with, other •• Accounting policy for short-term leases and low value assets if the exemptions are taken
underlying assets.
•• Sub-letting income from right-of-use assets
The exemption may be
taken even if the low-value •• Total cash outflow for leases
assets are material to the
accounts in aggregate. •• Gains and losses on sale and lease back transactions
•• Costs that the lessee has included in the carrying amount of another asset.
Practical expedients Additional qualitative and quantitative disclosures will also be necessary about the entity’s leasing
•• Portfolio application – IFRS 16 can be applied to a portfolio of leases with similar characteristics, if the activities if they are considered necessary to meet the overall disclosure objective set out above. This
effect on the financial statements is not materially different to accounting for the leases separately. may include for example, details of the leasing activities entered into, the variability of future cash
•• Account for as a single lease component – instead of separating non-lease components (services) outflows, restrictions or covenants imposed by the lessor.
from lease components of a contract the lessee can choose, by class of underlying asset, to account
for the whole contract as a single lease.

18 19

8
WHAT ARE THE TRANSITION MODELS
AND ARE THERE ANY RELIEFS?
There is no requirement to reassess whether a
contract is, or includes a lease (this is given as a
practical expedient). IFRS 16 will only be applied to
the contracts that were previously identified as a
lease under IAS 17 and IFRIC 4. If contracts are not
reassessed, this should be disclosed and applied to
all such contracts at the date of initial application.
There are two transition models that are available,
however, one model must be selected and applied
consistently to all leases.
Full Transition Method
Under the full transition method, IAS 8 is applied
in full, meaning that the financial position at the
beginning of the comparative period is restated
to reflect the carrying value of the right-to-use
assets and the financial liabilities as if IFRS 16 had
been applied from the inception of each lease.
Cumulative Catch Up Approach
Under the cumulative catch up approach, the
initial application date is determined to be the
first day of the financial period in which IFRS 16
is being applied. This means that corresponding
amounts are presented having applied IAS 17.
Whilst this method may be considered to be easier
to apply than the full transition method, the prior
period financial position and results will not be
comparable with the performance and position
presented for the current period. For this reason,
entities are required to disclose the effect of
applying this approach including:
20
Cumulative catch-up approach - practical expedients
Measurement of
lease liability
Measurement of
right of use asset
•• An explanation of any difference between the Leases less than
operating lease commitments disclosed for 12 months
the corresponding period discounted using
the incremental borrowing rate and the lease
liabilities recognised on initial application of
IFRS 16; and
•• The weighted average incremental borrowing
rate that has been applied to lease liabilities
recognised at the date of initial application. Apply single discount
Portfolio
Under this approach there is also the option of discount rate similar characteristics
applying some additional practical expedients.
These can be applied on a lease by lease basis
and entities can select which ones (if any) they
wish to apply.
Other transitional provisions - previously
recognised business combinations
If an asset or liability was previously recognised
Hindsight
relating to a favourable or an unfavourable lease
under IFRS 3 Business Combinations, the lessee
must derecognise that asset or liability and
adjust the carrying value of the right-of-use
asset by a corresponding amount at the date of
initial application.
Onerous leases used as an alternative
Measurement of lease liability
Entities are not required to go back to the start of
the lease and amend for any modifications. As an
Discount at the alternative, entities can calculate the lease liability
At present value lessee's incremental by discounting the remaining lease payments
of remaining lease borrowing rate
using the incremental borrowing rate at the date
payments at date of initial
of initial application.
application
Measurement of the right-of-use asset
Entities can choose to measure the right-of-
use asset at the same value as the lease liability
OR
adjusted to take into account any prepayment/
accrued lease payments that were previously
recognised. This means that no adjustment
will need to be made to equity at the initial
ROU asset = lease application date. However, this is likely to mean
Retrospectivly
liability
that the future depreciation expense will be
higher than if this practical expedient was not
applied. For this reason, it may be beneficial not
to apply this practical expedient to low volume,
high value contracts but to apply it to low value,
high volume contracts.
Leases with a remaining lease term of less than
Can treat as short- Measure and disclose 12 months
life leases in same way An entity can choose not to restate these leases
ie continue to treat them in the same way as
operating leases under IAS 17.
Portfolio discount rate
IFRS 16 permits an entity to apply a single
discount rate to a portfolio of leases that have
reasonably similar characteristics ie. leases with
rate to leases with remaining lease terms that are similar and relate
to a similar class of underlying asset in a similar
economic environment.
Hindsight
Hindsight can be applied when applying IFRS 16
for the first time. For example, if a lease has been
eg determining the extended or terminated, this known information
lease term
can be used in determining the lease term.
Onerous leases
If an onerous lease assessment has been
performed in a previous period, the standard
permits this to be used as an alternative to an
Onerous lease impairment review. In such circumstances, the
assessment may be
Value of onerous
lease provision may onerous lease amount replaces any impairment
be used to adjust loss and hence is adjusted against the value of the
to an impairment
value of ROU asset right-of-use asset. The reason this is permitted
review
is that onerous lease provisions will cease to exist
going forward as all lease obligations will already
be recognised in the balance sheet.
21
HOW CAN RSM HELP?

Develop an implementation
Assess the impact of plan to ensure a smooth
the new standard on and cost effective transition
your key performance and project manage the
indicators, loan and implementation process.
employee agreements.

Assess whether your existing

Help you understand
systems will be able to cope
the impact of
with the implementation of the
implementation on your
new standard and advise on a
financial statements and
selection of software vendors.
your business.

Establish an appropriate
business process and system
Identify, collate and of internal control over the
analyse the data required accounting for leases.
to help you determine
what financing decisions,
if any, you need to make.

Assess the impact of any

modifications to the lease
terms and how they will be
accounted for.

22 23
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Audit LLP and RSM UK Tax and Accounting Limited are not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to
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of investment business activities. Whilst every effort has been made to ensure accuracy, information contained in this communication may not be comprehensive and
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