CHAPTER 

5 – EMPLOYEE BENEFITS – IAS 19

OBJECTIVES

 apply and discuss the accounting treatment of both short‐term & long‐term 
employee benefits 

 discuss and apply the accounting treatment of both defined contribution and 
defined benefit plans 

 account for gains and losses on settlements and curtailments 

 account for the asset ceiling test and the reporting of remeasurement gains and 
losses 

 discuss the effects of current issues in corporate reporting 

1
EMPLOYEE BENEFITS – IAS 19

IAS 19 identifies 4 separate categories of employee benefits

– Short‐term employee benefits that are expected to be settled 
wholly within 12 months of the end of the reporting period

– Post‐employment benefits such as pensions

– Other long‐term employee benefits (e.g. long service leave)

– Termination benefits

2
EMPLOYEE BENEFITS – IAS 19

Recognise an expense (or asset) when the entity consumes the 
economic benefit arising from the service provide

An entity must recognise a liability when an employee had provided 
services in exchange for employee benefits payable in the future

3
EMPLOYEE BENEFITS – IAS 19

Recognise an expense – Accounting Framework

Expenses are recognised in the income statement when a decrease in 
future economic benefits has arisen that:
• related to a decrease in an asset or
• to an increase of a liability and
• can be measured reliably.

– Dr expense in profit or loss
– Cr cash (decrease an asset) or
– Cr salary & wages payable (increase a current liability) or
– Cr non‐current liability (LSL, pension obligation)

4
EMPLOYEE BENEFITS – IAS 19

Recognise a liability – Accounting Framework

A liability is a present obligation arising from past events, the settlement 
of which is expected to result in an outflow of resources embodying 
economic benefits.

– Dr expense in profit or loss
– Cr salary & wages payable (increase a current liability)
– Cr provision for LSL (increase a non‐current liability)

5
EMPLOYEE BENEFITS – IAS 19

Recognise an asset – Accounting Framework

An asset is a resource controlled by the entity as a result of past events
and from which future economic benefits are expected to flow to the 
entity .

– Dr Work in Process (creating inventory asset) or
– Dr PP&E (direct costs incurred bringing an asset to use) or
– Dr Intangible Asset (direct development cost)
– Cr Cash (reduce an asset) or
– Cr salary & wages payable (increase a current liability) or
– Cr provision for LSL (increase a non‐current liability)

6
EMPLOYEE BENEFITS – IAS 19

EMPLOYEE ON‐COSTS
• base wage 100.0%
• annual leave (4 weeks) 9.1%
• sick leave (2 weeks) 3.1%
• long‐service leave 0.8%
• NSW payroll tax 5.5%
• workers’ compensation insurance 0.5%
• superannuation contribution  9.5%
128.5%
• paid maternity leave?
• paid paternity leave?
7
Post‐employment benefit plans – IAS 19 text page 91

IAS 19 definition Under a defined
contribution plan the entity pays fixed 
contributions into a separate entity & 
will not have legal or constructive 
obligation to pay more if the fund does  EMPLOYEE
not hold sufficient assets to pay all  BENEFITS
benefits relating to employee service. 

The employer’s obligation is limited to 
defined payments at certain times. An 
expense is recognised when the  Defined Defined
obligation is incurred. benefit contribution
pensions pensions
All other post‐employment plans (i.e. 
that are not defined contribution plans) 
are defined benefit plans.
SFP OCI

P/L
8
EMPLOYEE BENEFITS – IAS 19

9
 EMPLOYEE BENEFITS – IAS 19

Example 1. Defined contribution or defined benefit?

Golden Gate has a defined contribution pension scheme for all employees. In the year ended 30 June 
20X4 it set up an additional fund (Fund) to enhance post‐retirement benefits. The terms of Fund are: 
 
 Employees with more than two years’ service are enrolled into Fund. 
 
 Golden Gate’s contributions into Fund are voluntary. In the year ended 30 June 20X4, it 
contributed 1% of wages and salaries. 
 
 While Fund is in existence, retiring members will receive an annual sum based on their number 
of years of service. 
 
 Golden Gate can cancel Fund at any point. If cancelled, no further benefits or compensation will 
be paid to members. 
 
Golden Gate is well‐known for paying its employees significantly higher salaries that the national 
average. Golden Gate produced a press release to publicly announce the Fund, which was widely 
reported and praised by several large, national newspapers. Employees have a high level of trust in 
the senior management and directors of Golden Gate. 
 
The directors wish to know whether Fund is a defined benefit or a defined contribution pension 
plan. 
10
EMPLOYEE BENEFITS – IAS 19

11
EMPLOYEE BENEFITS – defined contribution plans text p. 92

 The entity should charge the agreed pension contribution to profit or

loss as an employment expense in each period.

 The expense of providing pensions in the period is often the same as the

amount of contributions paid. However, an accrual or prepayment arises if

the cash paid does not equal the value of contributions due for the period.

12
EMPLOYEE BENEFITS – defined contribution plan

13
EMPLOYEE BENEFITS – defined contribution plan

14
EMPLOYEE BENEFITS – defined benefit plan text p. 94

15
EMPLOYEE BENEFITS – defined benefit plan
Plan obligation – the present value of the estimated future 
obligation
Plan assets – the fair value of investments and cash held by the 
defined benefit plan
Plan deficit/surplus – the amount by which the plan obligation 
exceeds plan assets and vice versa. This is recognised on the SFP.

16
EMPLOYEE BENEFITS – defined benefit plan

17
EMPLOYEE BENEFITS – defined benefit plan

18
Accounting for defined benefit plans – IAS 19  ¶ 57 text p. 94

The statement of financial position

1. calculate the present value of the current obligation to employees using an 
actuarial technique – the projected unit credit method ¶ 67‐69

2. calculate the fair value of plan assets (per IFRS 13) ¶ 113‐115

3. the net liability or asset is the sum of 2. fair value of assets less 1. present 
value of obligation

• a surplus (asset) is limited to its availability to the entity as refunds or in 
reducing future contributions (the asset ceiling) ¶ 65

4. Unpaid expenses (service costs) are a liability at the reporting date

19
 Accounting for defined benefit plans – IAS 19  ¶ 57 text p. 96

Interest charged / paid to 
Charged to P&L current  P&L for change in liability 
service cost + past service  / asset due to passage of 
cost ¶ 103 + gain or loss  time.
on settlement ¶ 109

20
EMPLOYEE BENEFITS – defined benefit plan

Example 3 - Defined benefit pension schemes

Byzantium operates a defined benefit pension scheme. The following details

relate to the pension scheme in the year ended 31 December 20X1:
$m
Present value of the obligation at 31 December 20X1 100
Present value of the obligation at 1 January 20X1 90
Fair value of plan assets at 31 December 20X1 76
Fair value of plan assets at 1 January 20X1 72
Current service cost 5
Contributions into the scheme by Byzantium 6
Pension benefits paid during the year 2
The interest rates available on good quality corporate bonds had been:
1 January 20X1 5%

31 December 20X1 4%

How should the scheme be accounted for at 31 Dec 20X1?

21
EMPLOYEE BENEFITS – example 3 answer
The liability on the SFP at 31 Dec 20X1 was $24m ($100m – $76m).

In the statement of profit or loss, Byzantium recognises an expense for the current
service cost of $5 million.

Byzantium charges the net interest component of $0.9 million (($90m – $72m) × 5%)) to
profit or loss.

The re-measurement loss of $6.1 million (W1) is recognised in OCI.

(W1) Reconciliation of net obligation

$m
Balance bfd ($90m – $72m) 18.0
Net interest component 0.9
Service cost component 5.0
Contributions (6.0)
Benefits paid 0.0
Re-measurement component (bal. fig) 6.1
–––––
Balance cfd ($100m – $76m) 24.0

22
EMPLOYEE BENEFITS – example 4 asset ceiling

Bloom operates a defined benefit pension scheme. The following details relate
to the pension scheme in the year ended 31 December 20X1:
$m
Present value of the obligation at 31 December 20X1 107
Present value of the obligation at 1 January 20X1 95
Fair value of plan assets at 31 December 20X1 124
Fair value of plan assets at 1 January 20X1 110
Current service cost 7
Contributions into the scheme by Byzantium 8
Pension benefits paid during the year 3

The interest rate on good quality corporate bonds at the start of the year was 6%.
Bloom identified an asset ceiling at the beginning and the end of the year of $10 million
– the present value of expected refunds from the scheme.

How should the scheme be accounted for at 31 December 20X1?

23
EMPLOYEE BENEFITS – example 4 asset ceiling – answer
The scheme was in surplus at the start of the year. This was recognised at the
lower of $15m ($110m – $95m) and the $10m ceiling – i.e. $10million.

Interest on the asset of $0.6 million ($10m × 6%) is credited to profit or loss as
income. The service cost of $7 million is charged to profit or loss as an expense. The
contributions increase the scheme surplus.

The scheme was still in surplus at the end of the year. The surplus is recognised at
the lower of $17m ($124m – $107m) and $10m – i.e. $10m.

The remeasurement loss of $1.6m is charged to OCI.

Reconciliation of net surplus $m

Balance bfd (10.0)
Net interest component (0.6)
Service cost component 7.0
Contributions (8.0)
Benefits paid 0.0
Re-measurement component (bal. fig) 1.6
–––––
Balance cfd (10.0)
24
Accounting for defined benefit plans – IAS 19  ¶ 57 text p. 100

Settlements

Settlements to employees are made by the plan. A settlement reduces the 
reporting entity’s obligation and reduces plan assets, normally be the same 
amount. The reporting entity’s deficit/surplus normally will remain unchanged. 
Any gain or loss on settlement is recognised in profit or loss.

Disclosures

IAS 19 requires risk‐based disclosures – explain how the reporting entity is 
exposed to uncertainty in future obligations and how that uncertainty may affect 
future cash flows. Uncertainty arises from investment risks, interest rate risks, 
employee‐based risks such as salaries and life‐spans.

25
Defined benefit plans – IAS 19 text p. 102

Criticisms

Definitions – measurements – offsetting ‐ OCI

Current developments

Revised conceptual framework – updating actuarial assumptions within a 
reporting period.

Ethical issues

How might management seek to manipulate financial statements?

Essential reading

Chapter 5 section 4 in Appendix 2
26
By the end of this session you should be able to:

 apply and discuss accounting for events after the reporting period

 determine and report going concern issues arising after the reporting date

 apply and discuss the recognition, derecognition and measurement of

provisions, contingent liabilities and contingent assets

 calculate and discuss restructuring provisions

and answer questions relating to these areas.

Chapter 6
27
Events after reporting period + Provisions & contingencies text p. 124

EVENTS AFTER PROVISIONS

THE REPORTING AND
PERIOD CONTINGENCIES

Non- Definitions
Adjusting and
adjusting
recognition

Specific
situations

28
Provisions – recognition & measurement IAS 37 text p 125

ignore if “remote”
disclose if “possible”

an obligation is 
something that may 
not be avoided
constructive means 
expectation from 
past behaviour
29
Provisions – remeasurement & derecognition IAS 37

Remeasure provisions to the best estimate of expenditure required to settle the 
liability at each reporting date ¶ 59

• unwind a discount & recognise in financing costs in profit or loss
Dr financing expense in P/L
Cr liability (provision)

Derecognise a provision that is no longer required to settle the obligation.

• only use a provision for expenditure related to the matter for which the 
provision had been raised ¶ 61

30
Provisions – specific guidance text p 126

the unavoidable costs of meeting 
obligations exceed the economic 
benefits expected

IAS 37 ¶ 63 IAS 37 ¶¶ 66‐69 IAS 37 ¶¶ 72‐83

31
Onerous contract  & future operating costs IAS 37 ¶¶ 66‐69

An onerous contract exists when the unavoidable costs of the contract exceed 
the benefits that will be obtained

A provision is recorded at the lower of:

• the cost of fulfilling the contract

• the cost of terminating the contract

No provision is allowed for future operating costs, even when the expenditure is 
required by law – however consider IAS36 impairment of assets

No provision is normally allowed for the cost of future repairs

32
Restructuring provisions IAS 37 ¶¶ 72‐83 text p. 127

A restructuring provision should only include direct costs necessarily incurred by 
the restructuring

• these are costs not associated with ongoing activities of the entity ¶ 80

Costs that are prohibited from inclusion:

• retraining or relocating staff
• marketing
• systems
• future operating losses (other than onerous contracts)
• profits from disposal of assets

33
Environmental & decommissioning provisions      IAS 37

Raise a provision for future costs if an obligation exists to decommission an asset

• DR property, plant & equipment

• CR provision

An environmental provision may only cover environmental damage already 
incurred

• and there is an obligation to repair the damage

• just causing damage or intending to clean up do not create an obligation

Recognise the full cost as the obligation arises:

• discount for the time value of money as appropriate

• recognise an asset if expenditure gives rise to future economic benefits
34
Environment issues ‐ example

35
Environmental issues - answer
Obligation to repair damage

Bringing the machinery into use and operating it for the first year are past events that
have caused damage to the local land.

There is no legal obligation for Alias to repair the damage caused to the local land.
Alias has a constructive obligation to repair the damage because it publishes its
environmental policies in its <IR> & it is known for honouring these policies.

The initial damage

A provision for the initial damage by the machine is recognised at 1 October 20X5.

The initial provision is measured as $1.47m ($2m × 1/1.084). PPE is increased.

The present value is unwound over the year, increasing the carrying amount of the
provision & raising a finance cost of $0.12m ($1.47m× 8%) in profit or loss.

The PPE is depreciated over 4 years, with annual charge of $2.87 million (($10m +
$1.47m) / 4 years) recorded in profit or loss.

The subsequent damage

As at 30 September 20X6, Alias has operated the machine for a year so has a
constructive obligation to pay $0.5 million to repair the additional damage caused.

Alias cannot provide for the damage that would be caused in years 2, 3 and 4 of the
machine’s life because this is avoidable (the machine could be disassembled early).

The provision that should be recognised in respect of this additional damage at 30 September
20X6 is $0.40 million ($0.5m × 1/1.083). 36
Contingent liabilities & contingent assets – IAS 37 text p 129

An entity will not recognise a contingent liability ¶ 27 or a contingent asset ¶ 31

A contingent liability is:
• a possible obligation whose existence will be confirmed by future events not 
controlled by the entity
• a present obligation where an outflow of economic benefits is not probable
• a present obligation where the outflow of economic benefits is not measurable

Disclose a contingent liability unless the possibility is remote – IAS 37 ¶ 86

An asset is contingent when its existence will only be confirmed by future events not 
controlled by the entity
Disclose a contingent asset where inflow of economic benefits is probable – IAS 37 ¶ 89

37
 Events after reporting period – IAS 10 text p. 130

see IAS 10 ¶¶ 3‐7

financial 
statements are 
based upon 
conditions 
existing at the 
reporting date
a fundamental change 
to  the basis of 
accounting 38
Adjusting events IAS 10 ¶¶ 8‐9

Events that provide evidence of conditions that existed at the reporting date, e.g.

1. sale of inventory (& net realisable value changes)

2. bankruptcy of a debtor (& allowance had not been made)

3. discovered fraud or error

4. settlement of a legal dispute (& allowance had not been made)

Adjust the amounts recognised in the financial statements, for the effects of these 
events 

39
Non‐adjusting events IAS 10 ¶¶ 10‐11

Events evidencing conditions that arose after the reporting date, e.g.

1. announced plan to discontinue an operation

2. announced plan to restructure an operation

3. purchase, disposal or destruction of assets

4. changes to market factors or conditions (e.g. exchange rates)

Disclose the details and consequences of material events 

40
Adjusting events – example

41
Adjusting events – example

IFRS 5
see text page 335

Events after the reporting period

Active marketing commenced after the reporting date. As at the period end,
the building was not being actively marketed and so should not have been
classified as held for sale.

If deemed material, Ivy should disclose in a note to the financial statements

that the conditions required to classify the building as held for sale were met
after the reporting date.

42
Adjusting events – example
has new evidence arisen of a condition 
that existed or of a new condition that 
did not exist at year end?

43
Adjusting events – example

44
 GOING CONCERN – issue arising IAS 10 ¶¶ 14‐16

IAS 1 ¶¶ 25‐26

An entity shall not prepare its financial statements on a going 
concern basis if management determines after the reporting period either that 
it intends to liquidate the entity or to cease trading, or that it has no realistic 
alternative but to do so.

IAS10 requires a fundamental change in the basis of accounting when the going 
concern assumption is no longer appropriate – rather than an adjustment to the 
amounts recognised.

45
Events after reporting period + Provisions & contingencies

Ethical issues

How might management seek to manipulate financial statements? Look for use of 
provisions to manipulate profits.

Essential reading

Chapter 6 section 1.3 in Appendix 2
Chapter 6 section 3 in Appendix 2

46
CHAPTER 9 – LEASES – IFRS 16

47
LEASES – IFRS 16

Identifying a
Right-of-use lease
asset

Lessee Lessor
Leases
accounting accounting

Net
Liability Sale and investment
leaseback

Remeasurement

Transfer is Transfer is
a sale not a sale
48
LEASES – IFRS 16

an identified asset – the 
supplier does not have a 
substantive right to 
substitute the asset during 
the lease period 49
 IDENTIFYING A LEASE – IFRS 16  ¶ 9
1. the right to use ¶ B9

o the right to substantially all economic benefits from use ¶ B21‐B23

o the right to direct the use ¶ B24‐B27

2. an identifiable asset

o the lessor does not have a substantive right to substitute an asset ¶ 

B14‐B18

3. for a period of time ¶ B10

4. in exchange for consideration 50
IDENTIFYING A LEASE – IFRS 16 ¶ 9

51
IDENTIFYING A LEASE – IFRS 16 ¶ 9

52
LESSEE ACCOUNTING – initial measurement – IFRS 16 text p. 197

At inception
of lease
recognise

Right-of-use
Lease liability
asset

Recognise present value of payments Recognise cost, which is:

not yet made:
 Initial value of lease liability
 Fixed payments
 Payments made at or before
 Variable payments - value at commencement
inception
 Initial direct costs
 Amounts expected to be paid under
residual value guarantees  Estimated costs of asset removal
or dismantling as per lease
 Options to purchase that are conditions
expected to be exercised

 Termination penalties if expected

they will be paid.
53
 LESSEE ACCOUNTING – IFRS 16 ¶ 22

THE TERM OF A LEASE COMPRISES:   ¶ 18

o non‐cancellable periods ¶ B34

o the period of an option to extend, if reasonably certain to be exercised ¶ B37

o the period of an option to terminate if reasonably certain to not be exercised 

¶ B35

54
LEASE ACCOUNTING – initial treatment  IFRS 16

55
LEASE ACCOUNTING – initial treatment  IFRS 16

Dr right‐of‐use asset $3.14
Cr lease liability $3.04
Cr opex $0.1

56
LESSEE ACCOUNTING – IFRS 16

no liability
no right‐of‐use asset
straight‐line recognition of payments, in P/L

57
 LESSEE ACCOUNTING – IFRS 16 ¶ 36

Subsequent measurement: liability

Interest charge increases the liability and is recognised in profit or loss: 
 
Dr Finance costs (P/L)  X 
 
Cr Lease liability  X 
 
Cash payments reduce the lease liability: 
 
Dr Lease liability  X 
 
Cr Cash  X 

58
 LESSEE ACCOUNTING – IFRS 16 ¶ 29

Subsequent measurement: right-of-use asset

Under the cost model, the asset will be measured at cost less 
accumulated depreciation and impairment losses. 
 
The asset is depreciated: 
 
 over the shorter of the lease term and the useful economic 
life of the asset if ownership does not transfer to the lessee 
 
 over the useful economic life of the asset if ownership does 
transfer to the lessee. 

59
LESSEE ACCOUNTING – subsequent measurement

ownership 
does not tfr to 
3 the lessee

60
LEASE ACCOUNTING – subsequent measurement

3
2

61
 LESSEE ACCOUNTING – IFRS 16
Separating components ¶ B9 – B33
A contract may contain a lease component and a non-lease component.

Unless an entity chooses otherwise, IFRS 16 specifies that the consideration in the
contract should be allocated to each component based on standalone selling prices.

Reassessing the lease liability ¶39

If changes to lease payments occur then the lease liability must be recalculated and
its carrying amount adjusted.

A corresponding adjustment is posted against the carrying amount of the right-of-use

asset.

Exceptions – short-life and low value assets ¶ 5-6; B3-B8

If the lease is short-term (less than 12 months at the inception date) or of a low value
then IFRS 16 permits a simplified treatment.

In these cases, the lessee can choose to recognise the lease payments in profit or
loss on a straight-line basis. No lease liability or right-of-use asset would therefore
be recognised.
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LESSEE ACCOUNTING – reassessed liability

PV of 3annual  
pmts $2mn 
discounted 10% 
p.a. is $4.97mn

63
 LESSEE ACCOUNTING – example 4 solution
Year ended 30 April 20X3
In the prior year, the right-of-use asset would have been recognised at $7 million ($5m +
$2m). The depreciation charge in the prior year was $1.75 million ($7m/4 years) and the
carrying amount of the asset at the end of the prior year was $5.25 million.

The lease liability was recorded at $5 million. Interest of $0.5m ($5m × 10%) was added
& charged to profit or loss. The liability at 30 April 20X3 was $5.5m ($5m + $0.5m).

Reassessed liability at 1 May 20X3

Based on inflation for the last 12 months, the lease payments now due each year are
$2.1 million ($2m × 105%). The revised liability is calculated as follows:
Cash flows Disc. Present value

1/5/20X3 2.1 1 2.1

1/5/20X4 2.1 1/1.101 1.91
1/5/20X5 2.1 1/1.102 1.74
–––––
Revised liability 5.75
–––––
The lease liability is increased from $5.5 million to $5.75 million:

Dr Right-of-use asset $0.25m

Cr Lease liability $0.25m

The right-of-use asset is then held at $5.5 million ($5.25m + $0.25m). 64

LESSOR ACCOUNTING – IFRS 16 text p. 204

• the leased assets are specialised
• the lessee benefits from increased 
fair value
65
LESSOR ACCOUNTING – lease classification

66
 LESSOR ACCOUNTING – example 5 solution

In accordance with IFRS 16 Leases, a lease is classified as a finance lease if it transfers

substantially all the risks and rewards incidental to ownership from the lessor to the
lessee. All other leases are classified as operating leases.
Classification is made at the inception of the lease.

In this case, the leases are operating leases. This is for the following reasons:

 The lease is unlikely to transfer ownership of the vehicle to the lessee by the end
of the lease term as the option to purchase the vehicle is at a price which is
higher than fair value at the end of the lease term.

 The lease term is not for the major part of the economic life of the asset as
vehicles normally have a length of life of more than three years and the
maximum un-penalised mileage is 10,000 miles per annum.

 The present value of the minimum lease payments is unlikely to be substantially

all of the fair value of the leased asset as the price which the customer can
purchase the vehicle is above market value, hence the lessor does not appear to
have received an acceptable return by the end of the lease.

 Carsoon maintains the vehicles, which again indicates that the risks and rewards
remain with the entity.

67
LESSOR ACCOUNTING – IFRS 16

PV of lease payments + 
RV @ implicit interest 
rate

68
 LESSOR ACCOUNTING – Finance lease – IFRS 16 ¶ 70

A lessor shall recognise finance income over the lease term, based on a pattern 
reflecting a constant periodic rate of return on the lessor’s net investment in the 
lease ¶ 75

At inception. a lessor presents assets held under a finance lease as a receivable.

The investment in a finance lease comprises the present value of:

o future fixed payments for the right to use the asset

o variable payments valued at date of inception

o guaranteed and unguaranteed residual value

o exercise price of purchase options, if expected to be exercised

o termination penalties if the lease term is based on termination event

69
LESSOR ACCOUNTING – Finance lease – IFRS 16 ¶ 70

A lessor shall recognise finance income over the lease term, based on a pattern 
reflecting a constant periodic rate of return on the lessor’s net investment in the 
lease ¶ 75

Subsequent measurement of the investment in a finance lease:

1. increase the carrying amount of the lease receivable by the finance income 
earned in the current period – e.g. if monthly
annual percentage 
opening carrying amount * (1 + APR / 12) rate (APR) implicit in 
the lease
Dr lease receivable
Cr investment income
2. reduce the carrying amount of the receivable by the rental received in the 
current period
Dr cash
Cr lease receivable

70
LESSOR ACCOUNTING – finance lease

71
LESSOR ACCOUNTING – finance lease

72
LESSOR ACCOUNTING – Operating lease – IFRS 16 & IAS 16

1. a lessor shall recognise lease payments over the lease term, on a 
straight‐line basis under IFRS 16 ¶ 81

2. recognise and measure the underlying asset according to IAS 16 PPE 
or IAS 38 Intangible assets

73
LESSOR ACCOUNTING – operating lease

74
LESSOR ACCOUNTING – operating lease

75
Sale & Leaseback – the right‐of‐use asset text p. 207

see text p. 51

76
Sale & Leaseback – the right‐of‐use asset

IFRS 16 ¶ 100 (a)

• the seller/lessee recognises a profit or loss based on rights transferred to buyer

• the lease liability represents rights retained by the seller/lessee

1. proportion of rights retained = lease liability / sale price
liability ÷
2. right‐of‐use asset = proportion of rights retained * carrying value sale price X 
carrying 
value
3. profit/loss = value of rights transferred = + sale price
+ right‐of‐use‐asset value
‐ carrying value
illustration p. 208 ‐ lease liability
77
LESSOR ACCOUNTING – sale & leaseback

78
 LESSOR ACCOUNTING – sale & leaseback
Example 8 - answer
ORYX – if a sale & leaseback transaction represents the satisfaction of a performance
obligation (per IFRS 15), the seller-lessee recognises a right-of-use asset at the
proportion of the underlying asset’s previous carrying amount that relates to the rights
retained. A profit or loss on disposal arises based on the rights transferred to the buyer-
lessor.

Thee right-of-use asset is recognised as $2.0m ($5.7m/$20m × $7m). A lease liability is

recognised for the present value of the lease payments, $5.7m. Record this double entry:

Dr Cash $20m
Dr Right-of-use asset $2m

Cr Lease liability $5.7m

Cr Building $7.0m
Cr Profit on disposal (bal. fig.) $9.3m

The profit on disposal of $9.3 million is recorded in the statement of profit or loss.

Crake records the asset purchase as $20 million and applies lessor accounting rules.

The lease is an operating lease because the present value of lease payments is much lower than
the fair value of the asset. Crake recognises rental income in profit or loss on a straight-line basis.
The asset is depreciated over its useful economic life.
79
Sale & Leaseback – where consideration ≠ fair value

IFRS 16 ¶ 101‐102

consideration is below the asset’s fair value:

• recognise the shortfall as a prepayment of lease rentals

consideration is greater than the asset’s fair value:

• recognise the excess as additional financing provided by the lessor

80
LESSOR ACCOUNTING – disclosure – IFRS 16 ¶ 89

Present the underlying asset in the statement of position

For a finance lease, disclose:

• finance income
• profit or loss on sale
• changes in the carrying amount of the net investment
• a maturity analysis of undiscounted lease payments receivable

For an operating lease, disclose:

• a maturity analysis of undiscounted lease payments receivable

81
 Chapter 9 LEASES – IFRS 16

Ethical issues

How might management seek to manipulate financial statements? Look for 
incorrect classification to manipulate SFP.

Essential reading

Chapter 9 section 1.4 in Appendix 2

82