Marbella, Alyanna Mae M.

BAA4/CA426/MTH/5:30-7:00

PFRS 16 LEASES

Summary:

The objective of IFRS 16 is to report information that

(a) faithfully represents lease transactions and

(b) provides a basis for users of financial statements to assess the amount, timing and uncertainty of cash
flows arising from leases.
To meet that objective, a lessee should recognise assets and liabilities arising from a lease.

IFRS 16 introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities
for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is
required to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease
liability representing its obligation to make lease payments.

IFRS 16 was issued in January 2016 and applies to annual reporting periods beginning on or after 1 January
2019.

Within the lessee accounting model under IFRS 16, there is no longer a classification distinction between
operating and finance leases. Rather, now a single model approach exists whereby all lessee leases post-
adoption are reported as finance leases. These leases are capitalized and presented on the balance sheet as
both assets, known as the right-of-use (ROU) asset, and liabilities, unless subject to any of the exemptions
prescribed by the standard.

Scope
IFRS 16 Leases applies to all leases, including subleases, except for:
a. leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources;
b. leases of biological assets held by a lessee (see IAS 41 Agriculture);
c. service concession arrangements (see IFRIC 12 Service Concession Arrangements);
d. licences of intellectual property granted by a lessor (see IFRS 15 Revenue from Contracts with Customers);
and
e. rights held by a lessee under licensing agreements for items such as films, videos, plays, manuscripts,
patents and copyrights within the scope of IAS 38 Intangible Assets

What is considered a lease under IFRS 16?

Under IFRS 16, a lease is defined as a contract granting an entity the right to utilize a specific asset for a
prescribed period of time in exchange for agreed-upon consideration. To determine whether a contract
grants control of the asset to the lessee, the agreement must provide the following to the lessee:

a. The right to substantially all economic benefits from the use of the asset
b. The right to dictate how the asset is used by the entity
At times, an organization may have a contract that seems to meet the definition of a lease but does not fall
within the scope of IFRS 16. Situations where this may occur include but are not limited to:

a. Leases of biological assets

b. Leases for the exploration of non-regenerative resources such as oil, gas, etc.
c. Service concession arrangements
d. Licenses of intellectual property

Amortization schedule
The following steps to generate the IFRS 16 amortization schedule:
a. Calculate the initial lease liability as the present value of the total remaining lease payments as of the
commencement date.
b. Calculate the initial right-of-use asset as the lease liability at commencement plus or minus any
necessary adjustments.
c. Amortize the lease liability over the lease term to reflect both lease payments and interest on the
liability using the effective interest method.
d. Depreciate the ROU asset in a systematic and rational manner over the useful life of the underlying
asset or the lease term, whichever is shorter.

Accounting by lessees
Upon lease commencement a lessee recognises a right-of-use asset and a lease liability. [IFRS 16:22]
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. [IFRS 16:24]

Journal entries

The initial journal entry under IFRS 16 records the asset and liability on the balance sheet as of the lease
commencement date. Below we present the entry recorded as of 1/1/2021 for our example:
Initial Journal Entry

Utilizing the amortization table, the journal entry for the end of the first period is as follows:
First Period Journal Entry

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

IFRS 16 disclosures

The disclosure requirements for lessees under IFRS 16. Within the notes to the financial statements, an entity
is expected to present both qualitative and quantitative disclosures regarding their leasing activities for the
respective reporting period(s). The quantitative disclosures required by IFRS 16 for lessees include but are
not limited to:

a. The carrying amount of all ROU assets summarized by asset class as of the end of the reporting
period
b. ROU asset depreciation expense, summarized by asset class for the reporting period
c. Total interest expense on lease liabilities for the reporting period
d. Expenses from short-term leases not included on the balance sheet as of the end of the reporting
period
 e. Expenses from low-value asset leases not included on the balance sheet as of the end of the reporting
period or in the expense summary of short-term leases for the reporting period
f. Expenses from variable lease payments excluded from the lease liability calculation
g. Sublease income for the reporting period
h. Any gains or losses recognized from sale-leaseback transactions
i. Total cash outflows for leases
j. Any ROU asset additions
k. A maturity analysis of all lease liabilities as of the end of the period

Disclosure
The objective of IFRS 16’s disclosures is for information to be provided in the notes that, together with
information provided in the statement of financial position, statement of profit or loss and statement of cash
flows, gives a basis for users to assess the effect that leases have. Paragraphs 52 to 60 of IFRS 16 set out
detailed requirements for lessees to meet this objective and paragraphs 90 to 97 set out the detailed
requirements for lessors. 

Qualitative information to help financial statement users understand the entity’s leases and leasing activities,
including the following:

- Summary of leasing activities

- Commitments for leases not yet commenced (i.e. a liability is not yet recorded on the balance sheet)