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Hien, Nguyen Thi Thu - 2018

Lease: IIFR 16

IFRS 16 – Content
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 Overview
 Accounting by lessee
 Accounting by lessor

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 1.Overview
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 Development of IFRS 16- Leases?

 Objective and scope of IFRS 16?
 What is a lease?
 Does the arrangement contain a lease?
 Lease components

 Key terms
1.1.Development of IFRS 16- Leases?

1982: IAS 17 originally issued

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Substance over form Present value

Essentially unchanged for 27 years

2016: New standard IFRS 16

Operating vs Concept of Different reporting in

finance lease “right-to-use” the financial statements

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 1.2. Overview: Objective & scope
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1 January 2019
IFRS 16 IAS 17 leases will no longer apply
Early application only with IFRS 15!

objective  To specify the principles for recognition,

measurement presentation and disclosure
of LEASES

1.2. Overview: objective & scope

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IFRS 16 does NOT apply to:

 Leases to explore for/use of minerals, oil, natural gas and similar

 Leases of biological asset (IAS 41)
 Intellectual property licenses (IFRS 16)
 Service concession arrangement (IFRIC 12)

 Rights under licensing agreements (IAS 38)

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 1.3. Lease
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What is a lease?

= contract that conveys the right to use an asset for a period of time
in exchange for consideration

Asset

CONTRACT Lessor
Lessee

Consideration

What is a lease?

8 = contract that conveys the right to use an asset for a period of time
in exchange for consideration

 In most arrangements => Very straightforward

 In some arrangement => Judgement necessary to assess

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 Does an arrangement contain a lease?
= Throughout the period of use, the customer has both of the
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following rights to the identified asset:

 The right to obtain  The right to direct the use

substantially all
Economic benefits
User makes:

• Exclusive right of use

• Including its primary output • Decisions about why and how
and by- products the asset is used
• Protective rights do not limit the
right to direct the use

Does an arrangement contain a lease?

= Throughout the period of use, the customer has both of the
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following rights to the identified asset:

Explicity Implicity

Capacity portion = Identified asset IF:

 Physically distinct OR  Substantially all of the capacity

Unit XYZ (v) 90% (v)

Warehouse Pipeline
(x) 60 m2 50% (x)

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 Does an arrangement contain a lease?
No
Q1: is there an identified asset?
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Yes
No
Q2: The right to obtain substantially
all of the economic benefits?
Yes
Supplier
Customer Q3: The right to direct the asset’s use –
customer? Suppliers? Neither party?
Neither
Yes
Q4: The right operate the asset-
Customer?
No
NO
LEASE Yes Q5: Did the customer design the asset No LEASE
(predetermined use)?

Example
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 Imagine you want to rent some space in the warehouse for storing
your goods. You’d like to enter into a 3-year rental contract. The
owner of that warehouse offers 2 options to you:
 You will occupy a certain area of XY cubic meters, but the specific
place will be determined by the owner of the warehouse, based on
actual usage of the warehouse and free storage.
 You will occupy the unit n. 13 of XY cubic meters in the sector A
of that warehouse. This place is assigned to you and no one can
change it during the duration of the contract.

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 Example
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 Both contracts look like lease contracts, and indeed, in both cases,
you would book the rental payments an expense in profit or loss
under older IAS 17.
 Under new IFRS 16, you need to assess whether these contracts
contain lease as defined in IFRS 16.
-> The first thing you would look at is whether an underlying
asset can be identified.

Identify a lease
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 Long story short:
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 The first contract does not contain any lease, because no asset can
be identified.
The reason is that the supplier (warehouse owner) can exchange
one place for another and you lease only certain capacity.
Therefore, you would account for rental payments as for expenses
in profit or loss.
 The second contract does contain a lease, because an underlying
asset can be identified– you are leasing the unit n. 13 of XY cubic
meters in the sector A.
Therefore, you need to account for this contract as for the lease and
it means recognizing some asset and a liability in your balance
sheet.

Combined contract: a lease & some services

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IAS 17
When you lease some assets under
operating lease (as called by older IAS
17), in most cases, a lessor provides
certain services to you, such as
maintenance, repairs, cleaning, etc.
Under older IAS 17, you did not need to
think about it too much, because you put
all lease payments as some rental expense
to your profit or loss.
IFRS 16
Under new IFRS 16, you need to split the
rental or lease payments into lease
element and non-lease element, because
you need to:
Account for a lease element as for a lease
under IFRS 16 (if it meets the criteria in
IFRS 16); and
Account for a service element as before,
in most cases as an expense in profit or
loss.

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 Combined contract: a lease & some services
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Example
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 From our example above: let’s say you took the option 2 and you
pay CU 10 000 per year. This payment includes the payment for
rental of the unit n. 13 and its cleaning once per week.
 Therefore, you need to split the payment of CU 10 000 into lease
element and cleaning element based on their relative stand-alone
selling prices (i.e. for similar contracts when got separately).
 You find out that you would be able to rent out similar unit in the
warehouse next door for CU 9 000 per year without cleaning
service, and you would need to pay CU 1 500 per year for its
cleaning.

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 Example
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 Based on this, you need to:

 Allocate CU 8 571: 10.000 CU* (CU 9 000/(CU 9 000+CU 1 500))
to the lease element and account for that as for the lease; and
 Allocate CU 1 429:10.000CU* (CU 1 500/(CU 9 000+CU 1 500))
to the service element and in this case, probably recognize it in
profit or loss as an expense for cleaning.
 Not an easy thing, especially when the stand-alone selling prices are
not readily available.

How to separate lease component?

=> An entity accounts for a lease component SEPARATELY from a non-lease
20 component if:

 The lessee can benefit  The asset is NOT highly dependent on or

from the use of asset interrelated with other asset in the contract

Lease component Non- Lease component

- 4- year contract
- Monthly: CU 10.000
Admin
- Total: CU 480.000 Rent of Maintenance
equipment CU 100
CU 9.400 CU 500

 Allocate CU 480.000 to rent and maintenance based on relative stand- alone prices
 LESSEES do not need to separate if they elect not to

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 1.4. Key terms
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IFRS 16- key terms

Dates: Inception of contract Conmmencement date

Earlier of
= when lessor makes an underlying
asset available for use by lessee
Date of lease Date of commitment
agreement by the parties

=> Assessment of the contract is made => Accounting starts

Assess contract on 20 Jan 20X1

- Contract signed: 20 jan 20X1
- Asset taken: 1 mar 20x1
- 1st rental payment: 1 may 20x1
Recognize right – of- use asset on 1 mar 20X1

IFRS 16- key terms

Lease term = non- cancellable period of the lease
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+ period covered by an option to extend (if option exercised)
+ period covered by an option to terminate (if option not exercised)

=> Assess whether the option will be exercised

Terms and conditions of option Costs of terminating the lease

 Leasehold improvements Importance of underlying asset

- Non- cancellable term: 3 years

- Extension for another 2 years possible  Lease term = 3 year

at market rates Lease term = 5 year

- Lessee built expensive glass partitions

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 IFRS 16- key terms
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Lease = payments made by a lessee to a lessor for the

payments right - of- use of an underlying asset during the
lease term
Fixed payments (also in- substance fixed payments) less any
incentives
Variable payments depending on an index or a rate
=> Include at prevailing rate/index at measurement date, remeasure
only when changed
Exercise price of purchase option (if to be exercised)
Penalties for terminating the lease
Residual value guarantees

2. Accounting by lessee
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2.1. Lessee’s accounting at the commencement date

2.2. Lessee’s accounting after the commencement date
2.3. Presentation & disclosure

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 2.1. At the commencement
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 The biggest change: lessee’s accounting for leases

 Recognize a right-of-use asset and corresponding liability
 Interest rate implicit in the lease

The biggest change: lessee’s accounting for leases

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 Here’s the biggest change: lessees

(those who take an asset under
lease) do not need to classify the
lease at its inception and determine
whether it’s finance or operating.

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 The biggest change: lessee’s accounting for leases
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 The reason is that IFRS 16 prescribes a single model of accounting

for every lease for the lessees. Very shortly:
 Lessee needs to recognize a right-of-use asset and
corresponding liability in its statement of financial position.
 An asset shall be depreciated and a liability amortized over the
lease term.

This model is very similar to the accounting for finance leases under
IAS 17. There are 2 exceptions from this rule:
 Lease of assets for less than 12 months (short-term leases), and
 Lease of assets of a low value (such as computers, furniture etc.).

Leases: Accounting by lessees

!!! No classification of leases!!!
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AT THE COMMENCEMENT

Right - of – use asset Lease liability

Lease payments
 Amount for lease liability
not paid at the
 Lease payments before/on
commencement
commencement date – lease
date
incentives
 Initial direct costs
 Estimate of dismantling costs
Discounted
Interest rate implicit in the lease

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 Lease payments
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Fixed payments Includes in-substance fixed payments/incentives

Variable lease payments Only for index or rate/rate at commencement

Residual value guarantees At amount lessee expects to pay

Purchase option exercise price If lessee reasonably certain to exercise

Payments for terminating If lessee term reflects termination by lessee

right of use asset

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Lease liability

Lease
Right of Initial direct costs Incentives
use received
asset
prepayments

Restore/dismantle

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 Leases: Accounting by lessees
!!! No classification of leases!!!
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AT THE COMMENCEMENT

Right - of – use asset Lease liability

Except for (optional)

Underlying asset of low
Lease term < 1 year value when new

=> Lease payments on a straight – line (or another systematic) basic

Exemple (cont)
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 At the commencement:
 You need to recognize right to use a warehouse in the amount
equal to the lease liability plus some other items like initial
direct costs.
 The lease liability is calculated at present value of lease
payments over the lease term. In this case you need to
calculate the present value of 3 payments of CU 8 571 (only
lease element) at 5%, which is CU 23 341.
 Accounting entry is then
 Debit Right-of-use asset: EUR 23 341
 Credit Lease Liability: EUR 23 341

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 How to determine the appropriate Discount rate ?

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Lessor Lessee

=> Interest rate implicit in the lease (IRR)  Interest rate implicit in the lease (IRR)
(difficult to determine)

 PV of lease  FV of
payments underlying asset  Incremental borrowing rate

PV of Lessor’s initial Similar term and security

unguaranteed direct cost Observable rates
residual value

2.2. After the commencement

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 Right - of – use asset &Lease liability

 Remeasurement
 modifications

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 Leases: Accounting by lessees

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Right - of – use asset Lease liability

Debit: Credit: Interest on the LL Constant periodic

P/L- depreciation ROU- accumulated interest rate
Ex depreciation
Debit: Credit:
Cost model (IAS 16) P/L- Interest Lease liability
Fair value model (IAS 40)
Reduction of the LL
Revaluation model (IAS 16)
Impairment test (IAS 36)
Debit: Credit:
Lease liability Cash/bank

Example (cont..)
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 Subsequently, when you make a payment and/or at the end of

reporting period, you need to:
 Recognize depreciation of the right-of-use asset over the lease
term, in this case CU 7 780 (CU 23 341/3) per year (I took
straight-line depreciation);
 Recognize remeasurement of the lease liability to include interest,
exclude amounts paid and take any lease modifications into
account.

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 Example (cont..)
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Lease liability Add interest at Less amounts Lease liability

Year b/f 5% paid c/f
1 23 341 1 167 - 8 571 15 937
2 15 937 797 - 8 571 8 163
3 8 163 408 - 8 571 0
Total n/a 2 372 - 25 713 n/a

Note: “b/f” means “brought forward (at the beginning of the year)”, “c/f”
means “carried forward (at the end of the year)”.

Summary of accounting entries under IFRS 16:

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When What How much Debit Credit

At the Right-of-use asset

commencement + lease liability 23 341 Right-of-use asset Lease liability

Interest 1 167 P/L: Interest expense Lease liability

Cash (bank
10 000 account)

8 571 Lease liability

P/L: Expenses for
Rental payment 1 429 cleaning services
At the end of
the year 1 Depreciation 7 780 P/L: Depreciation Right-of-use asset

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 Leases: Accounting by lessees

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Complications
Variable lease
payments

Do they depend on the index or rate?

Included in the lease payments  Excluded from the lease payments

Measured at the rate prevalent at  In profit or loss
the measurement date

Leases: Accounting by lessees

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Complications

Initial direct costs

= Incremental costs of obtaining a lease that would NOT have been

incurred without the lease (except for manufacturer or dealer
lessors)

Legal fees (contract drafting…)  internal cost

Commissions Certain legal advices

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 Leases: Accounting by lessees

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Complications Remeasurement
Not below
0, rest in
After the commencement date => Lessee remeasures P/L

Lease liability As an adjustment Right – of – use asset

HOW? => Discount revised lease payments

Revised discount rate Unchanged discount rate

WHEN?
 Change in lease term  Change in amounts for residual value
Change in option to purchase Change in future payments due to
assessment index/rate

Leases: Accounting by lessees

42 Lease modifications

= change in the scope, or consideration that was NOT part of original terms

Are the rights added to the lease contract to use one No

or more underlying assets? Lease modification
Yes =
No Change in existing
Does the consideration increase commensurate
with the stand – alone price for the increase in lease
scope?
Yes
LEASE
MODIFICATION =
SEPARATE LEASE

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 Leases: Accounting by lessees

43 Lease modifications

= change in the scope, or consideration that was NOT part of original terms
Lessee accounts:

Lease modification  Allocates the consideration in the modified contract

=
Change in existing Determines the lease term of the modified lease
lease Applies revised discount rate to remeasure the lease liability

 Adjustment to right – of – use asset

2.3. Presentation & disclosure

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Presentation
 Present right – of – use asset separately from other asset  Or disclose
 Present lease liabilities separately from other liabilities in the notes

 Present interest on the lease liability separately from depreciation of ROU asset
 Cash flows:

• Payments for principal  Financing activities

• Payments for interest  choice (Financing or operating)

• Payments for short – term  operating activities

leases, low – value asset
leases and variable payments
not within lease liability

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 2.3. Presentation & disclosure
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Disclosures
1. Disclosures of assets, liabilities, expenses and cash flows
In tabular format

 Depreciation of ROU by class  Income from subleasing of ROU assets

Interest expense on lease liabilities Cash outflow for leases
Expense related to short – term leases Addition to ROU assets
Expense related to low – value leases Gains/losses sale and leaseback
Expenses related to variable LP not Carrying amount of ROU by class
within LL

2. Additional disclosures

3. Accounting by lessor
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 3.1. Classification of leases

 3.2. Finance lease
 3.3. Operating lease
 3.4. Other: sublease; sale & leaseback
 3.5. Disclosure

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3.1. Classification of lease
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Are risks and rewards of ownership transferred to lessee?

RISK REWARDS

Finance lease Operating lease

Finance lease
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Situations
 Ownership transferred by the end of lease term
 Option to purchase the asset at price < fair value
 Lease term => major part of economic life of asset
 Present value of lease payments => close to fair value
 Leased assets are specialized nature

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 Example
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 An entity leases an asset. The lease is for three years with

payments of $5,000 annually. The fair value of the asset is $
13,000 and the present value of the minimum lease payments
is $ 12,886. The useful life of the asset is 3 years and the
entity is responsible for maintaining and insuring the asset

Indicators of Situations
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Indicators of situations that could also lead to a lease being classified

as a finance lease are:
(1) if the lessee can cancel the lease, the lessor’s losses associated with

the cancellation are borne by the lessee;

(2) gains, or losses, from the change in the fair value of the residual
accrue to the lessee (for example, in the form of a rent rebate
equalling most of the sales proceeds at the end of the lease); and
(3) the lessee has the ability to continue the lease for a secondary

period, at a rent that is substantially lower than market rent.

This generally indicates that the lessor has no wish to take back
the asset and only wishes to finance the transaction

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 Example Cancellation-cost to the lessee

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 You lease a photocopier for 7 years. If you cancel the lease, you
must pay all the remaining payments (till the end of the lease). This
is a finance lease, as there is no method of paying a reduced rental
for just the time elapsed since the start of the lease.

Accounting by lessors:
classification of leases
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Land + Building => Land = indefinite economic life

Separate classification

Land Building

Operating lease unless title

Operating or finance lease
passes at the end of lease term

=> Allocation of lease payments = based on proportion of fair value

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 Land and Buildings
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 Leases of land and of buildings are classified as operating, or

finance, leases in the same way as leases of other assets.
However, land normally has an indefinite economic life and, if
title is not to pass to the lessee by the end of the lease term,
the lessee normally does not receive substantially all of the
risks and rewards incidental to ownership, and the lease of
land will be an operating lease.

3.2. Accounting by lessor: finance

lease
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 3.2.1. At the commencement

 3.2.1. After the commencement

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 3.2.1. At the commencement
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At the commencement

Debit: Credit:
Lease receivable PPE

Credit:
P/L gain on sale of PPE
Net investment in the lease (or Debit if Loss)

 Fixed payments
Payments not
 Variable payments (index) + initial direct
paid at the
 Residual value guarantees costs
commencement
 Exercise price of purchase option
date
 Penalties for terminating

3.2.2. After the commencement

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After the commencement

LR: lease payments

Reduction of LR Finance income

Debit: Cash Credit: lease receivable
P/L – interest income

Constant periodic rate of return

Apply IFRS 9 to the net investment in the lease (impairment, derecognition)

Lease remeasurement and modification => Similar as lessees

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 Accounting by lessor:
Finance lease
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Manufacturer / Dealer lessors

Selling profit Finance lease

 Revenue – costs of sales  Initial direct costs in P/L

 As outright sales under IFRS 15  If artificially low interest rate
=> selling profit is restricted

3.3. Accounting by lessor: operating

lease
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Accounting by lessor:
Operating lease

Lease payments Underlying asset

 Revenue on straight – line (or other) basic  Initial direct costs are added to
the asset
 Depretiation

Manufacturer / Dealer lessors => No selling profit

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 3.3. Accounting by lessor: operating
lease
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 Accounting for operating leases:

 Leased assets remain on B/S

 Recognize lease income on straight-line basis over lease term

 Add initial direct costs to leased asset and depreciate over

lease term on same basis as lease income is recognized
 Depreciation and impairment covered by IAS 16, 38 and 36

Lessor accounting
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• Derecognise the right-of-use asset (1) and recognise instead a

lease receivable equal to the net investment in the sub-lease
(2);
• Recognise the difference between (1) and (2) as a gain or loss
Finance in the income statement;
lease • Retain the previously recognised lease liability in capacity as
lessee and recognise interest expense thereon; and
• Recognise interest income on the lease receivable in capacity
as finance lessor.

• Retain the right-of-use asset in capacity as lessee and continue to

recognise depreciation thereon;
Operating • Retain the lease liability in capacity as lessee and continue to
lease recognise interest expense thereon;
• Recognise lease income from the sub-lease in capacity as
operating lessor

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 3.4. Accounting by lessor: other
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 Sublease
 Sale & leaseback

Accounting by lessor:
sublease
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Original lessee
Original lessee Lessee
Lessor Head lease Sublease (sublessee)
Intermediatelessor
Intermediate lessor

Type of sublease Accounting by the intermediate lessor

Operating Keeps recognizing the head lease as before

Debit Net investment in the lease / credit

Finance ROU asset (difference in profit or loss)
Head lease = short - term Recognition exemption; sublease = operating

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 Sale & leaseback
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Sale
Seller = lessee

Buyer = lessor

Leases back

Sale & leaseback

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IFRS 15- Revenue from

Is the transfer of asset a sale under
contracts with customers?

Seller (lessee):
 Seller (lessee):
• Right – of – use asset at proportion
• Continues to recognize an asset
of the previous carrying amount
• Financial liability (IFRS 9)
• Gain/loss related to the transferred
Buyer (lessor):
right only
• Financial asset (IFRS 9)
Buyer (Lessor):
• Asset under applicable standards
• Lease under IFRS 16
Leaseback:
• As for any other (adjustment for
off – market terms)

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 3.5. Accounting by lessor: disclosure
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In tabular format

=> For finance lease => For operating lease
 Selling profit or loss  Lease income
Finance income on net inv. In the lease Income related to variable
Income related to variable LP not within LR LP not depending on an
index/rate
Additional quantitative and qualitative
disclosures
Maturity analysis (refer to examples)

IFRS 16 how to implement?

= mandatory effective date
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(earlier application with IFRS 15 is permitted)

How to make a transaction?

Full retrospective adoption Modified retrospective adoption

= retrospectively to = retrospectively with cumulative
each prior reporting period effect at the date of initial application

No need to reassess whether contract Comparatives presented under prior

is/contains a lease at the date of initial IFRS
application (if IAS 17/IFRIC 4 applied) IFRS 16 applied to existing and new
contracts onwards
Adjustment to opening retained earnings

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