IFRS 16 Additional Examples

Margarita Kouloumbri
BA(Hons, MSc, ACA)
mkouloumbri@istosglobal.com
 Example 1

• In the example below, we’ll outline the steps to calculate the

lessee’s opening lease liability and ROU asset and present the
complete amortization schedule, followed by the initial transition
journal entry and the journal entry for the first period’s activity.

• Commencement Date: January 1, 2021

Lease Term: 10 years
Lease Payment (paid in arrears): $10,000 annually
Lessee’s Incremental Borrowing Rate: 6%
Useful Life of Underlying Asset: 25 years
Amortization schedule
Based on the facts above, we’ll take the following steps
to generate the IFRS 16 amortization schedule:
1. Calculate the initial lease liability as the present value of
the total remaining lease payments as of the
commencement date.
2. Calculate the initial right-of-use asset as the lease liability
at commencement plus or minus any necessary
adjustments.
3. Amortize the lease liability over the lease term to reflect
both lease payments and interest on the liability using
the effective interest method.
4. 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.
To calculate the present value of the future
lease payments, apply the
lessee’s incremental borrowing rate of 6%.

Per IFRS 16, lessees are encouraged to use

the rate implicit in their lease. However, if
that is not readily determinable, then a
lessee is provided further leeway to use
their incremental borrowing rate as we have
done in this example.
As we can see in the above schedule, because no
adjustments were necessary to calculate the
opening ROU asset at commencement, the ROU
asset is equal to the lease liability. Thereafter the
ROU asset is depreciated in a systematic and
rational manner (e.g. straight-line in our case) over
the lesser of the lease term or useful life of the
underlying asset.
In our example, the ROU asset is depreciated over
the 10-year lease term, which is shorter than the
leased asset’s useful life of 25 years.
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:
 Example 2

Customer X enters into a 12-year contract with Supplier Y for the

right to use three fibres within a fibre optic cable between New
York and London. The contract identifies three of the cable’s 20
fibres for use by Customer X.
The three fibres are dedicated solely to Customer X’s data for the
duration of the contract term. Assume that Supplier Y does not
have a substantive substitution right
Analysis: The three fibres are identified assets because they are
physically distinct and explicitly specified in the contract.
 Example 3

Customer X enters into a five-year contract with Supplier Y

for the right to transport oil from Country A to Country
B through Supplier Y’s pipeline. The contract provides
that Customer X will have the right to use of 95% of the
pipeline’s capacity throughout the term of the
arrangement.
Analysis: The capacity portion of the pipeline is an
identified asset. While 95% of the pipeline’s capacity is
not physically distinct from the remaining capacity of
the pipeline, it represents substantially all of the
capacity of the entire pipeline and thereby provides
Customer X with the right to obtain substantially all of
the economic benefits from use of the pipeline.
 Example 4

Assume the same facts as in Scenario A, except that Customer X has

the right to use 60% of the pipeline’s capacity throughout the
term of the arrangement.

Analysis: The capacity portion of the pipeline is not an identified

asset because 60% of the pipeline’s capacity is less than
substantially all of the capacity of the pipeline. Customer X does
not have the right to obtain substantially all of the economic
benefits from use of the pipeline.
 Example 5
Assume that an electronic data storage provider (supplier)
provides services through a centralised data centre,
that involve the use of a specified server (Server No. 9).
The supplier maintains many identical servers in a
single accessible location and determines, at inception
of the contract, that it is permitted to and can easily
substitute another server without the customer’s
consent throughout the period of use. Further, the
supplier would benefit economically from substituting
an alternative asset, because doing this would allow
the supplier to optimise the performance of its
network at only a nominal cost.
 Example 5

In addition, the supplier has made clear that it has negotiated this
right of substitution as an important right in the arrangement, and
the substitution right affected the pricing of the arrangement.

Analysis: The customer does not have the right to use an identified
asset because, at the inception of the contract, the supplier has
the practical ability to substitute the server and would benefit
economically from such a substitution. However, if the customer
could not readily determine whether the supplier had a
substantive substitution right (e.g., there is insufficient
transparency into the supplier’s operations), the customer would
presume the substitution right is not substantive and conclude
that there is an identified asset.
 Example 6

Assume the same facts as in Scenario A except that Server No. 9 is

customised, and the supplier does not have the practical ability to
substitute the customised asset throughout the period of use.
Additionally, it is unclear whether the supplier would benefit
economically from sourcing a similar alternative asset.

Analysis: Because the supplier does not have the practical ability to
substitute the asset and there is no evidence of economic benefit
to the supplier for substituting the asset, the substitution right is
non-substantive, and Server No. 9 would be an identified asset. In
this case, neither of the conditions of a substitution right is met.
As a reminder, both conditions must be met for the supplier to
have a substantive substitution right.
 Example 7

Entity A enters into a 10-year lease of property. The lease payment for
the first year is CU1,000. The lease payments are linked to the
consumer price index (CPI), i.e., not a floating interest rate. The
CPI at the beginning of the first year is 100. Lease payments are
updated at the end of every second year. At the end of year one,
the CPI is 105. At the end of year two, the CPI is 108.
Analysis: At the lease commencement date, the lease payments are
CU1,000 per year for 10 years. Entity A does not take into
consideration the potential future changes in the index. At the end
of year one the payments have not changed, so the liability is not
updated. At the end of year two, when the lease payments
change, Entity A updates the remaining eight lease payments to
CU1,080 per year (CU1,000/100*108) and does not change its
discount rate to remeasure the lease liability (and right-of-use
asset).
Any questions??