The Issue

Under the old IAS 17 Leases, entities were able to classify a significant number of
liabilities as operating leases and as a result keep both the assets and liability off
balance sheet. However, IFRS 16 Leases requires most leases to be recognized as an
asset and a liability. Lessor accounting continues to apply IAS 17.

Identifying a lease
A contract is or may contain a lease if it conveys the right to control the useof an
asset for a period of time in exchange for a consideration (usually cash).
Right to control means the customer has the right to direct assets use and obtain
substantially all of the economic benefits.

Separating lease and service components

Contracts often contain both lease and service components and in such case, you need
to split the rental or lease payments into lease component and non-lease component,
and account for a lease component under IFRS 16 and a service component as
an expense in profit or loss.

Initial Recognition
Lessee recognizes the right to control the use of an asset as non-current asset and a
liability. The liability is initially measured at the present value of minimum lease
payments over the lease term discounted at the rate implicit in the lease. Also
capitalize any direct costs such as legal fee.

Subsequent Measurement
Asset shall be recognized under recognition criteria of IAS 16 Property Plant and
Equipment or IAS 40 Investment Property i.e. depreciation or revaluation as
consistent with its class of assets. The lease liability would be paid off over time
using the actuarial method. Lease payments would reduce the lease liability when paid.
Recognition Exemption

A lessee may elect to account for lease payments as an expense on straight line basis
over the lease term if:
·        Lease term is 12 months or less
·        Underlying assets has a low value e.g. a Computer or a chair

Transition
IFRS 16 provides two options for transitioning existing operating leases into the model
required:
·        Full retrospective application as if IFRS 16 always applied; or
·        Partial retrospective application as at the date of initial application (start of
financial year when IFRS 16 is first adopted). Under the partial method the liability and
right-to-use asset can be recorded as the present value of remaining lease payments.

Application date
IFRS 16 is effective for reporting periods beginning on or after 1 January 2019 (early
application possible if IFRS 15 Revenue from Contracts with Customers is also adopted
early).