2023/07/17

CACC022
(2ND SEMESTER2023)

MODULE 2:
IFRS 16 LEASES

 Read Chapter 15: ‘Leases’ in your prescribed textbook –

‘Financial Accounting: IFRS Principles’.
 Attend the lecture and make notes on things that you need
clarity on so that you can consult with the lecturer.
 Study Chapter 15: ‘Leases’ in your prescribed textbook –
‘Financial Accounting: IFRS Principles’ and work through all
examples.
 Understand the new concepts that are explained in the textbook.
 Do the tutorial question and Attend tutorial class and
participate during tutorials.
 Do questions in question bank and text book.
 Write the concept test in order to evaluate your understanding of
the work.
 CONSULT! CONSULT! CONSULT!

→ Identify whether or not a contract contains a

lease.
→ Recognise and measure the relevant right-of-use
asset, lease liability and finance cost that arise
from lease payments by the lessee.
→ Present leases in the annual financial statements
of lessees.

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Identifying a ASSET must be an ‘IDENTIFIED ASSET’

LEASE Explicitly / Must be

implicitly identified. physically distinct.

Assets are NOT IDENTIFIED if the

supplier has a substantive right to
substitute it.

The lessee must have a ‘RIGHT TO CONTROL THE USE’ of the asset.

Lessee obtain substantially The lessee has the right to

all the economic benefits direct the use of the identified
from the use of the asset. asset.

EXAMPLE 1: Identifying a
lease
• CUSTOMER enters into a contract with an information
technology company (SUPPLIER) for the use of an
identified server for three years.
• SUPPLIER delivers and installs the server at CUSTOMER’s
premises in accordance with CUSTOMER’s instructions, and
provides repair and maintenance services for the server, as
needed, throughout the period of use.
• SUPPLIER substitutes the server only in the case of
malfunction.
• CUSTOMER decides on which data to store on the server
and how to integrate the server within its operations.
• CUSTOMER can change its decisions in this regard
throughout the period of use.

EXAMPLE 2: Identifying a lease

A contract between Macro Ltd and Dynamik provides Macro with

the use of 10 trucks for five years. The truck registration
numbers have been listed on the contract. The contract specifies
the trucks; the trucks are owned by Dynamik.
Macro determines when, where and which goods are to be
transported using the trucks. When the trucks are not in use, they
are kept at Macro’s premises. Macro can use the trucks for another
purpose (e.g. transporting livestock for Macro’s own shareholders) if
it so chooses.
However, the contract specifies that Macro cannot transport
particular types of cargo (e.g. explosives).
If a particular truck needs to be serviced or repaired, Dynamik is
required to substitute with a truck of the same type. Otherwise, and
other than on default by Macro, Dynamik cannot retrieve the during
the five-year period.

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EXAMPLE 3: Identifying a
lease
CUSTOMER enters into a contract with an aircraft owner (SUPPLIER)
for the use of an explicitly specified aircraft for a two-year period. The
contract details the interior and exterior specifications for the aircraft.
There are contractual and legal restrictions in the contract on where the
aircraft can fly. Subject to those restrictions, CUSTOMER determines
where and when the aircraft will fly, and which passengers and cargo will
be transported on the aircraft.
SUPPLIER is responsible for operating the aircraft, using its own crew.
CUSTOMER is prohibited from hiring another operator for the aircraft or
operating the aircraft itself during the term of the contract.
SUPPLIER is permitted to substitute the aircraft at any time during
the two-year period and must substitute the aircraft if it is not
working. Any substitute aircraft must meet the interior and exterior
specifications of the contract. There are significant costs involved in
outfitting an aircraft in SUPPLIER’s fleet to meet CUSTOMER’s
specifications.

EXAMPLE 4: Identifying a
lease
A coffee company (CUSTOMER) enters into a contract with an
airport operator (SUPPLIER) to use a space in the airport to sell
its goods for a three-year period.
The contract states the amount of space and that the space may
be located at any one of several boarding areas within the airport.

SUPPLIER has the right to change the location of the space

allocated to CUSTOMER at any time during the period of use.
There are minimal costs to SUPPLIER associated with changing
the space for the CUSTOMER.
CUSTOMER uses a kiosk (that it owns) that can be moved easily
to sell its goods. There are many areas in the airport that are
available and that would meet the specifications for the space in
the contract.

EXAMPLE 5: Identifying a lease

A contract between Computer Lab Ltd “thereafter Customer” and Ricoh Ltd
(thereafter Supplier) requires the Supplier to install 4 heavy duty printers
called “Ricoh” at the Computer Lab for a period of five years. The Supplier
provides the “4 Ricoh printers” as part of the contract.

The contract states the number of operating hours and the amount of
printing that the printers may do over the specified period. The supplier
has a large pool of printers that can be used to fulfil the requirements
of the contract.

The printers are stored at Ricoh’s premises when not being used at the
computer lab e.g during winter/summer holidays.

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RECOGNITION AND MEASUREMENT – NECESSARY TERMINOLOGY

LEASE TERM = Non-cancellable period + extension LEASE INCENTIVES = Payments

periods (only if reasonably certain to exercise made by a lessor to a lessee
renewal option) + cancellable periods (only if associated with a lease or the
reasonably certain that it won’t exercise the reimbursement or assumption by a
cancellation option) lessor of costs of a lessee.

FIXED PAYMENTS =
VARIABLE LEASE PAYMENTS = the portion of payments made by a
Payments made by a
lessee to a lessor for the right to use an underlying asset during the
lessee to a lessor for
lease term that varies because of changes in facts or circumstances
the right to use an
after the commencement date, other than the passage of time.
underlying asset
during the lease term
A RESIDUAL VALUE GUARANTEE = A guarantee made to a lessor excluding variable
that the value (or part thereof) of an underlying asset at the end of a lease payments.
lease will be at least a specified amount.

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RECOGNITION AND MEASUREMENT – NECESSARY TERMINOLOGY

THE INTEREST RATE IMPLICIT IN THE LEASE = the rate of INCREMENTAL

interest that causes the present value of (a) the lease payments BORROWING RATE = the
and (b) the unguaranteed residual value to equal the sum of (i) rate of interest the LESSEE
the fair value of the underlying asset and (ii) any initial direct would have to pay to
costs of the LESSOR. borrow over a similar term,
and with similar security, the
THE UNGUARANTEED RESIDUAL VALUE = that portion of funds necessary to obtain
the residual value of the underlying asset, the realisation of an asset of a similar value
which by a lessor is not assured or is guaranteed solely by a to the right-of-use asset in a
party related to the lessor. similar economic
environment.

INITIAL DIRECT COSTS = incremental costs of obtaining a lease that would not have been
incurred if the lease had not been obtained EXCEPT for such costs incurred by a manufacturer
/ dealer lessor in connection with a finance lease.
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RECOGNITION EXEMPTIONS!!

Lease term < 1 year The lessee may

if no option to extend elect to:
Recognise lease
payments as an
EXPENSE on a
Underlying asset of low
straight-line (or
value when new
other systematic)
basis over the
lease term.
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EXAMPLE 6: Leases of low value assets

A lessee in the pharmaceutical manufacturing and distribution industry has the
following leases:
 Leases of real estate (both office buildings and warehouses).
 Leases of manufacturing equipment.
 Leases of trucks and vans used for delivery purposes, of varying size and value.
 Leases of IT equipment for use by individual employees (such as laptop
computers, desktop computers, hand held computer devices, desktop printers
and mobile phones).
 Leases of servers, including many individual modules that increase the storage
capacity of those servers. The modules have been added to the mainframe
servers over time as the lessee has needed to increase the storage capacity of
the servers.
 Leases of office equipment (such as office furniture, water dispensers and high-
capacity multifunction photocopier devices).

Can you identify low value asset leases from the above? Think – what do
you look at? Does it depend on the size of the entity? 13
• $5 000 per IFRS 16: BC100?

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EXAMPLE 7: Leases of low value assets

Zet Ltd entered into a non-cancellable lease on 1 January
2019 to lease five laptop computers for its employees from
Rent Ltd. The contract is a lease in terms of IFRS 16.
The initial lease term is six years. The lease payments are
R2 500 per month for the first four years and R1 500 per
month for the final two years.
Zet Ltd has the option to extend the lease term for a further
two years at R1 000 per month. At commencement of the
lease Zet Ltd is reasonably certain that it will exercise the
option to extend the lease term by a further two years.
Zet Ltd elected to apply the recognition exemption in
respect of low value assets to this lease agreement.
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ACCOUNTING FOR LEASES - LESSEES

At the COMMENCEMENT
DEBIT CREDIT

Lease liability [PV OF UNPAID LEASE

Right-of-use asset [AT COST] PAYMENTS]
 The amount of the lease liability recognised.  Fixed payments (including in-substance fixed
 Any lease payments made at or before the payments) less any lease incentives
commencement date (e.g. deposit), less any receivable.
lease incentives.  Variable lease payments dependant on index
 Any initial direct costs incurred (i.e. the or rate.
incremental costs of obtaining a lease which  Residual value guarantees.
would not have been incurred if the lease had  The exercise price of a reasonably certain
not been obtained); and purchase option.
 An estimate of costs to be incurred to dismantle  Lease termination penalties, if a lessee
and remove an asset and restore the site based termination option was considered in setting
on the terms and conditions of the lease. the lease term.
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EXAMPLE 8: Initial measurement of right-of-

use asset
Thabo Ltd (LESSEE) leases a machine under a lease
agreement from 1 June 2012 from Thembe Ltd
(LESSOR). Thabo Ltd did not elect the simplified
accounting treatment for the machine.
The details of the lease agreement are as follows:

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EXAMPLE 8: Initial measurement of right-of-

use asset (continues…)
Lease term: 3 years
Payment made on 17/01/2012 relating to the design of the machine R19 500
Non-refundable deposit paid on 26/05/2012 to secure the lease R15 000
Legal fee paid to a legal advisor to check the contract R2 500
50% of the legal fee reimbursed by Thembe Ltd in cash R1 250
Cost to assemble the machine R5 000
Annual inspection cost to be paid by Thabo Ltd R3 500
Estimated future dismantling cost to be paid on 31/05/2015 R7 500
Pre-tax discount rate applicable to the dismantling provision 9%
Initial measurement of lease liability on 01/06/2012 R46 000
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EXAMPLE 9: Initial measurement of lease

liability (In-substance fixed payment)
Flexi Ltd provides various training classes, including
yoga. Flexi Ltd leases a studio from Health Ltd in terms
of a lease contract.
The lease contract specifies that Flexi Ltd must pay an
amount of R400 per hour for the use of the studio with
a minimum annual payment of R500 000.
Flexi Ltd expects to use the studio for 1 500 hours per
year.
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EXAMPLE 10: Initial measurement of lease liability

(Lease payments that depend on index)
Medex Ltd (LESSEE) operates in an inflationary
environment. On 1 March 20X6, Medex Ltd entered
into a six-year lease contract with annual lease
payments of R250 000, payable at the beginning of
each year. Every two years, lease payments will be
adjusted to reflect changes in the Consumer Price
Index (CPI) for the preceding 24 months. On 1 March
20X6, the CPI was 125. On 1 March 20X8, the CPI is
140.
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EXAMPLE 11: Initial measurement of lease liability

(variable lease payments)
Medex Ltd (LESSEE) operates in an inflationary environment. On
1 March 20X6, Medex Ltd entered into a six-year lease contract
with annual lease payments of R250 000, payable at the
beginning of each year. Every two years, lease payments will be
adjusted to reflect changes in the Consumer Price Index (CPI) for
the preceding 24 months. On 1 March 20X6, the CPI was 125.
On 1 March 20X8, the CPI is 140.
Medex Ltd is also required to make variable lease payments for
each year of the lease, which are determined as 2.5% of Medex’s
audited sales generated from the underlying asset.

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EXAMPLE 12: Initial recognition & measurement

LESSEE enters into a 10-year lease of a floor of a building, with
an option to extend for five years. Lease payments are R50 000
per year during the initial term and R55 000 per year during the
optional period, all payable at the beginning of each year.
To obtain the lease, LESSEE incurs initial direct costs of R20
000, of which R15 000 relates to a payment to a former tenant
occupying that floor of the building and R5 000 relates to a
commission paid to the real estate agent that arranged the lease.
As an incentive to LESSEE for entering into the lease, LESSOR
agrees to reimburse to LESSEE the real estate commission of R5
000 and the LESSEE’s leasehold improvements of R7 000.

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EXAMPLE 12: Initial recognition &

measurement (continued…)
At the commencement date, LESSEE concludes that it
is not reasonably certain to exercise the option to
extend the lease.
The interest rate implicit in the lease is not readily
determinable. LESSEE’s incremental borrowing rate is
5% per annum, which reflects the fixed rate at which
LESSEE could borrow an amount similar to the value of
the right-of-use asset, in the same currency for a 10-
year term, and with similar collateral.
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EXAMPLE 13: Initial recognition & measurement

On 1 January 20.16 Peglarea Ltd entered into a lease
agreement with Platinum Ltd to lease a new office
building from Platinum Ltd for a non-cancellable period
of ten years, starting on 1 January 20.16.
At the end of the lease term, Peglarea has guaranteed
Platinum Ltd that they will receive a residual value of at
least R25 000 000 for the office building. On 1 January
20.16, Peglarea Ltd expects that it will have to make a
payment of R2 000 000 under the residual value
guarantee.
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EXAMPLE 13: Initial recognition & measurement

(continued…)
Platinum Ltd determined on 1 January 20.16 that it will be
able to sell the building to an independent 3rd party for R28
000 000 at the end of the lease term.
The following information has been extracted from the
lease contract:
 1 January 20.16 is the commencement date of the lease.
 Platinum Ltd incurred initial direct costs of R5 000 related to the lease
agreement and paid in cash.
 Peglarea Ltd incurred initial direct costs of R15 000 related to the lease
and paid in cash.
 Annual lease payments, payable in arrears are R7 500 000.
 The fair value of the building on commencement date is R51 200 000
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ACCOUNTING FOR LEASES - LESSEES

SUBSEQUENT MEASUREMENT

ROU ASSET LEASE LIABILITY

[COST MODEL In terms of IAS16 i.e.
initial cost less accumulated depreciation
and impairment losses]
[FAIR VALUE in terms of IAS40]
Initial lease liability + interest accrued –
lease payment  adjustments with
regards to lease modification or revised
in-substance fixed lease payments

[REVALUATION MODEL in terms of

IAS16 if the ROU asset relates to a class
of PPE to which the lessee applies the
revaluation model]
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EXAMPLE 14: Subsequent measurement

On 1 January 20.16 Peglarea Ltd entered into a lease agreement
with Platinum Ltd to lease a new office building from Platinum Ltd
for a non-cancellable period of ten years, starting on 1 January
20.16.
At the end of the lease term, Peglarea has guaranteed Platinum
Ltd that they will receive a residual value of at least R25 000 000
for the office building. On 1 January 20.16, Peglarea Ltd expects
that it will have to make a payment of R2 000 000 under the
residual value guarantee.
Platinum Ltd determined on 1 January 20.16 that it will be able to
sell the building to an independent 3rd party for R28 000 000 at
the end of the lease term.
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EXAMPLE 14: Subsequent measurement

(continued…)
The following information has been extracted from the lease contract:
 1 January 20.16 is the commencement date of the lease.
 Platinum Ltd incurred initial direct costs of R5 000 related to the lease
agreement and paid in cash.
 Peglarea Ltd incurred initial direct costs of R15 000 related to the lease and paid
in cash.
 Annual lease payments, payable in arrears are R7 500 000.
 The fair value of the building on commencement date is R51 200 000
 The lease does not include any options to extend or terminate the lease and
ownership of the office building does not transfer to Peglarea Ltd at the end of
the lease term.
 This office building is accounted for in accordance with the cost model of IAS16
Property, plant and equipment.
 In terms of IAS 16, depreciation is calculated in accordance with the straight-line
method over the estimated useful life of 20 years.
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END OF CLASS

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