IFRS 16

LEASES
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Learning objectives

After studying this topic, you should be able to:

• Identify a lease.
• Understand the recognition and measurement
of leases.
• Discuss the information of leases that is
presented and disclosed in financial statements.
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Contents

1. What is a lease?
 Does the arrangement contain a lease?
 Determine the lease components
2. Accounting by lessee
 Recognition, Measurement and Disclosures
3. Accounting by lessor
 Recognition, Measurement and Disclosures
4 Scope

IFRS 16 does not apply to:

• Leases to explore for / use of minerals, oil,
natural gas and similar
• Leases of biological assets (IAS 41)
• Intellectual property licenses (IFRS 15)
• Service concession arrangements (IFRIC 12)
• Rights under licensing agreements (IAS 38)
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1. What is a lease?
A lease is contract that conveys the right to control the use
of an identified asset for a period of time in exchange for
(Lease term)
consideration
(Lease payments)

Asset

CONTRACT Lessor Lessee

Consideration
6 1.1. Does an arrangement contain a lease?
Throughout the period of use, the customer has
both of the following rights to the identified asset

1 2

✓ The right to obtain substantially ✓ The right to direct the use

all of the economic benefits
(for example, by having exclusive use) • Deside how and for what
purpose the asset will be used
• by using, holding or subleasing
the asset • Protective rights do not limit
the right to direct the use
• Including its primary output and
by-products
7 1.1. Does an arrangement contain a lease?
Throughout the period of use, the customer has
both of the following rights to the identified asset
(Explicity or Implicity)

A capacity portion of an asset is an identified asset IF…

Physically distinct OR Substantially all of the capacity

Ex: Warehouse Ex: Pipeline

Unit XYZ (yes) 60 m2 (no) 90% (yes) 50% (no)
8 1.1. Does an arrangement contain a lease?
No
Q1: Is there an identified asset?
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
thoughout the period of use?
How and for what purpose the asset
Neither
will be used is predetermined
Yes Q4: The right to operate the asset
thoughout the period of use?
No
Yes NO
Q5: The right to design the asset LEASE
LEASE
thoughout the period of use? No
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13 Separating components of a contract
Additional lease components Additional non-lease
components
A lessee shall allocate the lease A lessee may elect to / not to
payments (consideration) to each allocate the lease payments
lease component (underlying (consideration) to lease
asset) if both: component and non-lease
- The lessee can benefit from use components, and:
of the underlying asset either on - Account for the lease
its own or together with other component as a lease under
resources that are readily IFRS 16 (if it meets the criteria in
available to the lessee; and IFRS 16); and
- The underlying asset is neither - Account for any non-lease
highly dependent on, nor highly components (services) as
interrelated with, the other expenses in profit or loss.
underlying assets in the contract.
14 Separating components of a contract
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1.2. Lease components - 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

Ex:
- Contract signed: 20 Jan 20X1
✓Assess contract on 20 Jan 20X1
- Asset taken: 1 Mar 20x1
✓Recognize right–of–use asset on 1 Mar 20X1
- 1st rental payment: 1 May 20x1
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1.2. Lease components - Lease term
Lease term = non-cancellable period of the lease
+ period covered by an option to extend (if option exercised)
+ period covered by an option to terminate (if option not exercised)

Note: Assess whether the option will be exercised

✓ Terms and conditions of option ✓ Costs of terminating the lease
✓ Leasehold improvements ✓ Importance of underlying asset

Ex:
- 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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1.2. Lease components - Lease payments
Lease payments = payments made by a lessee to a lessor for the right-of use
of an underlying asset during the lease term

Include:
✓ 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
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2. Accounting by lessee

2.1. At the commencement

2.2. After the commencement
2.3. Presentation & disclosure
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2.1. At the commencement

2.1.1. Right-of-use asset and lease liability

2.1.2. Interest rate implicit in the lease
25 2.1.1 Right-of-use asset & lease liability
!!! No classification of leases !!!

Right-of-use asset Lease liability

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

Except for (optional)

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

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

26 Right-of-use asset

Lease liability

Right of Prepayments Lease

use Incentives
asset received
Initial direct costs

Restore/Dismantle
27 Complications - Initial direct costs

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

28 Lease payments

Fixed payments Includes in-substance fixed payments/incentives

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

Purchase option exercise price If lessee reasonably certain to exercise

Payments for terminating If lessee term reflects termination by lessee

Residual value guarantees At amount lessee expects to pay

29 Complications - Variable lease payments

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 ✓ In profit or loss
at the measurement date
30 Example (cont)

 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: CU 23.341
Credit Lease Liability: CU 23.341
31 2.1.2. Interest rate implicit in the lease
Discount rate

Lessor Lessee
Interest rate Interest rate
implicit in the lease (IRR) implicit in the lease (IRR)
(difficult to determine)

✓ PV of lease Incremental borrowing rate

✓ FV of
payments
underlying asset ✓Similar term and security
✓Observable rates
✓ PV of
✓ Lessor’s initial
unguaranteed
direct cost
residual value
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2.2. After the commencement

2.2.1. Right–Of–Use Asset and Lease Liability

2.2.2. Remeasurement
2.2.3. Modifications
33 2.2.1. Right–Of–Use Asset & Lease Liability

Right-of-use asset Lease liability

Debit: Credit:
✓ Interest on the lease liability
P/L-Depreciation ROU-Accumulated
Expense Depreciation Constant periodic interest rate

Debit: Credit:
✓ Cost model (IAS 16) P/L-Interest Expense Lease Liability
✓ Fair value model (IAS 40)
✓ Reduction of the lease liability
✓ Revaluation model (IAS 16)
✓ Impairment test (IAS 36) Debit: Credit:
Lease liability Cash/bank
34 Example (cont.)

 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.
35 Example (cont..)

Lease Add (+) Less (-) Lease

Year Liability b/f Interest at 5% amounts paid Liability 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 2.372 - 25.713

Note:
“b/f” means “brought forward (at the beginning of the year)”,
“c/f” means “carried forward (at the end of the year)”.
36 Summary of accounting entries under IFRS 16

How
When What Debit Credit
much
At the ROU asset
ROU asset Lease liability 23.341
commencement Lease liability
P/L: Interest
Interest Lease liability 1.167
expense
Lease liability 8.571
P/L: Expenses
At the end of Rental for cleaning 1.429
the year 1 payment services

Cash (bank account) 10.000

Depreciation P/L: Depreciation ROU asset 7.780

37 2.2.2. Remeasurement
After the commencement date
Not below 0,
Lessee remeasures The rest in 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 option to purchase assessment
✓ Change in amounts for residual value
✓ Change in future payments due to index/rate
38 2.2.3. Modifications

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

Are the rights added to the lease contract to use No

one or more underlying assets? Lease
modification
Yes
=
Does the consideration increase No CHANGE IN
commensurate with the stand – alone price for EXISTING LEASE
the increase in scope?
Yes

Lease modification = SEPARATE LEASE

39 2.2.3. Modifications

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

Lessee accounts:

Lease ✓ Allocates the consideration in the modified contract

modification
= ✓ Determines the lease term of the modified lease
CHANGE IN
EXISTING LEASE ✓ Applies revised discount rate to remeasure the lease liability

✓ Adjustment to right–of–use asset

40 2.3. Presentation & disclosure
Presentation

✓ Present right – of – use asset separately from other asset

Or disclose in
✓ Present lease liabilities separately from other liabilities 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 leases,  Operating activities

low–value asset leases and
variable payments not within
lease liability
41 2.3. Presentation & disclosure
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
✓ Expense related to short – term leases
✓ Expense related to low – value leases
✓ Expenses related to variable LP not
within LL
✓ Cash outflow for leases
✓ Addition to ROU assets
✓ Gains/losses sale and leaseback
✓ Carrying amount of ROU by class

2. Additional disclosures
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3. Accounting by lessor

3.1. Classification of leases

3.2. Finance lease
3.3. Operating lease
3.4. Other: sublease; sale and leaseback
3.5. Disclosure
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3.1. Classification of leases

Are risks and rewards of ownership transferred to lessee?

RISK REWARDS

Finance lease Operating lease

44 Finance lease

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

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.
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Indicators of Situations
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

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.
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Land and Buildings

Land has indefinite Land and Building

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

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.
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3.2. Finance lease

3.2.1. At the commencement

3.2.1. After the commencement
51 3.2.1. At the commencement

At the commencement

Debit: Credit:
Lease Receivable PPE
Credit:
P/L Gain on sale of
Net investment in the lease PPE (or Debit if Loss)
✓ Fixed payments
✓ Variable payments (index) Payments not paid
✓ Residual value guarantees at the + Initial direct
commencement costs
✓ Exercise price of purchase option date
✓ Penalties for terminating
52 3.2.2. After the commencement

After the commencement

Lease Receivable : Lease payments

Reduction of LR Finance income

Debit: Cash Credit:
Lease Receivable
P/L – Interest Income
Constant periodic rate of return

Lease remeasurement and modification => Similar as lessees

53 Manufacturer / Dealer lessors

Manufacturer / Dealer lessors

Selling profit Finance lease

✓ Revenue & Costs of sales ✓ Initial direct costs in P/L

✓ As outright sales under ✓ If artificially low interest rate
IFRS 15 → selling profit is restricted
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3.3. Operating lease

Accounting by lessor: Operating lease

Lease payments Underlying asset

✓ Revenue on straight – ✓ Initial direct costs are

line (or other) basic added to the asset
✓ Depreciation

Manufacturer / Dealer lessors → No selling profit

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3.3. Operating lease

 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
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3.4. Other

3.4.1. Sublease
3.4.2. Sale & Leaseback
57 3.4.1. Sublease

Original lessee Lessee

Lessor Head lease Sublease
Intermediate lessor (sublessee)

Type of sublease Accounting by the intermediate lessor

Operating Keeps recognizing the head lease as before

Debit Net investment in the lease

Finance Credit ROU asset
Debit or Credit Difference in profit or loss

Head lease = short - term Recognition exemption; sublease = operating

58 3.4.1. Sublease

• 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
Finance loss 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
lease continue to recognise interest expense thereon;
• Recognise lease income from the sub-lease in capacity as
operating lessor
59 3.4.2. Sale & Leaseback

Sale

Seller = lessee Buyer = lessor

Leases back
60 3.4.2. Sale & Leaseback

Is the transfer of asset a sale under IFRS 15 - Revenue from contracts

with customers?
Did control of an underlying
asset passed to the buyer?
✓ 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
right only
✓ Buyer (Lessor): ✓ Buyer (lessor):
• Asset under applicable standards • Financial asset (IFRS 9)
• Lease under IFRS 16
✓ Leaseback:
• As for any other (adjustment for off
– market terms)
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3.5. Disclosure

✓ 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 LP
✓ Income related to variable LP not within LR not depending on an index/rate

✓ Additional quantitative and qualitative disclosures

✓ Maturity analysis (refer to examples)
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IFRS 16 how to implement?
= mandatory effective date
(earlier application with IFRS 15 is permitted)

How to make a transaction?

Full retrospective adoption Modified retrospective adoption

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

✓No need to reassess whether contract
is/contains a lease at the date of initial
application (if IAS 17/IFRIC 4 applied)
✓Comparatives presented under prior IFRS
✓IFRS 16 applied to existing and new
contracts onwards
✓Adjustment to opening retained earnings
THE END

THANK YOU!

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