IFRS16 - Examples

List of Examples IFRS 16 Leases
N. Title
Example 1 Separating the lease element from the non-lease element
Example 2 Accounting for the lease by the lessee with incremental borrowing rate
Example 3 Accounting for the lease by the lessee with interest rate implicit in the lease
Example 4 Variable lease payments
Example 5 Lease remeasurement I. - updating the lease payments
Example 6 Lease remeasurement II. - change in the lease term
Example 7 Lease modifications I. - separate contract
Example 8 Lease modifications II. - change in the existing contract
Example 9 Lessors: Classification of leases
Example 10 Lessors: land and building elements in the lease
Example 11 Accounting for finance lease by the lessor
Example 12 Manufacturer / dealer lessors and finance lease
Example 13 Accounting for operating lease by the lessor
Example 14 Sale and leaseback
Example 1: Separating lease/non-lease elements IFRS 16 Leases
On 1 January 20X1, Worker Corp. enters into a lease contract with Rentor, for the rent of 3 printers, a cutting system and a copy machine for 2 years.
It is assumed that the machines will be returned back to Rentor. The economic life of all machines is 5 years.
Worker will pay monthly payments of CU 5 000 for the following services:
- CU 4 700 for the rent of all machines,
- CU 200 for the maintenance of all machines,
- CU 100 to reimburse Rentor's admin costs associated with the contract.
Worker could have bought one printer for CU 60 000, a cutting system for CU 40 000 and a copy machine for CU 45 000 when paying cash. The third
party company provides similar maintenance services for CU 30 per machine per month.
Advise Worker and Rentor how to account for the contract under IFRS 16.
1. Assessment of leases
Worker needs to account for a right-of-use asset (no classification)
Rentor classifies a lease as operating
2. Allocation of a consideration
Total consideration: 120000
Stand-alone Allocated
Item Proportion
selling price consideration
Printer 1 60,000 21.90% 26,277.37
Printer 2 60,000 21.90% 26,277.37
Printer 3 60,000 21.90% 26,277.37
Cutting syste 40,000 14.60% 17,518.25
Copy machine 45,000 16.42% 19,708.03
Maintenance 9,000 3.28% 3,941.61
TOTAL 274,000 100.00% 120,000.00
3. Accounting
Worker can either:

- account for the whole contract as for the lease (i.e. total consideration of CU 120 000 = lease payments)
- separate, and in this case:
- printers, cutting system and copy machine: recognize a right-of-use asset and a lease liability for every machine (CU 26 277 for 1 printer, etc.)
- maintenance: recognize CU 164 (3 942/24 months) in profit or loss every month
Rentor:
- as a lessor, he has no choice. He needs to separate contracts and account for:
- maintenance: recognize CU 164 as revenue in profit or loss every month
- rent of machines: Rentor needs to classify the leases and account for them based on the classification (operating or finance)
Example 2: Accounting for the lease by the lessee with incremental borrowing rate IFRS 16 Leases
On 1 January 20X1 Worker rents a car under the lease contract. The lease term is for 1 year, with the option to extend the lease with the same
lease payments for another year. At the lease commencement date, Worker concludes that the option will not be exercised, because for the
same rentals, the new car can be leased and also it's been Worker's practice to change the cars after 1 year.
Monthly lease payments are CU 10 000 and Worker incurred the legal cost of CU 1 200 associated with negotiating the lease contract.
How would this transaction appear in the financial statements of Worker at 31 December 20X1?
1. Assessment at the lease commencement
The lease term = 1 year

Reasons:
- option to extend is at market rentals
- common practice of Worker
Short-term lease
- exemption can be applied
2. Journal entries:
2.1 Transaction cost:
Debit Prepayments 1,200

Credit Cash -1,200
0
Debit P/L - Lease expenses 100 on a monthly basis

Credit Prepayments -100
0
2.2 Monthly rentals:
Debit P/L - Lease expenses 10,000

Credit Cash -10,000
Debit P/L - Lease expenses

Credit Cash
0
The same situation as above, but this time, Worker has an option to extend the lease term for CU 5 000 per month (1/2 of market rentals). Due to
this favorable condition, Worker expects to extend the lease term.
Monthly lease payments are CU 10 000 in arrears and Worker incurred the legal cost of CU 1 200 associated with negotiating the lease contract.
Assume incremental borrowing rate = 3% p.a., the fair value of the car is CU 230 000.
3. Assessment at the lease commencement
The lease term = 2 years

Reasons:
- option to extend is at below market rentals
Regular lease (extended lease term)
4. Initial measurement:
Annual discount rate: 3.00%

Monthly discount rate:
Monthly discount rate: 0.25% Formula used: =(1+annual rate)^(1/12)-1
Discount Present value of

Month Lease payment
factor lease payment
1 -10,000 0.998 -9,975
2 -10,000 0.995 -9,951
3 -10,000 0.993 -9,926
4 -10,000 0.990 -9,902
5 -10,000 0.988 -9,878
6 -10,000 0.985 -9,853
7 -10,000 0.983 -9,829
8 -10,000 0.980 -9,805
9 -10,000 0.978 -9,781
10 -10,000 0.976 -9,757
11 -10,000 0.973 -9,733
12 -10,000 0.971 -9,709

13 -5,000 0.968 -4,842
14 -5,000 0.966 -4,831
15 -5,000 0.964 -4,819
16 -5,000 0.961 -4,807
17 -5,000 0.959 -4,795
18 -5,000 0.957 -4,783
19 -5,000 0.954 -4,771
20 -5,000 0.952 -4,760
21 -5,000 0.950 -4,748
22 -5,000 0.947 -4,736
23 -5,000 0.945 -4,725
24 -5,000 0.943 -4,713
Total -175,427 = lease liability at the commencement date
Discount factor =
1/
(1+rate)^month
5. Journal entries - initial recognition
Debit Right-of-use asset 176,627

Credit Lease liability -175,427
Credit Cash -1,200
0
6. Subsequent measurement
Lease liability Lease Decrease in Lease

Month Interest
b/f payment lease liability liability c/f
1 175,427 -10,000 -433 -9,567 165,860
2 165,860 -10,000 -409 -9,591 156,269
3 156,269 -10,000 -385 -9,615 146,655
4 146,655 -10,000 -362 -9,638 137,016
5 137,016 -10,000 -338 -9,662 127,354
6 127,354 -10,000 -314 -9,686 117,668
7 117,668 -10,000 -290 -9,710 107,959
8 107,959 -10,000 -266 -9,734 98,225
9 98,225 -10,000 -242 -9,758 88,467
10 88,467 -10,000 -218 -9,782 78,685
11 78,685 -10,000 -194 -9,806 68,879
12 68,879 -10,000 -170 -9,830 59,049
13 59,049 -5,000 -146 -4,854 54,195
14 54,195 -5,000 -134 -4,866 49,328
15 49,328 -5,000 -122 -4,878 44,450
16 44,450 -5,000 -110 -4,890 39,560
17 39,560 -5,000 -98 -4,902 34,657
18 34,657 -5,000 -85 -4,915 29,743

19 29,743 -5,000 -73 -4,927 24,816
20 24,816 -5,000 -61 -4,939 19,877
21 19,877 -5,000 -49 -4,951 14,926
22 14,926 -5,000 -37 -4,963 9,963
23 9,963 -5,000 -25 -4,975 4,988
24 4,988 -5,000 -12 -4,988 0
Total -175,427
7. Journal entries - subsequent measurement
1st monthly payment:
Debit P/L - Interest expense 433

Debit Lease liability 9,567
Credit Cash -10,000
0
Total for the year 20X1:
Debit P/L - Interest expense 3,622

Credit Cash -120,000
0
Depreciation of right-of-use asset:
Debit P/L - Depreciation 88,314

Credit Right-of-use asset -88,314
(depr.) 0
Example 3: Accounting for the lease by the lessee with interest rate implicit in the lease IFRS 16 Leases
On 1 January 20X1 Stamper Co, producer of metal casts, enters into a lease contract to lease the stamping machine. Cash price of machine was
500 000 EUR and Stamper incurred additional costs of 2 000 EUR for arranging the lease contract. The lessors initial direct costs were CU 3 000.
Economic life of stamping machine is 6 years. Lease term is 5 years, annual lease payments are 110 000 EUR payable 31 December each year. At
the end of the lease term, Stamper has an obligation to purchase the machine for 1 000 EUR. There is no unguaranteed residual value of the
lessor.
How would this transaction appear in the financial statements of Stamper Co. at 31 December 20X1?
1. Initial recognition
1.1 Interest rate implicit in the lease:

- put lease payments in the table
- at the lease commencement, put FV of an asset plus lessor's initial direct costs.
- lease commencement = year 0. If the lease payments are in advance, then deduct the 1st payment from the FV of an asset + lessor's initial direct costs
- to the last period, add unguaranteed residual value of the lessor (it's 0 in this case),
- don't forget to add any price of exercising the option, etc. (here: 1 000 added to the last lease payment)
Year Cash flow

Lease commencement 0 503,000
20X1 1 -110,000
20X2 2 -110,000
Interest rate implicit in

20X3 3 -110,000
IRR(D20:D25)
20X4 4 -110,000
the lease =
20X5 5 -111,000
3.11%
1.2 Present value of the lease payments:

- you don't have to calculate it again - it's 503 000, isn't it? But, let me prove it you in the table below:

Year Lease payment
factor lease payments
1 -110,000 0.970 -106,679
2 -110,000 0.941 -103,458
3 -110,000 0.912 -100,334
4 -110,000 0.885 -97,305
5 -111,000 0.858 -95,225
Total -503,000
1.3 Right-of-use asset:
PV of the minimum lease payments: 503,000

Initial direct costs of the lessee: 2,000
505,000
1.4 Journal entry
Recognition of asset / lease liability:

Credit Cash -2,000
0
Example 3: Accounting for the lease by the lessee with interest rate implicit in the lease IFRS 16 Leases
2.1 Allocation of the lease payments

Year Interest
1 -503,000 -110,000 -15,660 -94,340 -408,660
2 -408,660 -110,000 -12,723 -97,277 -311,383
3 -311,383 -110,000 -9,694 -100,306 -211,077
4 -211,077 -110,000 -6,571 -103,429 -107,649
5 -107,649 -111,000 -3,351 -107,649 0
-503,000
2.2 Calculation of depreciation
Cost of right-of-use asset: 505,000

Useful life in years: 6
Annual depreciation charge (505 000 / 6): 84,167
2.3 Journal entries
Depreciation of ROU: Annual payment in the 1st year:
Debit Depreciation expenses 84,167 Debit Interest expense 15,660

Credit Accum. dep. - -84,167 Debit Finance lease liability 94,340
ROU 0 Credit Cash -110,000
0
Example 4: Variable lease payments IFRS 16 Leases
On 1 February 20X1 Worker enters into a 4-year lease of the office space. The information about the contract is as follows:
- Monthly payment is CU 2 000 at the time of the lease commencement.
- Every 2 years on 1 February, the monthly payments are adjusted for the annual inflation rate prevalent at the time of adjustment.
- If Worker installs new window blinds, then the lease payments decrease by CU 200 per month for the period of 1 year.
Worker incurred the following expenditures related to the contract:
- Legal fees associated with the contract: CU 5 000
- Salary of an employee who negotiated the contract: CU 10 000 (allocated based on the hourly wage)
The property owner (lessor) provided a 3-month rent-free period to Worker as an initial bonus. Worker took the office space on 1 March 20X1, but
due to unexpected events, Worker moved in the office space on 1 May 20X1.
Inflation rates: in 20X1 - 2%, 20X2 - 2.3%, 20X3 - 2.1%. Incremental borrowing rate is 4% p.a.
1. Initial measurement:

Monthly discount rate:
Monthly discount rate: 0.33% Formula used: =(1+annual rate)^(1/12)-1
Month 1 = lease commencement = 1 March 20X1

Month Lease payment
03/20X1 1 0 0.997 0
04/20X1 2 0 0.993 0
05/20X1 3 0 0.990 0
06/20X1 4 -2,000 0.987 -1,974
07/20X1 5 -2,000 0.984 -1,968
08/20X1 6 -2,000 0.981 -1,961
09/20X1 7 -2,000 0.977 -1,955
10/20X1 8 -2,000 0.974 -1,948
11/20X1 9 -2,000 0.971 -1,942
12/20X1 10 -2,000 0.968 -1,936
01/20X2 11 -2,000 0.965 -1,929
02/20X2 12 -2,000 0.962 -1,923
03/20X2 13 -2,000 0.958 -1,917
04/20X2 14 -2,000 0.955 -1,911
05/20X2 15 -2,000 0.952 -1,904
06/20X2 16 -2,000 0.949 -1,898
07/20X2 17 -2,000 0.946 -1,892
08/20X2 18 -2,000 0.943 -1,886
09/20X2 19 -2,000 0.940 -1,880
10/20X2 20 -2,000 0.937 -1,873
11/20X2 21 -2,000 0.934 -1,867
12/20X2 22 -2,000 0.931 -1,861
01/20X3 23 -2,000 0.928 -1,855
02/20X3 24 -2,000 0.925 -1,849
03/20X3 25 -2,000 0.922 -1,843
04/20X3 26 -2,000 0.919 -1,837
05/20X3 27 -2,000 0.916 -1,831
06/20X3 28 -2,000 0.913 -1,825
07/20X3 29 -2,000 0.910 -1,819
08/20X3 30 -2,000 0.907 -1,813
09/20X3 31 -2,000 0.904 -1,807
10/20X3 32 -2,000 0.901 -1,801
11/20X3 33 -2,000 0.898 -1,796
12/20X3 34 -2,000 0.895 -1,790
01/20X4 35 -2,000 0.892 -1,784
02/20X4 36 -2,000 0.889 -1,778
03/20X4 37 -2,000 0.886 -1,772
04/20X4 38 -2,000 0.883 -1,766
05/20X4 39 -2,000 0.880 -1,761
06/20X4 40 -2,000 0.877 -1,755
07/20X4 41 -2,000 0.875 -1,749
08/20X4 42 -2,000 0.872 -1,743
09/20X4 43 -2,000 0.869 -1,738
10/20X4 44 -2,000 0.866 -1,732
11/20X4 45 -2,000 0.863 -1,726
12/20X4 46 -2,000 0.860 -1,721
01/20X5 47 -2,000 0.858 -1,715
02/20X5 48 -2,000 0.855 -1,710
Total -82,742 = lease liability at the commencement date
Discount factor =
1/
(1+rate)^month
2. Journal entries - initial recognition

Credit Cash -5,000
0

Month Interest
03/20X1 1 -82,742 0 -271 271 -83,013
04/20X1 2 -83,013 0 -272 272 -83,285
05/20X1 3 -83,285 0 -273 273 -83,558
06/20X1 4 -83,558 -2,000 -274 -1,726 -81,831
07/20X1 5 -81,831 -2,000 -268 -1,732 -80,099
08/20X1 6 -80,099 -2,000 -262 -1,738 -78,361
09/20X1 7 -78,361 -2,000 -257 -1,743 -76,618
10/20X1 8 -76,618 -2,000 -251 -1,749 -74,869
11/20X1 9 -74,869 -2,000 -245 -1,755 -73,114
12/20X1 10 -73,114 -2,000 -239 -1,761 -71,353
01/20X2 11 -71,353 -2,000 -234 -1,766 -69,587
02/20X2 12 -69,587 -2,000 -228 -1,772 -67,815
03/20X2 13 -67,815 -2,000 -222 -1,778 -66,037
04/20X2 14 -66,037 -2,000 -216 -1,784 -64,253
05/20X2 15 -64,253 -2,000 -210 -1,790 -62,463
06/20X2 16 -62,463 -2,000 -204 -1,796 -60,668
07/20X2 17 -60,668 -2,000 -199 -1,801 -58,866
08/20X2 18 -58,866 -2,000 -193 -1,807 -57,059
09/20X2 19 -57,059 -2,000 -187 -1,813 -55,246
10/20X2 20 -55,246 -2,000 -181 -1,819 -53,427
11/20X2 21 -53,427 -2,000 -175 -1,825 -51,601
12/20X2 22 -51,601 -2,000 -169 -1,831 -49,770
01/20X3 23 -49,770 -2,000 -163 -1,837 -47,933
02/20X3 24 -47,933 -2,000 -157 -1,843 -46,090
03/20X3 25 -46,090 -2,000 -151 -1,849 -44,241
04/20X3 26 -44,241 -2,000 -145 -1,855 -42,386
05/20X3 27 -42,386 -2,000 -139 -1,861 -40,525
06/20X3 28 -40,525 -2,000 -133 -1,867 -38,657
07/20X3 29 -38,657 -2,000 -127 -1,873 -36,784
08/20X3 30 -36,784 -2,000 -120 -1,880 -34,904
09/20X3 31 -34,904 -2,000 -114 -1,886 -33,019
10/20X3 32 -33,019 -2,000 -108 -1,892 -31,127
11/20X3 33 -31,127 -2,000 -102 -1,898 -29,229
12/20X3 34 -29,229 -2,000 -96 -1,904 -27,324
01/20X4 35 -27,324 -2,000 -89 -1,911 -25,414
02/20X4 36 -25,414 -2,000 -83 -1,917 -23,497
03/20X4 37 -23,497 -2,000 -77 -1,923 -21,574
04/20X4 38 -21,574 -2,000 -71 -1,929 -19,645
05/20X4 39 -19,645 -2,000 -64 -1,936 -17,709
06/20X4 40 -17,709 -2,000 -58 -1,942 -15,767
07/20X4 41 -15,767 -2,000 -52 -1,948 -13,818
08/20X4 42 -13,818 -2,000 -45 -1,955 -11,864
09/20X4 43 -11,864 -2,000 -39 -1,961 -9,903
10/20X4 44 -9,903 -2,000 -32 -1,968 -7,935

11/20X4 45 -7,935 -2,000 -26 -1,974 -5,961
12/20X4 46 -5,961 -2,000 -20 -1,980 -3,980
01/20X5 47 -3,980 -2,000 -13 -1,987 -1,993
02/20X5 48 -1,993 -2,000 -7 -1,993 0
Total -82,742
4. Journal entries - subsequent measurement
1st month:

Credit Lease liability -271
0
Total for the year 20X1:
Debit P/L - Interest expense 2,611

Credit Cash -14,000
0
Depreciation of right-of-use asset:

(depr.) 0
Example 5: Lease remeasurement I. - updating the lease payments IFRS 16 Leases
Example 4 continues:
On 1 February 20X3, Worker completed the installation of new window blinds and as a result, the lease payments will decrease by CU 200 monthly for
the next 12 months (starting in February 20X3).
Also, the lease payments are adjusted by the inflation rate as agreed in the contract.
How would these transactions appear in the financial statements of Worker at 31 December 20X3?
1. Remeasurement of the lease liability
The new lease payment: 2,042

(CU 2 000 x 1,021)
Discount rate: 0.33%

Month Lease payment
02/20X3 1 -2,042 0.997 -2,035
03/20X3 2 -2,042 0.993 -2,029
04/20X3 3 -2,042 0.990 -2,022
05/20X3 4 -2,042 0.987 -2,015
06/20X3 5 -2,042 0.984 -2,009
07/20X3 6 -2,042 0.981 -2,002
08/20X3 7 -2,042 0.977 -1,996
09/20X3 8 -2,042 0.974 -1,989
10/20X3 9 -2,042 0.971 -1,983
11/20X3 10 -2,042 0.968 -1,976
12/20X3 11 -2,042 0.965 -1,970
01/20X4 12 -2,042 0.962 -1,963
02/20X4 13 -2,042 0.958 -1,957
03/20X4 14 -2,042 0.955 -1,951
04/20X4 15 -2,042 0.952 -1,944
05/20X4 16 -2,042 0.949 -1,938
06/20X4 17 -2,042 0.946 -1,932
07/20X4 18 -2,042 0.943 -1,925
08/20X4 19 -2,042 0.940 -1,919
09/20X4 20 -2,042 0.937 -1,913
10/20X4 21 -2,042 0.934 -1,907
11/20X4 22 -2,042 0.931 -1,900
12/20X4 23 -2,042 0.928 -1,894
01/20X5 24 -2,042 0.925 -1,888
02/20X5 25 -2,042 0.922 -1,882
Total -48,940 = lease liability at the remeasurement date date
Adjustment:
Lease liability before remeasurement: -47,933
Lease liability at the remeasurement date: 48,940
Change: 96,873
Right-of-use asset before the remeasurement:

Cost: 87,742
Depreciation for 23 months: 42,043
Carrying amount: 45,699
New carrying amount: 142,572
New monthly depreciation (25 months) 5,703
2. Subsequent measurement:

Month Interest
02/20X3 1 -48,940 -2,042 -160 -1,882 -47,058
03/20X3 2 -47,058 -2,042 -154 -1,888 -45,170
04/20X3 3 -45,170 -2,042 -148 -1,894 -43,276
05/20X3 4 -43,276 -2,042 -142 -1,900 -41,376
06/20X3 5 -41,376 -2,042 -135 -1,907 -39,469
07/20X3 6 -39,469 -2,042 -129 -1,913 -37,556
08/20X3 7 -37,556 -2,042 -123 -1,919 -35,637
09/20X3 8 -35,637 -2,042 -117 -1,925 -33,712
10/20X3 9 -33,712 -2,042 -110 -1,932 -31,780
11/20X3 10 -31,780 -2,042 -104 -1,938 -29,842
12/20X3 11 -29,842 -2,042 -98 -1,944 -27,898
01/20X4 12 -27,898 -2,042 -91 -1,951 -25,947
02/20X4 13 -25,947 -2,042 -85 -1,957 -23,990
03/20X4 14 -23,990 -2,042 -79 -1,963 -22,027
04/20X4 15 -22,027 -2,042 -72 -1,970 -20,057
05/20X4 16 -20,057 -2,042 -66 -1,976 -18,081
06/20X4 17 -18,081 -2,042 -59 -1,983 -16,098
07/20X4 18 -16,098 -2,042 -53 -1,989 -14,109
08/20X4 19 -14,109 -2,042 -46 -1,996 -12,113
09/20X4 20 -12,113 -2,042 -40 -2,002 -10,110
10/20X4 21 -10,110 -2,042 -33 -2,009 -8,102
11/20X4 22 -8,102 -2,042 -27 -2,015 -6,086
12/20X4 23 -6,086 -2,042 -20 -2,022 -4,064
01/20X5 24 -4,064 -2,042 -13 -2,029 -2,035
02/20X5 25 -2,035 -2,042 -7 -2,035 0
Total -48,940
3. Journal entries:
Remeasurement:
0
Lease payment - Feb 20X3:

Credit Cash -1,842
Credit P/L Variab.lease p -200
0
Depreciation of right-of-use asset (monthly)

(depr.) 0
Example 6: Lease remeasurement II. - change in the lease term IFRS 16 Leases
On 1 January 20X1, Delia enters into a 4-year lease of the office space. The information about the contract is as follows:
- Annual payment is CU 25 000 payable in the beginning of each year;
- After 4 years, Delia has an option to extend the lease for another 2 years for the annual rental payment of CU 25 000 adjusted by the inflation
rate prevalent after 4 years. At the lease commencement, Delia assumes that this option will NOT be exercised, because of significant increase of
new hires and the need to rent a bigger office space.
- Delia paid CU 3 000 to the real estate agent for finding the right property and arranging the lease contract.
Inflation rate in 20X5: 2.2% p.a., incremental borrowing rate: 4% p.a.
How would this transaction appear in the financial statements of Delia at 31 December 20X1?
Lease Present value of

Year Discount factor
payment lease payment
20X1 0 -25,000 1.000 -25,000
20X2 1 -25,000 0.962 -24,038
20X3 2 -25,000 0.925 -23,114
20X4 3 -25,000 0.889 -22,225
-94,377
Journal entry:

Credit Cash -3,000
0
Decrease in Lease
Lease liability
Year Lease payment Interest lease liability
b/f
20X1 0 -94,377 -25,000 0 liability
-25,000 c/f
-69,377
20X2 1 -69,377 -25,000 -2,775 -22,225 -47,152
20X3 2 -47,152 -25,000 -1,886 -23,114 -24,038
20X4 3 -24,038 -25,000 -962 -24,038 0
-94,377
Journal entries in 20X1:
Annual depreciation of right-of-use asset:
Debit Depreciation expenses 24,344

Credit Accum. dep. - ROU -24,344
0
Annual payment in the 1st year:

Credit Cash -25,000
0
Interest accrual in 20X1:
Debit P/L - Interest expenses

Credit Accruals 2,775 Note: You need to do interest accruals only when payments are in advance (in the beginning of the period).
-2,775 The reason is that in the second payment (1-Jan-20X2), you pay the interest for 20X1 in fact.
0
Annual payment in the 2nd year:

Debit Accruals 2,775
Credit Cash
-25,000
0
On 1 January 20X3, after the third payment was made, Delia's managers believe that no new employees will be hired due to the economic crisis.
As a result, Delia's management changes its plan not to exercise the option to extend the lease and now they assume that the lease will be
extended by another 2 years.
How should Delia recognize these transactions in its financial statements?
The incremental borrowing rate prevalent in 20X3 is 3.5% p.a.
3. Remeasurement of the lease liability

payment lease payments
20X4 1 -25,000 0.966 -24,155
20X5 2 -25,000 0.934 -23,338
20X6 3 -25,000 0.902 -22,549
Total -70,041
Adjustment:
Lease liability before remeasurement: -24,038
Lease liability at the remeasurement date: -70,041
Change: -46,002
Right-of-use asset before the remeasurement:

Cost: 97,377
Depreciation for 2 years: 48,689
New carrying amount: 94,691
New annual depreciation (4 years) 23,673

Decrease in Lease
Lease liability
b/f
20X3 1 -70,041 0 0 liability 0 c/f
-70,041
20X4 2 -70,041 -25,000 -2,451 -22,549 -47,492
20X5 3 -47,492 -25,000 -1,662 -23,338 -24,155
20X6 4 -24,155 -25,000 -845 -24,155 0
Total -70,041
4. Journal entries:
Remeasurement in 20X3:
0
Interest accrued for 20X3:
Debit P/L - Interest expenses

Credit Accruals 2,451
-2,451
0
Lease payment - Jan 20X3:

Credit Cash -25,000
0
Lease payment - Jan 20X4:

Credit Cash -25,000
0
TASK FOR YOU:

If you got this far, I have a challenge for you.
The contract says that Delia's lease payments will be adjusted after 4 years by the inflation rate prevalent at the time of adjustment - i.e. 1 Jan
20X5.
Can you work out the remeasurement yourself and send me the solution to check?
Example 7: Lease modifications I. - separate contract IFRS 16 Leases
On 1 January 20X1, Celia enters into an 8-year lease contract for 3 000 square meters of office space. Annual lease payment is CU 120 000
payable on 31 December each year.
On 1 January 20X5, Celia and the property owner agree to amend the original lease for the remaining 4 years to include additional 4 000 square
meters of office space. As a result, the lease payment increases to CU 260 000 per year.
How should Celia account for the lease modification?
Note: Celia's incremental borrowing rate is 5% in 20X1 and 6% in 20X5.
1. Assessment
Does the modification add the right to use one or more assets? YES
Separate Lease
Does the consideration increase commensurate with the stand-alone price? YES
Original consideration: 40 per square meter per year

Modified consideration: 37 per square meter per year
Discount (reasonable, reflecting the same lessee, no additional cost..)

20X1 1 -120,000 0.952 -114,286
20X2 2 -120,000 0.907 -108,844
20X3 3 -120,000 0.864 -103,661
20X4 4 -120,000 0.823 -98,724
20X5 5 -120,000 0.784 -94,023
20X6 6 -120,000 0.746 -89,546
20X7 7 -120,000 0.711 -85,282
20X8 8 -120,000 0.677 -81,221
-775,586
Journal entry:

0
Decrease in Lease
Lease liability
b/f
20X1 1 -775,586 -120,000 -38,779 liability
-81,221 c/f
-694,365
20X2 2 -694,365 -120,000 -34,718 -85,282 -609,083
20X3 3 -609,083 -120,000 -30,454 -89,546 -519,537
20X4 4 -519,537 -120,000 -25,977 -94,023 -425,514
20X5 5 -425,514 -120,000 -21,276 -98,724 -326,790
20X6 6 -326,790 -120,000 -16,339 -103,661 -223,129
20X7 7 -223,129 -120,000 -11,156 -108,844 -114,286
20X8 8 -114,286 -120,000 -5,714 -114,286 0
-775,586

0
Debit P/L-Interest paid 38,779

0
3. Lease modification

20X5 1 -140,000 0.943 -132,075
20X6 2 -140,000 0.890 -124,600
20X7 3 -140,000 0.840 -117,547
20X8 4 -140,000 0.792 -110,893
Total -485,115
Journal entry:

0
Subsequent measurement of the modification:
Decrease in Lease
Lease liability
b/f
20X5 1 -485,115 -140,000 -29,107 liability
-110,893 c/f
-374,222
20X6 2 -374,222 -140,000 -22,453 -117,547 -256,675
20X7 3 -256,675 -140,000 -15,400 -124,600 -132,075
20X8 4 -132,075 -140,000 -7,925 -132,075 0
Total -485,115
4. Journal entries in 20X5 - total contract:
Depreciation of the right-of-use assets:

Original lease Modification TOTAL
Debit P/L - Depreciation charge 96,948 121,279 218,227
Credit Right-of-use asset
-96,948 -121,279 -218,227
0 0 0
Lease payment - Dec 20X5
Debit P/L Interest expense 21,276 29,107 50,383

Debit Lease liability
98,724 110,893 209,617
Credit Cash
-120,000 -140,000 -260,000
0 0 0
Example 8: Lease modifications II. - change in the existing contract IFRS 16 Leases
On 1 January 20X1, Melinda enters into an 8-year lease contract for 5 000 square meters of office space. Annual lease payment is CU 200 000
payable on 31 December each year..
On 1 January 20X5, Melinda and the property owner agree to amend the original lease for the remaining 4 years to decrease the leased office
space to only 3 000 square meters. As a result, the lease payment decreases to CU 130 000 per year.
How should Melinda account for the lease modification?
Note: Melinda's incremental borrowing rate is 5% in 20X1 and 6% in 20X5.
1. Assessment
Does the modification add the right to use one or more assets? NO Change in the original lease
Not a separate lease

20X1 1 -200,000 0.952 -190,476
20X2 2 -200,000 0.907 -181,406
20X3 3 -200,000 0.864 -172,768
20X4 4 -200,000 0.823 -164,540
20X5 5 -200,000 0.784 -156,705
20X6 6 -200,000 0.746 -149,243
20X7 7 -200,000 0.711 -142,136
20X8 8 -200,000 0.677 -135,368
-1,292,643
Journal entry:
Debit Right-of-use asset 1,292,643

Credit Lease liability -1,292,643
0
Decrease in
Lease liability Lease
Year Lease payment Interest lease
b/f liability c/f
20X1 1 -1,292,643 -200,000 -64,632 liability
-135,368 -1,157,275
20X2 2 -1,157,275 -200,000 -57,864 -142,136 -1,015,138
20X3 3 -1,015,138 -200,000 -50,757 -149,243 -865,895
20X4 4 -865,895 -200,000 -43,295 -156,705 -709,190
20X5 5 -709,190 -200,000 -35,460 -164,540 -544,650
20X6 6 -544,650 -200,000 -27,232 -172,768 -371,882
20X7 7 -371,882 -200,000 -18,594 -181,406 -190,476
20X8 8 -190,476 -200,000 -9,524 -190,476 0
-1,292,643

0
Debit P/L-Interest paid 64,632

0
3. Lease modification

20X5 1 -130,000 0.943 -122,642
20X6 2 -130,000 0.890 -115,700
20X7 3 -130,000 0.840 -109,151
20X8 4 -130,000 0.792 -102,972
Total -450,464
The proportionate decrease in the lease liability / ROU:
Original office space: 5,000 sq meters

Modified office space: 3,000 sq meters
%: 60.00%
Reduction of pre-modification ROU:

Cost of ROU: 1,292,643
Accumulated depreciation: -646,321
Carrying amount before modification: 646,321
Reduced to 60%: 387,793
Difference: 258,529
Reduction of pre-modification lease liability:

Lease liability @31-Dec-20X4 -709,190
Reduced to 60%: -425,514
Difference: -283,676
Reduced pre-modification lease liability: -425,514

Modified lease liability: -450,464
Difference: 24,950
4. Journal entries
Modification adjustment - proportionate reduction in the lease liability+ROU

Credit ROU -258,529
Credit P/L - Gain on the lease modification -25,148
0
Modification adjustment - difference between reduced and modified lease liability:
Debit ROU 24,950

0
Depreciation charge of ROU in 20X5:
Debit P/L - Depreciation charge 103,186

0
Lease payment @ 31-Dec-20X5:
Debit P/L Interest expense 27,028

0
Example 9: Lessors: Classification of leases IFRS 16 Leases
LorryCars, the leasing company, plans to enter into a lease contract with Lessie and there are 2 options of how the lease contract can be structured:
General information:
1. Lorry would be leased for 4 years under the non-cancellable lease that starts 1 January 20X1.
2. Rentals are paid annually on 31 December starting year 20X1.
3. In these rentals, the insurance fee of 300 CU is included.
4. At the end of lease, lorry would have market value of 12 400 CU.
5. Normal economic life of lorry is 6 years.
6. LorryCars sells this type of lorries for 35 000 CU when paid cash.
7. LorryCar's incremental borrowing rate is 3% (and it is close to the rate implicit in the lease).
Option 1: Lessie would pay annual rentals amounting to 6 800 CU. At the end of the lease term, Lessie has an option to buy lorry for its market value
or lease it for additional 2 years with the same rental fees.
Option 2: Lessie would pay annual rentals amounting to 9 500 CU. At the end of the lease term, Lessie has an option to buy lorry either for 200 CU,
or lease it for another 2 years with rental fee of 100 CU per annum.
Advise LorryCars on correct classification of above presented leases.
1. Present value of the lease payments
Option 1 Option 2
Discount factor Present value Present value
Year Cash flow Cash flow
1/(1+0,03)^year (cash flow*DF) (cash flow*DF)
1 0.971 6,500.00 6,310.68 9,200.00 8,932.04
2 0.943 6,500.00 6,126.87 9,200.00 8,671.88
3 0.915 6,500.00 5,948.42 9,200.00 8,419.30
4 0.888 6,500.00 5,775.17 9,400.00 8,351.78
Total 24,161.14 34,375.00
FV at inception: 35,000.00 35,000.00
%: 69.03% 98.21%
Option 1 Option 2
Transfer of ownership at the end of lease term no no
Option to purchase asset for price < fair value no yes
Lease term = major part of economic life no yes
Present value of LP close to fair value no yes
Leased asset - specialized nature no no
Losses from cancellation borne by lessee ? ?
Gains / losses from fluctuations to the lessee ? ?
Option to continue rent for rental under market no yes

Example 9: Lessors: Classification of leases IFRS 16 Leases
Operating Finance
Example 10: Lessors: land and building elements in the lease IFRS 16 Leases
On 1 January 20X1, Belinda enters into a lease contract as a lessor to lease a specialized production hall with land. The lease contract has the
following characteristics:
1. The lease term is 40 years (= remaining economic life of the hall). At the end, the hall has no residual value.
2. No ownership to the hall or land is transferred to the lessee after the end of the lease term.
3. Annual rentals are paid on 31 December each year amounting to 43 750 CU.
4. Belinda's incremental borrowing rate is 3,1%.
5. At the end of 20X0, the fair value of the hall and land was 800 000 CU and 200 000 CU respectively.
Advise Belinda how to classify the lease.
Land operating lease (indefinite life, no ownership transferred)
Building needs to be assessed separately
2. Assessment of building element
2.1 Rentals related to building element
Fair value of buildings: 800,000 A

Total fair value (800 000 + 200 000): 1,000,000 B
Percentage of building element: 80% A/B
Total rentals:
Rentals related to building element
35,000
(80%*43 750)
2.2 Present value of the lease payments
N. of payments: 40
Amount of 1 payment at the end of each year: 35,000
Formula used:
Present value: 796,097 =PV(3,1%;40;35 000; 0))
Percentage of present value / fair value
99.51%
(796 097 / 800 000)
2.3 Assessment of buildings' lease
Transfer of ownership at the end of lease term no
Option to purchase asset for price < fair value no
Lease term = major part of economic life yes
Present value of LP close to fair value yes
Leased asset - specialized nature yes
Losses from cancellation borne by lessee ?
Gains / losses from fluctuations to the lessee ?
Option to continue rent for rental under market no

Example 10: Lessors: land and building elements in the lease IFRS 16 Leases
Finance lease
Example 11: Accounting for finance lease by the lessor IFRS 16 Leases
On 1 January 20X1 Belinda entered into a finance lease of used stamping machine as a lessor. The fair value of the machine was CU 500 000 and its
carrying amount in Belinda's financial statements was CU 470 000.
Belinda incurred additional costs of CU 3 000 for arranging the lease contract. Remaining economic life of the stamping machine is 6 years. Lease term
is 5 years, annual lease payments are CU 110 000 payable 31 December each year. Belinda expects that at the end on the lease term, the machine can
be sold for CU 50 000 and the lessee agrees to protect Belinda from the first CU 20 000 of loss for a sale at a price below the estimated residual value
(i.e. CU 50 000).
Belinda classifies the lease as finance.
How would this transaction appear in Belinda's financial statements at 31 December 20X1?
1.1 Asset - net investment in the lease

Fair value of stamping machine: 500,000
Initial direct costs: 3,000
Net investment in the lease (500 000 + 3 000) 503,000
1.2 Journal entry
Recognition of net investment in the lease:
Debit Assets - net investment in the lease 503,000

Credit PPE - Stamping -470,000
machine -3,000
Credit Cash - paid for -30,000
expenses 0
Credit gain on sale of PPE
2.1 Interest rate implicit in the lease:
Year Cash flow Note:

0 -503,000 Cash flows - FV of an underlying asset at the commencement: -500,000
Interest rate implicit in the lease,
Formula used: =IRR(C37:C42)
1 110,000 include: - lessor's initial direct costs: -3,000

2 110,000 - 5x annual lease payments: 550,000
3 110,000 - guaranteed residual value WITHIN the lease payments 20,000 included in year 5
4 110,000 - unguaranteed residual value 30,000 included in year 5
5 160,000
5.84%
2.2 Allocation of the lease payments
Lease Lease Decrease in lease Lease

Year Interest
receivable b/f payment receivable receivable c/f
1 503,000 110,000 29,386 80,614 422,386
2 422,386 110,000 24,676 85,324 337,062
3 337,062 110,000 19,691 90,309 246,753
4 246,753 110,000 14,416 95,584 151,169
5 151,169 110,000 8,831 101,169 50,000
Example 11: Accounting for finance lease by the lessor IFRS 16 Leases
2.3 Journal entry
Debit Cash 110,000

Credit P/L - Finance income -29,386
Credit Net investment in the lease -80,614
0
3. Disclosures
Gross investment in the lease:

due not later than 1 year 110,000
due later than 1 year but not later than 2 years 110,000
due later than 2 years but not later than 3 years 110,000
due later than 4 years but not later than 5 years 0
due later than 5 years 0
Total 460,000
less unearned finance income -67,614
Present value of the lease payments: 392,386
Add unguaranteed residual value: 30,000
Net investment in the lease: 422,386
Check:
Net investment in the lease at the commencement date: 503,000
Less the decrease in the first lease payment: -80,614
Net investment in the lease @31-Dec-20X1: 422,386
Example 12: Manufacturer / dealer lessors and finance lease IFRS 16 Leases
In January 20X1, CarProd, manufacturer of cars, offered the following finance lease related to the newest model of car produced:
1. The newest model of car has fair value equal to its selling price, that is CU 30 000. Cost of manufacture is CU 27 000.
2. The lease is non-cancellable for 4 years, with annual installments of CU 8 500 paid in arrears.
3. At the end of the lease term, the ownership of the car automatically passes to the client at no additional cost.
CarProd incurred further cost of CU 1 000 related to negotiating contract. How would this transaction appear in the financial statements of
CarProd at 31 December 20X1?

Fair value of new model: 30,000
1.2 Accounting treatment
Recognition of net investment in the lease / sale of asset:

Credit Inventory - new model of car -27,000
Credit Cash - paid for expenses -1,000
Credit Profit on sale (30 000 - 27 000 - 1 -2,000
000)
0
2.1 Allocation of minimum lease payments

Lease
Lease Lease Decrease in
Year Interest receivable
receivable b/f payment lease receivable
0 n/a -30,000 c/f
30,000
1 30,000 8,500 1,560 6,940 23,060
2 23,060 8,500 1,200 7,300 15,760
3 15,760 8,500 820 7,680 8,080
4 8,080 8,500 420 8,080 0
5.20%

Formula used: =IRR(D32:D36)
2.2 Journal entries
Debit Cash 8,500

Credit Finance income -1,560
0
Example 12: Manufacturer / dealer lessors and finance lease IFRS 16 Leases
3. Disclosures
Lease payments to be received:

Total 25,500
Present value of the lease payments: 23,060
Add unguaranteed residual value: 0
Check:
Net investment in the lease at the commencement date: 30,000
Less the decrease in the first lease payment: -6,940
Net investment in the lease @31-Dec-20X1: 23,060
Example 13: Accounting for operating lease by the lessor IFRS 16 Leases
On 1 January 20X1, Lessor Co. made a following offer for operating lease to one of its biggest clients:
1. Lease relates to machinery in total fair value of CU 1 000 000.
2. Lease is non-cancellable for 6 years, whereas machines have an economic life of 10 years.
3. Annual rentals of CU 170 000 are payable in arrears on 31 December each year.
Lessor paid CU 50 000 of commission to an agent for mediating the lease.
How would this transaction appear in the financial statements of Lessor Co. at 31 December 20X1?
1. Journal entries
1.1 Asset related entries:
Recognition of assets at commencement:
Debit PPE - machinery 1,000,000

Credit Cash -1,000,000
0
Initial direct costs:

50,000
Debit PPE - machinery
Credit Cash -50,000
0
Depreciation charge of PPE for 20X1 (w/o initial direct costs)
Debit Depreciation expenses (1 000 000 / 10) 100,000

Credit PPE - cummulated depreciation -100,000
0
Depreciation charge of PPE for 20X1 (initial direct costs)
Debit Depreciation expenses (50 000 / 6) 8,333

0
1.2 Rentals related entries:
Cash received on 31 December 20X1:
Debit Cash 170,000

Credit Rental income -170,000
0
2. Disclosures
Lease payments to be received:

Total 850,000
Example 14: Sale and leaseback IFRS 16 Leases
On 1 January 20X1, Relia sells an administrative building to FinanceMaster for CU 600 000 and at the same time, Relia leases the same
building back for 15 years for an annual payment of CU 50 000 due 31 December each year. Additional info:
- the fair value of the building at the time of the sale is CU 500 000,
- the carrying amount of the building in Relia's books right before the sale is CU 480 000,
- the transaction meets the definition of a sale under IFRS 15,
- the interest rate implicit in the lease is 4% p.a.
- FinanceMaster classifies the lease as operating
How should Relia and FinanceMaster account for the transaction?
1. Relia = seller = lessee
Selling price 600,000

Fair value 500,000
Difference 100,000 => additional financing to be repaid in the lease payments
Present value of the lease payments:

N. of payments: 15
Amount of 1 payment at the end of each ye 50,000
Discount rate: 4%
Present value: 555,919
thereof:
"Loan" (financing): 100,000
Lease - payments for ROU asset 455,919
ROU asset = proportion of the previous carrying amount of the building that relates to the ROU retained
Carrying amount of the building: 480,000

Fair value of the building: 500,000 => total rights
Discounted lease payments: 455,919 => the rights transferred
ROU asset: 437,683
Gain related to the rights transferred to FinanceMaster:
FV of the building: 500,000

Gain on sale: 20,000
thereof:
related to ROU retained by the seller: 18,237
related to rights transferred to the buyer: 1,763
Journal entries:
At the commencement:
Debit Cash 600,000

Debit ROU asset 437,683
Credit PPE - building
Credit Financial Liability -480,000
Credit Gain on the rights transferred -555,919
-1,763
Debit ROU asset Example 14: Sale and leaseback IFRS 16 Leases
Credit PPE - building
Credit Financial Liability
Credit Gain on the rights transferred
0
Example 14: Sale and leaseback IFRS 16 Leases
After the commencement:
Debit P/L Depreciation of ROU asset 29,179 over 15 years

Credit ROU asset (accum. dep.) -29,179
0
Debit P/L Interest expense 22,237

Debit Financial liability 27,763
Credit Cash -50,000
0
2. FinanceMaster = buyer = lessor
At the commencement:
Debit PPE - Building 500,000
Debit Financial asset (loan) 100,000
0
Annual lease payment:

thereof:
for the ROU asset transferred: 41,006
for the repayment of a loan: 8,994
Debit Cash 50,000

Credit P/L - Lease income -41,006
Credit P/L - Interest income
-4,000
Credit P/L = Financial liability
-4,994
0
Is there an identified asset?
Yes
Does the customer have the right to obtain

substantially all the economic benefits from
use of the asset throughout the period of
use?
Yes
Does the customer, the supplier or neither

party have the right to direct how and for
Customer Supplier
what purpose the asset is used throughout
the period of use?
Neither, how and for what

purpsoe the asset will be used is
predetermined
Does the customer have the right to operate

the asset throughout the period of use,
Yes
without the supplier having the right to
change those operating instructions?
No
Did the customer design the asset in a way

that predetermines how and for what NO
purpose the asset will be used throughout
the period of use?
Yes
The contract The contract does

contains the lease not contain the
lease
On 1 January 20X1, LessieCorp entered into a low value lease for new lorry under the following conditions:
1. Lease is non-cancellable for 4 years.
2. Rentals amounting to 9 200 EUR are to be paid annually, on 31 December, starting 20X1.
How would this transaction appear in the financial statements of LessieCorp at 31 December 20X1?
1. Accounting treatment
No asset is recognized under exception of IFRS 16. Rentals are included in expenses.
Debit Expenses - rentals 9,200

Credit Cash -9,200
0
2. Disclosures
Future minimum lease payments under non-cancellable lease:

Total 27,600
A Lessor leases a bulldozer, a truck and a long-reach excavator to Lessee to be used in Lessee’s mining operations for four years. Lessor also agrees to maintain each item of
equipment throughout the lease term. The total consideration in the contract is CU600,000, payable in annual instalments of CU150,000, and a variable amount that depends on
Example-1
the hours of work performed in maintaining the long-reach excavator. The variable payment is capped at 2 per cent of the replacement cost of the long-reach excavator. The
consideration includes the cost of maintenance services for each item of equipment.
Several suppliers provide maintenance services for a similar bulldozer and a similar truck. Accordingly, there are observable standalone prices for the maintenance services for
those two items of leased equipment. Lessee is able to establish observable stand-alone prices for the maintenance of the bulldozer and the truck of CU32,000 and CU16,000,
respectively, assuming similar payment terms to those in the contract with Lessor.
The observable consideration for those four-year maintenance service contracts is a fixed amount of CU56,000, payable over four years, and a variable amount that depends on
the hours of work performed in maintaining the long-reach excavator.
Lessee is able to establish observable stand-alone prices for the leases of the bulldozer, the truck and the long-reach excavator of CU170,000, CU102,000 and CU224,000,
respectively.
Required: - Allocate the transaction price to lease and non-lease components?
Answer
Lessee concludes that there are three lease components and three non-lease components (maintenance services) in the contract. Lessee applies the guidance IFRS 16 to allocate
the consideration in the contract to the three lease components and the non-lease components.
Several suppliers provide maintenance services for a similar bulldozer and a similar truck. Accordingly, there are observable standalone prices for the maintenance services for
those two items of leased equipment. Lessee is able to establish observable stand-alone prices for the maintenance of the bulldozer and the truck of CU32,000 and CU16,000,
respectively, assuming similar payment terms to those in the contract with Lessor. The long-reach excavator is highly specialized and, accordingly, other suppliers do not lease
or provide maintenance services for similar excavators. Nonetheless, Lessor provides four-year maintenance service contracts to customers that purchase similar long-reach
excavators from Lessor. The observable consideration for those four-year maintenance service contracts is a fixed amount of CU56,000, payable over four years, and a variable
amount that depends on the hours of work performed in maintaining the long-reach excavator. That variable payment is capped at 2 per cent of the replacement cost of the
long-reach excavator. Consequently, Lessee estimates the stand-alone price of the maintenance services for the long-reach excavator to be CU56,000 plus any variable
amounts. Lessee is able to establish observable stand-alone prices for the leases of the bulldozer, the truck and the long-reach excavator of CU170,000, CU102,000 and
CU224,000, respectively.
Lessee allocates the fixed consideration in the contract (CU600,000) to the lease and non-lease components as follows:
Lease Non-lease Total

Bulldozer 170,000
Truck 102,000
Excavator 224,000 104,000
496,000 104,000 600,000
Lessee enters into a 10-year lease of a floor of a building, with an option to extend for five years. Lease payments are CU50,000 per year during the initial term and
CU55,000 per year during the optional period, all payable at the beginning of each year. To obtain the lease, Lessee incurs initial direct costs of CU20,000, of which
CU15,000 relates to a payment to a former tenant occupying that floor of the building and CU5,000 relates to a commission paid to the real estate agent that arranged the
Example-2
lease. As an incentive to Lessee for entering into the lease, Lessor agrees to reimburse to Lessee the real estate commission of CU5,000 and Lessee’s leasehold
improvements of CU7,000.
At the commencement date, Lessee concludes that it is not reasonably certain to exercise the option to extend the lease and, therefore, determines that the lease term is
10 years.
The interest rate implicit in the lease is not readily determinable. Lessee’s incremental borrowing rate is 5 per cent 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.
In the sixth year of the lease, Lessee acquires Entity A. Entity A has been leasing a floor in another building. The lease entered into by Entity A contains a termination
option that is exercisable by Entity A. Following the acquisition of Entity A, Lessee needs two floors in a building suitable for the increased workforce. To minimize
costs, Lessee (a) enters into a separate eight-year lease of another floor in the building leased that will be available for use at the end of Year 7 and (b) terminates early
the lease entered into by Entity A with effect from the beginning of Year 8.
Consequently, at the end of Year 6, Lessee concludes that it is now reasonably certain to exercise the option to extend its original lease as a result of its acquisition and
planned relocation of Entity A.
Lessee’s incremental borrowing rate at the end of Year 6 is 6 per cent 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 nine-year term, and with similar collateral. Lessee expects to consume the right-of-use asset’s future
economic benefits evenly over the lease term and, thus, depreciates the right-of-use asset on a straight-line basis.
Required: -
a) Measure the value at which lease will be initially recognized in the books of lessee and pass necessary journal entries?
b) Provide accounting for the change in lease term and pass necessary journal entries?
c) Prepare lease repayment schedule for first six years and for seven and eighth year?
Answer
At the commencement date, Lessee makes the lease payment for the first year, incurs initial direct costs, receives lease incentives from Lessor and measures the lease
liability at the present value of the remaining nine payments of CU50,000, discounted at the interest rate of 5 per cent per annum, which is CU355,391.
Lessee initially recognizes assets and liabilities in relation to the lease as follows.
Rs. Rs.
Right to use asset 405,391
Lease liability 355,391
Cash 50,000
Cash (initial direct cost) 20,000
Cash (lease incentive) 5,000
Lessee accounts for the reimbursement of leasehold improvements from Lessor applying other relevant Standards and not as a lease incentive applying IFRS 16. This is
because costs incurred on leasehold improvements by Lessee are not included within the cost of the right-of-use asset.
The right-of-use asset and the lease liability from Year 1 to Year 6 are as follows.
Lease liability Right to use asset
Year Opening Lease Interest Ending Opneing Dep- for the Ending
balance payment expense balance balance year balance
1 355,391 - 17,770 373,161 420,391 42,039 378,352
2 373,161 50,000 16,158 339,319 378,352 42,039 336,313
3 339,319 50,000 14,466 303,785 336,313 42,039 294,274
4 303,785 50,000 12,689 266,474 294,274 42,039 252,235
5 266,474 50,000 10,824 227,297 252,235 42,039 210,196
6 227,297 50,000 8,865 186,162 210,196 42,039 168,156
At the end of the sixth year, before accounting for the change in the lease term, the lease liability is CU186,162 (the present value of four remaining payments of
CU50,000, discounted at the original interest rate of 5 per cent per annum). Interest expense of CU8,865 is recognized in Year 6. Lessee’s right-of-use asset is
CU168,157.
Lessee re-measures the lease liability at the present value of four payments of CU50,000 followed by five payments of CU55,000, all discounted at the revised discount
rate of 6 per cent per annum, which is CU378,174. Lessee increases the lease liability by CU192,012, which represents the difference between the re-measured liability
of CU378,174 and its previous carrying amount of CU186,162. The corresponding adjustment is made to the right-of-use asset to reflect the cost of the additional right
of use, recognized as follows.
Rs. Rs.
Following the re-measurement, the carrying amount of Lessee’s right-of-use asset is CU360,169 (i.e. CU168,157 + CU192,012). From the beginning of Year 7 Lessee
calculates the interest expense on the lease liability at the revised discount rate of 6 per cent per annum.
The right-of-use asset and the lease liability from Year 7 to Year 15 are as follows.

Year Opening Lease Interest Ending Opneing Dep- for the Ending
balance payment expense balance balance year balance
7 378,174 50,000 19,690 347,864 360,169 40,019 320,150
8 347,864 50,000 17,872 315,736 320,150 40,019 280,131
9 315,736 50,000 15,944 281,680 280,131 40,019 240,113
10 281,680 50,000 13,901 245,581 240,113 40,019 200,094
11 245,581 55,000 11,435 202,016 200,094 40,019 160,075
12 202,016 55,000 8,821 155,837 160,075 40,019 120,056
13 155,837 55,000 6,050 106,887 120,056 40,019 80,038
14 106,887 55,000 3,113 55,001 80,038 40,019 40,019
15 55,001 55,000 0 1 40,019 40,019 -
Example - 3
Lessee enters into a 10-year lease of property with annual lease payments of CU50,000, payable at the beginning of each year. The contract specifies that lease
payments will increase every two years on the basis of the increase in the Consumer Price Index for the preceding 24 months. The Consumer Price Index at the
commencement date is 125. This example ignores any initial direct costs. The rate implicit in the lease is not readily determinable. Lessee’s incremental
borrowing rate is 5 per cent 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.
Lessee expects to consume the right-of-use asset’s future economic benefits evenly over the lease term and, thus, depreciates the right-of-use asset on a straight-
line basis.
At the beginning of the third year of the lease the Consumer Price Index is 135.
Required: - Prepare the journal entries of all the three years and prepare lease repayment schedule?
Answer
At the commencement date, Lessee makes the lease payment for the first year and measures the lease liability at the present value of the remaining nine payments
of CU50,000, discounted at the interest rate of 5 per cent per annum, which is CU355,391.
Lessee initially recognizes assets and liabilities in relation to the lease as follows.
Rs. Rs.
Cash 50,000
During the first two years of the lease, Lessee recognizes in aggregate the following related to the lease.
Interest expense 33,928
Depreciation charge 81,078

[405,391/10]x2
At the beginning of the second year, Lessee makes the lease payment for the second year and recognizes the following.
Cash 50,000
At the beginning of the third year, before accounting for the change in future lease payments resulting from a change in the Consumer Price Index and making the
lease payment for the third year, the lease liability is CU339,319 (the present value of eight payments of CU50,000 discounted at the interest rate of 5 per cent per
annum = CU355,391 + CU33,928 -CU50,000).
The payment for the third year, adjusted for the Consumer Price Index, is CU54,000 (CU50,000 × 135 ÷ 125). Because there is a change in the future lease
payments resulting from a change in the Consumer Price Index used to determine those payments, Lessee re-measures the lease liability to reflect those revised
lease payments, i.e. the lease liability now reflects eight annual lease payments of CU54,000.
At the beginning of the third year, Lessee re-measures the lease liability at the present value of eight payments of CU54,000 discounted at an unchanged discount
rate of 5 per cent per annum, which is CU366,464. Lessee increases the lease liability by CU27,145, which represents the difference between the re-measured
liability of CU366,464 and its previous carrying amount of CU339,319. The corresponding adjustment is made to the right-of-use asset, recognized as follows.
Rs. Rs.
At the beginning of the third year, Lessee makes the lease payment for the third year and recognizes the following.
Cash 54,000

Year Opening Lease Interest Ending Opneing Dep- for Ending
balance payment expense balance balance the year balance
1 355,391 - 17,770 373,161 405,391 40,539 364,852
2 373,161 50,000 16,158 339,319 364,852 40,539 324,313
3 366,464 54,000 15,623 328,087 351,458 43,932 307,526
4 328,087 54,000 13,704 287,791 307,526 43,932 263,593
Example -3 Assume the same facts as Example 3 except that Lessee is also required to make variable lease payments for each year of the lease, which are determined as 1 per cent of Lessee’s sales
generated from the leased property.
Lessee prepares financial statements on an annual basis. During the first year of the lease, Lessee generates sales of CU800,000 from the leased property.
Required: - Prepare the journal entries for the first year only?
Answer
Those payments are not included in the measurement of the asset and liability.
Rs. Rs.
Cash 50,000
Lessee prepares financial statements on an annual basis. During the first year of the lease, Lessee generates sales of CU800,000 from the leased property. Lessee incurs an additional expense
related to the lease of CU8,000 (CU800,000 × 1 per cent), which Lessee recognizes in profit or loss in the first year of the lease.

Year Opening Lease Interest Opneing Dep- for
balance payment expense Ending balance balance the year Ending balance
1 355,391 - 17,770 373,161 420,391 42,039 378,352
2 373,161 50,000 16,158 339,319 378,352 42,039 336,313
3 339,319 50,000 14,466 303,785 336,313 42,039 294,274
4 303,785 50,000 12,689 266,474 294,274 42,039 252,235
5 266,474 50,000 10,824 227,297 252,235 42,039 210,196
6 227,297 50,000 8,865 186,162 210,196 42,039 168,156
7 186,162 50,000 6,808 142,970 168,156 42,039 126,117
8 142,970 50,000 4,649 97,619 126,117 42,039 84,078
9 97,619 50,000 2,381 50,000 84,078 42,039 42,039
10 50,000 50,000 (0) (0) 42,039 42,039 -
Example -5
Lessee enters into a 10-year lease for 2,000 square metres of office space. At the beginning of Year 6, Lessee and Lessor agree to amend the original lease for
the remaining five years to include an additional 3,000 square metres of office space in the same building. The additional space is made available for use by
Lessee at the end of the second quarter of Year 6. The increase in total consideration for the lease is
commensurate with the current market rate for the new 3,000 square metres of office space, adjusted for the discount that Lessee receives reflecting that Lessor
does not incur costs that it would otherwise have incurred if leasing the same space to a new tenant (for example, marketing costs).
Required: - Discuss the accounting treatment of modification of lease?

Answer
Lessee accounts for the modification as a separate lease, separate from the original 10-year lease. This is because the modification grants Lessee an additional
right to use an underlying asset, and the increase in consideration for the lease is commensurate with the stand-alone price of the additional right-of-use
adjusted to reflect the circumstances of the contract. In his example, the additional underlying asset is the new 3,000 square metres of office space.
Accordingly, at the commencement date of the new lease (at the end of the second quarter of Year 6), Lessee recognizes a right-of-use asset and a lease liability
relating to the lease of the additional 3,000 square metres of office space. Lessee does not make any adjustments to the accounting for the original lease of
2,000 square metres of office space as a result of this modification.
Lessee enters into a 10-year lease for 5,000 square metres of office space. The annual lease payments are CU100,000 payable at the end of each year. The
Example -6
interest rate implicit in the lease cannot be readily determined. Lessee’s incremental borrowing rate at the commencement date is 6 per cent per annum. At the
beginning of Year 7, Lessee and Lessor agree to amend the original lease by extending the contractual lease term by four years. The annual lease payments are
unchanged (ie CU100,000 payable at the end of each year from Year 7 to Year 14). Lessee’s incremental borrowing rate at the beginning of Year 7 is 7 per
cent per annum.

Answer
At the effective date of the modification (at the beginning of Year 7), Lessee re-measures the lease liability based on: (a) an eight-year remaining lease term,
(b) annual payments of CU100,000 and (c) Lessee’s incremental borrowing rate of 7 per cent per annum. The modified lease liability equals CU597,130. The
lease liability immediately before the modification (including the recognition of the interest expense until the end of Year 6) is CU346,511. Lessee recognizes
the difference between the carrying amount of the modified lease liability and the carrying amount of the lease liability immediately before the modification
(CU250,619) as an adjustment to the right-of-use asset.
Lessee enters into a 10-year lease for 5,000 square metres of office space. The annual lease payments are CU50,000 payable at the end of each year. The
Example -7
interest rate implicit in the lease cannot be readily determined. Lessee’s incremental borrowing rate at the commencement date is 6 per cent per annum. At the
beginning of Year 6, Lessee and Lessor agree to amend the original lease to reduce the space to only 2,500 square metres of the original space starting from the
end of the first quarter of Year 6. The annual fixed lease payments (from Year 6 to Year 10) are CU30,000. Lessee’s incremental borrowing rate at the
beginning of Year 6 is 5 per cent per annum.
Answer
At the effective date of the modification (at the beginning of Year 6), Lessee re-measures the lease liability based on: (a) a five-year remaining lease term, (b)
annual payments of CU30,000 and (c) Lessee’s incremental borrowing rate of 5 per cent per annum. This equals CU129,884. Lessee determines the
proportionate decrease in the carrying amount of the right-of-use asset on the basis of the remaining right-of-use asset (ie 2,500 square metres corresponding to
50 per cent of the original right-of-use asset).
50 per cent of the pre-modification right-of-use asset (CU184,002) is CU92,001. Fifty per cent of the pre-modification lease liability (CU210,618) is
CU105,309. Consequently, Lessee reduces the carrying amount of the right-of-use asset by CU92,001 and the carrying amount of the lease liability by
CU105,309. Lessee recognizes the difference between the decrease in the lease liability and the decrease in the right-of-use asset (CU105,309 - CU92,001 =
CU13,308) as a gain in profit or loss at the effective date of the modification (at the beginning of Year 6).
Lessee recognizes the difference between the remaining lease liability of CU105,309 and the modified lease liability of CU129,884 (which equals CU24,575)
as an adjustment to the right-of-use asset reflecting the change in the consideration paid for the lease and the revised discount rate.
Lessee enters into a 10-year lease for 2,000 square metres of office space. The annual lease payments are CU100,000 payable at the end of each year. The interest rate
Example -8
implicit in the lease cannot be readily determined. Lessee’s incremental borrowing rate at the commencement date is 6 per cent per annum. At the beginning of Year 6,
Lessee and Lessor agree to amend the original lease to (a) include an additional 1,500 square metres of space in the same building starting from the beginning of Year 6
and (b) reduce the lease term from 10 years to eight years. The annual fixed payment for the 3,500 square metres is CU150,000 payable at the end of each year (from
Year 6 to Year 8). Lessee’s incremental borrowing rate at the beginning of Year 6 is 7 per cent per annum.

Answer
The consideration for the increase in scope of 1,500 square metres of space is not commensurate with the stand-alone price for that increase adjusted to reflect the
circumstances of the contract. Consequently, Lessee does not account for the increase in scope that adds the right to use an additional 1,500 square metres of space as a
separate lease.
The pre-modification right-of-use asset and the pre-modification lease liability in relation to the lease are as follows.

1 736,009 100,000 44,161 680,170 736,009 73,601 662,408
2 680,170 100,000 40,810 620,980 662,408 73,601 588,807
3 620,980 100,000 37,259 558,238 588,807 73,601 515,206
4 558,238 100,000 33,494 491,733 515,206 73,601 441,605
5 491,733 100,000 29,504 421,237 441,605 73,601 368,004
6 421,237 421,237 368,004 - 368,004
At the effective date of the modificaion (at the beginning of Year 6), Lessee re-measures the lease liability on the basis of: (a) a three-year remaining lease term, (b)
annual payments of CU150,000 and (c) Lessee’s incremental borrowing rate of 7 per cent per annum. The modified liability equals CU393,647, of which (a) CU131,216
relates to the increase of CU50,000 in the annual lease payments from Year 6 to Year 8 and (b) CU262,431 relates to the remaining three annual lease payments of
CU100,000 from Year 6 to Year 8.
Decrease in the lease term
At the effective date of the modification (at the beginning of Year 6), the pre-modification right-of-use asset is CU368,004. Lessee determines the proportionate
decrease in the carrying amount of the right-of-use asset based on the remaining right-of-use asset for the original 2,000 square metres of office space (ie a remaining
three-year lease term rather than the original five-year lease term). The remaining right-of-use asset for the original 2,000 square metres of office space is CU220,802 (ie
CU368,004 ÷ 5 × 3 years).
At the effective date of the modification (at the beginning of Year 6), the pre-modification lease liability is CU421,236. The remaining lease liability for the original
2,000 square metres of office space is U267,301 (ie present value of three annual lease payments of CU100,000, discounted at the original discount rate of 6 per cent per
annum).
Consequently, Lessee reduces the carrying amount of the right-of-use asset by CU147,202 (CU368,004 - CU220,802), and the carrying amount of the lease liability by
CU153,935 (CU421,236 - CU267,301). Lessee recognises the difference between the decrease in the lease liability and the decrease in the right-of-use asset (CU153,935
- CU147,202 = CU6,733) as a gain in profit or loss at the effective date of the modification (at the beginning of Year 6).
Rs. Rs.
Right to use 147,202
Profit or loss account 6,733
At the effective date of the modification (at the beginning of Year 6), Lessee recognizes the effect of the re-measurement of the remaining lease liability reflecting the
revised discount rate of 7 per cent per annum, which is CU4,870 (CU267,301 - CU262,431), as an adjustment to the right-of-use asset.
Rs. Rs.
Increase in the leased space
At the commencement date of the lease for the additional 1,500 square metres of space (at the beginning of Year 6), Lessee recognizes the increase in the lease liability
related to the increase in scope of CU131,216 (i.e. present value of three annual lease payments of CU50,000, discounted at the revised interest rate of 7 per cent per
annum) as an adjustment to the right-of-use asset.
The modified right-of-use asset and the modified lease liability in relation to the modified lease are as follows.
6 393,647 150,000 27,555 271,202 347,148 115,716 231,432
7 271,202 150,000 18,984 140,186 231,432 115,716 115,716
8 140,186 150,000 9,813 (0) 115,716 115,716 -
Example -9
Lessee enters into a 10-year lease for 5,000 square metres of office space. At the beginning of Year 6, Lessee and Lessor agree to amend the original lease for
the remaining five years to reduce the lease payments from CU100,000 per year to CU95,000 per year. The interest rate implicit in the lease cannot be readily
determined. Lessee’s incremental borrowing rate at the commencement date is 6 per cent per annum. Lessee’s incremental borrowing rate at the beginning of
Year 6 is 7 per cent per annum. The annual lease payments are payable at the end of each year.

Answer
At the effective date of the modification (at the beginning of Year 6), Lessee re-measures the lease liability based on:
(a) a five-year remaining lease term,
(b)
annual payments of CU95,000 and (c) Lessee’s incremental borrowing rate of 7 per cent per annum. Lessee recognizes the difference between the
carrying amount of the modified liability (CU389,519) and the lease liability immediately before the modification (CU421,236) of CU31,717 as an
adjustment to the right-of-use asset.
LessieCorp plans to lease a new lorry from LorryCars . LorryCars made an offer to LessieCorp with 2 options:
General information:
1. Lorry would be leased for 4 years under non-cancellable lease that starts 1 January 20X1.
2. Rentals are paid annually on 31 December starting year 20X1.
3. In these rentals, insurance fee of 300 EUR is included.
4. At the end of lease, lorry would have market value of 12 400 EUR.
5. Normal economic life of lorry is 6 years.
6. LorryCars sells this type of lorry for 35 000 EUR when paid cash.
7. LessieCorp's incremental borrowing rate is 3% (and it is close to the rate implicit in the lease).
Option 1: LessieCorp would pay annual rentals amounting to 6 800 EUR. At the end of lease term, LessieCorp has an option to buy lorry for its
market value or lease it for additional 2 years with the same rental fees.
Option 2: LessieCorp would pay annual rentals amounting to 9 500 EUR. At the end of lease term, LessieCorp has an option to buy lorry either for
200 EUR, or lease it for another 2 years with rental fee of 100 EUR per annum.
Advise LessieCorp on correct classification of above presented leases.
1. Calculating present value of minimum lease payments
Option 1 Option 2
Discount factor Present value Present value
Year Cash flow Cash flow
1/(1+0,03)^year (cash flow*DF) (cash flow*DF)
1 0.971 6,500.00 6,310.68 9,200.00 8,932.04
2 0.943 6,500.00 6,126.87 9,200.00 8,671.88
3 0.915 6,500.00 5,948.42 9,200.00 8,419.30
4 0.888 6,500.00 5,775.17 9,400.00 8,351.78
Total 24,161.14 34,375.00
FV at inception: 35,000.00 35,000.00
%: 69.03% 98.21%
Option 1 Option 2
Transfer of ownership at the end of lease term no no
Option to purchase asset for price < fair value no yes
Lease term = major part of economic life no yes
Present value of MLP close to fair value no yes
Leased asset - specialized nature no no
Losses from cancellation borne by lessee ? ?
Gains / losses from fluctuations to the lessee ? ?
Option to continue rent for rental under market no yes
Operating lease Finance lease

On 1 January 20X1 FinanceLease Co. entered into finance lease of stamping machine as a lessor. Cash price of machine was 500 000 EUR.
FinanceLease Co. incurred additional costs of 3 000 EUR for arranging lease contract. Economic life of stamping machine is 6 years. Lease term is 5
years, annual lease payments are 110 000 EUR payable 31 December each year. At the end of lease term, machine has an unguaranteed residual
value of 1 000 EUR.
How would this transaction appear in the financial statements of FinanceLease Co. at 31 December 20X1?

Cash price of stamping machine: 500,000
Directly attributable expenses: 3,000
Net investment in the lease (500 000 + 3 000) 503,000
Recognition of net investment in the lease:

Credit Cash - paid for machine -3,000
0
Lease Ending balance of

Year Cash flow Interest
receivable FL receivable
0 -503,000 503,000
1 110,000 15,660 94,340 408,660
2 110,000 12,723 97,277 311,383
3 110,000 9,694 100,306 211,077
4 110,000 6,571 103,429 107,649
5 111,000 3,351 106,649 1,000
3.11%

Debit Cash 110,000

0
3. Disclosures

Total 441,000
Present value of minimum lease payments: 408,660
Present value of minimum lease payments:

due later than 5 years
Total 408,660
Unearned finance income in respect of finance leases: 32,340

Unguaranteed residual value accruing to the lessor: 1,000
In January 20X1, CarProd, manufacturer of cars, offered the following finance lease related to the newest model of car produced:
1. Newest model of car has fair value equal to its selling price, that is 30 000 EUR. Cost of manufacture is 27 000 EUR.
2. Lease would be non-cancellable for 4 years, with annual installments of 8 500 EUR paid in arrears.
3. At the end of lease term, ownership of the car automatically passes to the client at no additional cost.
CarProd incurred further cost of 1 000 EUR related to negotiating contract. How would this transaction appear in the financial statements of
CarProd at 31 December 20X1?

Cash price of new model: 30,000
Recognition of net investment in the lease / sale of asset:

Credit Inventory - new model of car -27,000
Credit Profit on sale (30 000 - 27 000 - 1000) Note: This is simplified accounting. CarProd would probably
-2,000 show 30 000 EUR as revenues, 27 000 EUR as costs of sales
0 and 1 000 EUR as marketing or other expenses.
Ending balance
Year Cash flow Interest Lease asset
of FL asset
0 -30,000 30,000
1 8,500 1,560 6,940 23,060
2 8,500 1,200 7,300 15,760
3 8,500 820 7,680 8,080
4 8,500 420 8,080 0
5.20%

Debit Cash 8,500

0
3. Disclosures

Total 25,500
Present value of minimum lease payments: 23,060
Present value of minimum lease payments:

Total 23,060
Unearned finance income in respect of finance leases: 2,440

On 1 January 20X1, Lessor Co. made a following offer for operating lease to one of its biggest clients:
1. Lease relates to machinery in total fair value of 1 000 000 EUR.
2. Lease is uncancellable for 6 years, whereas machines have an economic life of 10 years.
3. Annual rentals of 170 000 EUR are payable in arrears on 31 December each year.
4. First rental is decreased to 50 000 EUR as a bonus to great customer.
How would this transaction appear in the financial statements of Lessor Co. at 31 December 20X1?
1. Accounting treatment
1.1 Asset related accounting:
Recognition of assets at inception:
Debit PPE - machinery 1,000,000

Credit Cash -1,000,000
0
Depreciation charge of PPE for 20X1:
Debit Depreciation expenses (1 000 000 / 10) 100,000

0
1.2 Rentals related accounting:
Cash received on 31 December 20X1:
Debit Cash 50,000

0
Discount on 1st rental payment:
Debit Incentive 120,000

0
Reduction of rental income on straight-line basis:
Debit Rental income (120 000/6) 20,000

Credit Incentive -20,000
0
Rental income in the 1st year (50 000 + 120 000 - 20 000) 150,000
Accounting in the next years:
Debit Cash 170,000

0
Debit Rental income 20,000

Credit Incentive -20,000
0
2. Disclosures
Future minimum lease payments under non-cancellable operating lease:

Total 850,000
Example -10
An entity (Seller-lessee) sells a building to another entity (Buyer-lessor) for cash of CU2,000,000. Immediately before the transaction, the building is carried at a cost of
CU1,000,000. At the same time, Seller-lessee enters into a contract with Buyer-lessor for the right to use the building for 18 years, with annual payments of CU120,000
payable at the end of each year. The terms and conditions of the transaction are such that the transfer of the building by Seller-lessee satisfies the requirements for
determining when a performance obligation is satisfied in IFRS 15 Revenue from Contracts with Customers. Accordingly, Seller-lessee and Buyer-lessor account for
the transaction as a sale and leaseback. This example ignores any initial direct costs.
The fair value of the building at the date of sale is CU1,800,000. Because the consideration for the sale of the building is not at fair value, Seller-lessee and Buyer-lessor
make adjustments to measure the sale proceeds at fair value. The amount of the excess sale price of CU200,000 (CU2,000,000 - CU1,800,000) is recognized as
additional financing provided by Buyer-lessor to Seller-lessee.
The interest rate implicit in the lease is 4.5 per cent per annum, which is readily determinable by Seller-lessee. The present value of the annual payments (18 payments
of CU120,000, discounted at 4.5 per cent per annum) amounts to CU1,459,200, of which CU200,000 relates to the additional financing and CU1,259,200 relates to the
lease—corresponding to 18 annual payments of CU16,447 and CU103,553, respectively.
Buyer-lessor classifies the lease of the building as an operating lease.
Required: - Discuss the accounting treatment from seller lessee and buyer lessor point view and pass necessary journal entries for the first year?
Answer
Seller-lessee
At the commencement date, Seller-lessee measures the right-of-use asset arising from the leaseback of the building at the proportion of the previous carrying amount of
the building that relates to the right of use retained by Seller-lessee, which is CU699,555. This is calculated as: CU1,000,000 (the carrying amount of the building) ÷
CU1,800,000 (the fair value of the building) × CU1,259,200 (the discounted lease payments for the 18-year right-of-use asset).
Seller-lessee recognizes only the amount of the gain that relates to the rights transferred to Buyer-lessor of CU240,355 calculated as follows. The gain on sale of
building amounts to CU800,000 (CU1,800,000 - CU1,000,000), of which:
(a) CU559,645 (CU800,000 ÷ CU1,800,000 × CU1,259,200) relates to the right to use the building retained by Seller-lessee; and
(b) CU240,355 (CU800,000 ÷ CU1,800,000 × (CU1,800,000 - CU1,259,200)) relates to the rights transferred to Buyer-lessor.
At the commencement date, Seller-lessee accounts for the transaction as follows.
Rs. Rs.
Cash 2,000,000
Building 1,000,000
Financial liability 1,459,200
Gain on right to use asset 240,355
Buyer-lessor
At the commencement date, Buyer-lessor accounts for the transaction as follows.
Rs. Rs.
Building 1,800,000
Cash 2,000,000
After the commencement date, Buyer-lessor accounts for the lease by treating CU103,553 of the annual payments of CU120,000 as lease payments. The remaining
CU16,447 of annual payments received from Seller-lessee are accounted for as (a) payments received to settle the financial asset of CU200,000 and (b) interest revenue.

IFRS16 - Examples

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IFRS16 - Examples

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List of Examples IFRS 16 Leases

Worker needs to account for a right-of-use asset (no classification)

Rentor classifies a lease as operating

Total consideration: 120000

Worker can either:

1. Assessment at the lease commencement

The lease term = 1 year

2.1 Transaction cost:

Debit Prepayments 1,200

Debit P/L - Lease expenses 100 on a monthly basis

2.2 Monthly rentals:

Debit P/L - Lease expenses 10,000

Debit P/L - Lease expenses

3. Assessment at the lease commencement

The lease term = 2 years

Regular lease (extended lease term)

Annual discount rate: 3.00%

Discount Present value of

12 -10,000 0.971 -9,709

5. Journal entries - initial recognition

Debit Right-of-use asset 176,627

Lease liability Lease Decrease in Lease

18 34,657 -5,000 -85 -4,915 29,743

7. Journal entries - subsequent measurement

1st monthly payment:

Debit P/L - Interest expense 433

Total for the year 20X1:

Debit P/L - Interest expense 3,622

Depreciation of right-of-use asset:

Debit P/L - Depreciation 88,314

1.1 Interest rate implicit in the lease:

Year Cash flow

Interest rate implicit in

1.2 Present value of the lease payments:

Discount Present value of

1.3 Right-of-use asset:

PV of the minimum lease payments: 503,000

1.4 Journal entry

Recognition of asset / lease liability:

Debit Right-of-use asset 505,000

2.1 Allocation of the lease payments

Lease liability Lease Decrease in Lease

2.2 Calculation of depreciation

Cost of right-of-use asset: 505,000

2.3 Journal entries

Depreciation of ROU: Annual payment in the 1st year:

Debit Depreciation expenses 84,167 Debit Interest expense 15,660

Annual discount rate: 4.00%

Month 1 = lease commencement = 1 March 20X1

Discount Present value of

Total -82,742 = lease liability at the commencement date

2. Journal entries - initial recognition

Debit Right-of-use asset 87,742

Lease liability Lease Decrease in Lease

10/20X4 44 -9,903 -2,000 -32 -1,968 -7,935

4. Journal entries - subsequent measurement

Debit P/L - Interest expense 271

Total for the year 20X1:

Debit P/L - Interest expense 2,611

Depreciation of right-of-use asset:

Debit P/L - Depreciation 18,280

1. Remeasurement of the lease liability

The new lease payment: 2,042