IFRS 16 – Leases

Definition B. Short Life Low Value Separating Components

Lease is a contract between a lessor and a lessee. Lessor is the party Lease will be accounted as Short life low value
who will allow the lessee to use the asset it owns for a specified period if it meets either of the following criteria: 1.Separate the lease components & non-lease
of time. 1. Leased for lesser than 1 year. components i.e the ROU with other services.
. 2. First hand value of the asset is less than 5000USD.
Accounting in Lessee’s Books:
3. If examiner mentions the assets : Small furniture, small computer, 2.Allocate the Contract price to the lease & non-lease components
A. Regular Lease
telephones and tablets. based on their stand alone prices in the market.
Initial Measurement
4. If examiner mentions the word
Liability:
‘Short Life low value’. 3.The lease liability and ROU once separated from the
Present value of all the future lease payments
non lease component are then accounted normally as
Right of use of Asset: C. Sale and Leaseback per IFRS16 leases. i.e the present value of future
1. Initial Liability
payments for the initial lease measurement.
2. Payment made on the same day or in advance • Transfer is an actual Sale:
3. Direct costs Indication: When the asset is leased back it is leased for a
4. Dismantling Costs period lesser than its useful life so that the Lessor is also
Reassessing the lease liability and ROU
able to advantage of that asset.
Subsequent Measurement
Liability: 1.Recalculate Lease liability & ROU if there is a change in :
Treatment: Combined journal entry of Sale and Leaseback •Lease term
Payment made in arrears
B/F + Interest – Payment = C/F •Lease payments
Dr. Bank •Lease exercising option to purchase the asset
Payment made in advance Dr. ROU (PV of lease liab/ Sale proceeds X CV of asset)
B/F – Payment + Interest = C/F 2.The discount rate used for bringing the payments to present
Cr. Lease Liability value should be :
Interest will be recorded as Finance cost in Profit & Loss. Cr. Asset
Whatever remains after payment is Non current liability. •Rate implicit in the lease (if not available then)
Cr. Gain on disposal (SP- PV of lease liab/Sale proceeds X total profit) •Incremental borrowing rate
From the year end figure if NCL is removed then
whatever remains in current liability. Transfer is not an actual:
Indication: When the asset is leased back for years
Right of Use of Asset:
equal to the remaining life.
Check whether the assets ownership is
transferred to the Lessee at the end of the
Dr. Bank
lease term.
Ownership transferred : Depreciate over Cr. Loan
the useful life.
Dr. Finance Cost
Ownership not transferred : Depreciate
over the shorter of useful life or lease term. Cr. Interest payable

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 IFRS 16 – Leases
Accounting in Lessor’s Books: Finance Lease
Initial Measurement
Recognize Receivable:
Classification into Finance or Operating Lease
Present value of the future payments to be received.
Derecognize the asset:
If anyone of the following Indicators are met then it’s a Finance lease : The CV of the asset should be derecognized from the books.

Recognize profit:
•Purchase Option: The lessee can buy the asset at a price lower than its expected market value when the
The difference between the PV of receivable and the CV of
option is exercisable, the asset will be recognized as profit in the books.
Subsequent Measurement
and it's highly likely the option will be exercised.
Payment received in arrears :
•Lease Term: The lease duration, including any secondary periods, spans most of the asset's economic life. Op Bal + Finance Income – Cash received = Cl bal
•Present Value of Lease Payments: At the start of the lease, the lease payments' present value is almost equal
Payment received in advance :
to the asset's fair value. Op Bal– Cash received + Finance Income = Cl bal
•Specialized Assets: The assets are specialized, meaning only the lessee can use them without significant
Whatever remains after receipt in next year is Non current Asset. From the closing balance of
modifications. current year whatever Remains after deducting non-current element is Current Asset. Finance
Income should be recorded in PL.
•Lessee's Compensation for Cancellation: If the lease is terminated early, the lessee will cover the lessor's
losses.
•Gains/Losses on Residual Value: The lessee benefits or suffers from changes in the asset's residual value,
possibly through
lease payment rebates. Operating lease

•Secondary Lease Period: The lessee has the option to extend the lease for a secondary period at a rent
1. Continue to recognize the asset and depreciate it over its useful life.
significantly lower
2. Record Income from the lease on straight line basis.
than market rates.
3. Any direct costs incurred pertaining to the lease should be capitalized.

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