SLFRS 16

Leases

Lesson Content
1. Introduction and definitions
2. Lessee accounting

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3. Lessee accounting: reassessment and modification
4. Lessors: Lease classification

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5. Lessor accounting
6. Sale and leaseback transactions

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3. LESSEE ACCOUNTING: REASSESSMENT AND MODIFICATION

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3.1 REMEASURING THE LEASE LIABILITY

If any of the components of the calculation of lease liability change during the lease term,

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the lease liability is remeasured. This occurs, for example, if:

a) The lease term is revised N

b) There is a reassessment of the probability of a purchase option being exercised
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c) Variable lease payments (future lease payments based on an index or rate) are
revised
d) There is a change in the amount expected to be paid under residual value
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guarantees.
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Lease liabilities must be remeasured to reflect changes in circumstances. When

remeasuring the lease liability:
C

 A revised discount rate (the interest rate implicit in the lease for the remainder of
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the term or the lessee's incremental borrowing rate at the date of remeasurement)
is applied to future lease payments in the case of (a) and (b).

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The original discount rate is applied to future lease payments in the case of (c) and
(d).

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A corresponding adjustment is made to the right-of-use asset.

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Question 1 – Remeasuring the lease liability (change in lease term)

X Plc enters into a 5 year lease of a machine on 1 January Year 1.

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The lease liability at the commencement of the lease was Rs. 426,494.
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X Plc incurred initial direct costs of Rs. 5,000 when arranging the lease.
X Plc recognised a right of use asset at the commencement of the lease in the amount of
Rs. 431,494 (Rs. 426,494 + Rs. 5,000).
X Plc has guaranteed the residual value of the asset at the end of the lease term at Rs.
40,000.
 Further information
X Plc has an option to extend the lease term for a further three years at an annual rental
of Rs. 110,000.

At the commencement date, X Plc concluded that it was not reasonably certain to exercise
the option so the lease term was determined to be 5 years.

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X Plc would not have to guarantee a residual value if it were to exercise the option to
extend the lease term.

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End of Year 4
X plc’s circumstances have changed and it is now reasonably certain that it will exercise

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the option to extend the lease (meeting the conditions in SLFRS 16).

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X Plc is unable to determine a revised interest rate implicit in the lease but its incremental
borrowing rate is 9%.

Required

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How this should be accounted as per SLFRS 16?

3.2 LEASE MODIFICATION N

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Definition: Lease modification
Lease modification: A change in the scope of a lease, or the consideration for a lease, that
was not part of the original terms and conditions of the lease (for example, adding or
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terminating the right to use one or more underlying assets, or extending or shortening
the contractual lease term).
C

Lease modification is different from the situations addressed by the previous section. A
C

lease modification involves changes to the lease that were not part of the original terms
and conditions of a lease.
A

Question 2 – Lease modification

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X Plc leases a building for an initial period of five years with an option to extend the lease
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for a further three years.

At the commencement date, X Plc concluded that it was not reasonably certain to exercise
the option so the lease term was determined to be 5 years.
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At the end of the fourth year of the lease X plc’s circumstances have changed and it is now
reasonably certain that it will exercise the option to extend the lease (meeting the
conditions in SLFRS 16).
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Required
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How this should be accounted as per SLFRS 16?

 Question 3 – Lease modification

Y Plc leases a building for five years. At the end of the fourth year of the lease X plc’s
circumstances have changed and it has contracted with the lessor to extend the lease for
a further three years beyond the original lease term.

Required

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How this should be accounted as per SLFRS 16?

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