#DigInIFRS IFRS-16 (Part:1)

By: Muzammil Hussain Korai Lessor

(Treatment at start of lease)

Has the Lessor transferred

substantially all the risk and
Finance Lease Operating Lease
rewards of the underlying
asset?

Net Investment in Lease:

Present Value of :
Initial Fixed payments + Variable payments + GRV + 1. Don’t derecognize the underlying asset
Measurement Purchase Option/Penalties for termination + from SOFP.
UGRV + IDC (Initial Direct Cost) 1. No entry at date of inception (unless some
Discounted by using implicit interest rate cash is received in advance)
2. Recognize Lease income either on straight-
line basis, or any other systematic basis

Other Lessors Manufacturer/

Dealer Lessor

Such as; if operating lease is for 2 years. And

Lease payments are as follows:
1. Derecognize the underlying asset (the Year 1: CU 5,000 Year 2: CU 17,000
asset that is subject to lease, such as a 1. Record Revenue at lower of:
car) - Fair Value of Underlying Asset, and Now income will be recorded as
2. Recognize Lease Receivable, - Present value of Lease payments [(5K+17K)/2= 11K per year]
equivalent to Net Investment in Lease discounted at market rate of interest
3. Charge any differential amount to P/L 2. Record Cost of sale at:
Cost of Sale/Carrying amount of asset
Less: PV of UGRV
3. Expense out the IDC directly to P/L Examples of Situations resulting in transfer
of Substantial risk and rewards
Dr. Cr.
Lease Receivable XX • the lease transfers ownership of the
Underlying Asset/Cash XX underlying asset to the lessee by the end of
Gain/Loss (bal.) XX / XX the lease term;
• lessee has the option to purchase the
Dr. Cr.
underlying asset at a price that is expected
Lease Receivable XX
to be sufficiently lower than the fair value at
Cost of Sales (Less: UGRV) XX
Treatment of IDC: the date of exercising that purchase option
Revenue (Less: UGRV) XX
IDC is expensed out if the lessor is Dealer/ • lease term is for the major part of the
Manufacturer. However; in case of other Inventory XX
economic life of the underlying asset
lessors, IDC is included in Lease receivable/ • the underlying asset is of such a specialised
Net Investment in lease. Initial Direct Cost (P/L) XX
And, in case of operating lease, IDC is included nature that only the lessee can use it without
Cash XX
in the cost of the underlying asset. major modifications

Remember:
Lease classification (decision as to whether it’s operating lease or finance lease) is made only at the inception date and is reassessed only if there is a
lease modification. Changes in estimates (for example, changes in estimates of the economic life or of the residual value of the underlying asset), or
changes in circumstances (for example, default by the lessee), do not give rise to a new classification of a lease for accounting purposes.

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IFRS-16 (Part:2)
By: Muzammil Hussain Korai
Lessor Concepts

Lease Modification
Land and Building lease
(From Lessor Point of View)

Can lease payments be Modification in

Modification in
allocated between Land
and Building reliably? Finance Lease Operating Lease

Ask Yourself these 2 questions

• Will be considered as a new

Entire lease 1 Does the modification increase the lease as per new terms
would be Classify each
scope of lease? • Prepaid or accrued lease
classified as element
2 Does increase in lease consideration payments from the original
finance lease separately
reflect the stand-alone price for the lease will be adjusted within
increase in scope? the new lease payments.
And

unless it is Allocate lease

clear that both payments to
elements are both elements
operating proportionatel Would the lease be considered
leases y an operating lease if the
Modification will be modification had been in
treated as separate lease effect at the inception date?
Apply
IFRS-9

Important
For a lease of land and buildings in which the amount for the
land element is immaterial to the lease, a lessor may treat the
land and buildings as a single unit for the purpose of lease
classification.
• account for the lease modification as a new lease
• measure the carrying amount of the underlying asset as the
net investment in the lease immediately before the effective
date of the lease modification.

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IFRS-16 (Part:3)
By: Muzammil Hussain Korai
Lessee (Lease Types & Measurement)

Standard Lease Other Leases

Initial Measurement

Lease of low-
Lease Liability Short-Term Lease
value asset

Measured as
Lease Payments:
Fixed payments +
Variable payments +
GRV + Purchase A lease having a lease term Such as telephones, small
PV of lease payments that are not
Option/Penalties for of 12 months or less items of office furniture, etc.
paid at commencement date
early termination

However, if that lease Remember: Decision as to

contains a purchase option, whether an asset is low value
Discounted using interest rate implicit then it wouldn’t be a short- or not, is made based on the
in the lease. If that rate is not available, term lease even if its lease value when the asset is new,
then lessee’s incremental borrowing rate term is =< 12 months not the used one
is used for discounting.

However: If a lessee
Right-of-use Asset subleases an asset, or expects
Measurement
to sublease an asset, the head
lease does not qualify as a
Prepared by: Entity has the option
lease of a low-value asset.
Muzammil Hussain
Initially measured at cost Korai (CA Finalist)

Recognize rental expense in

Apply measurement rules of
P&L on straight line / another
Standard Lease
This Cost includes: systematic basis
• Initially measured amount of lease liability
• Any lease payments made at or before the
commencement date Subsequent Measurement
• Initial Direct Cost (IDC) Right-of-use Asset:
• Decommissioning Liability as per IAS 37 By default: Cost Model => Cost Less (Accumulated depreciation +
• Less: any lease incentives received Accumulated Impairment loss +/- Reassessment or modification
adjustment)
Exceptions: 1) When right-of-use asset meets the definition of
Dr. Cr. investment property and lessee applies Fair value model to its
Right of Use Asset (at cost) XX investment property 2) If right-of-use assets relate to a class of PPE
Initial Lease Liab. (PV of lease payments payable) XX to which the lessee applies the revaluation model in IAS 16
Entry Decommissioning Liability (IAS 37) XX Lease Liability: PV of lease liability + unwinding effect – lease
Cash (IDC + Initial lease payment) XX payments +/- reassessment or modification adjustment

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 #DigInIFRS IFRS-16 (Part:4)
By: Muzammil Hussain Korai Lessee (Lease Reassessment &
Modification)

Lease Lease
Reassessment Modificaiton

Def. Example Def. Example

In lease reassessment, Only
assumptions or the variable
facts change without affecting
the original contractual terms
and conditions.
What to do?
• Derive revised value of lease
liability based on revised
assessment
• Compare the new value of
lease liability with its old
value and pass an entry for
the differential amount by
updating lease liability as
well as right-of-use asset
If
• Change in Lease term due to
reassessment of option to
extend/terminate lease, or
• Reassessment of whether to
exercise Purchase Option or
not
Such as first we assumed
that we’ll not exercise
purchase option, but after
1 year we plan to exercise
that option. This is
reassessment of lease.
(Because that purchase option
was already available in the
contract. And now only our
assessment is changed, not
contract terms. Contract terms
are same as before)
Remember: if the carrying amount
of the right-of-use asset is reduced
to zero and there is a further
reduction in the measurement of
the lease liability, a lessee shall
recognise any remaining amount
of the remeasurement in profit or
loss.
Such as if new value of lease
liability is lower, then
Dr. Cr.
Lease Liability XX
Right-of-use Asset XX
• Change in Guaranteed
Residual Value
• Change in index rate or other
variable consideration
A lease modification involves a
change to the original terms and
conditions of the lease through a
formal renegotiation between lessor
and lessee.
Increase in
scope & price
Does increase in price reflect
stand-alone selling price of
increase in scope?
Separate Lease
Existing contract modified
Remeasure Lease Liability by
using revised terms and the
revised discount rate.
Decrease in Scope is better
grasped with examples. You may
refer to IFRS-16's Illustrative
examples of 17 & 18 for this. Or
comment down, and I’ll share
those examples alongwith
entries in excel format with you.
Step
02
Such as, earlier lease term was 7
years. But, after 1 year, lease term
was reduced to only 3 more years by
mutual agreement.
(Terms are changed in the contract)
What is the result of
that modification?
Prepared by: Decrease in
Muzammil Hussain scope
Korai (CA Finalist)
Fore better understanding, consider the
above example where after 1 year, lease term
was reduced from 6 remaining years to 3
remaining years. (Decrease in scope). And the
discount rate was revised from 8% to 9%.
Step
01
• Reduce the Right-of-use Asset by the same
percentage as the decrease in scope
[such as there’s 50% decrease in scope (3 out of 6
remaining years) in our case. Hence reduce ROU asset’s
value on modification date by 50%]
• Calculate the new value of the Lease Liability
by incorporating the effect of that decrease in
scope & price alone. ( In our scenario, this pertains
solely to the change in the lease term. Since the discount
rate has been increased, do not include its effect in the
calculation. Use earlier discount rate in this step.)
• Charge balancing amount to P/L

Use Revised Discount rate while
deriving new value of lease liab.
• Calculate the new value of the lease liability by incorporating all revised terms.
Use Original Discount rate while (For example, in step 1, we did not consider factors unrelated to the decrease in scope, such as the
deriving new value of lease liab., increase in the discount rate. However, we will now take into account every revised value,
including the updated discount rate.)
unless the rate is floating itself
• Adjust Right-Of-Use asset accordingly.

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 #DigInIFRS IFRS-16 (Part:5)
By: Muzammil Hussain Korai SubLease,
Sale and Lease Back

Sale and Lease

Sub-Lease
Back

Sublease classified as an Operating Lease:

When an entity transfers an asset, and gets it
back from the buyer on lease, it will first assess
whether transfer of the asset is a sale or not (by
applying IFRS-15)
• Record lease income from sublease based on a systematic basis
• There’s no impact of this lease on head lease
Sublease classified as a Finance Lease:
• Derecognize the ROU asset relating to head lease, but retain its Lease
liability and keep continuing its accounting as earlier.
• Recognize the Net Investment in the Sublease (PV of lease payments +
UGRV + IDC)
• Charge any difference between ROU asset and Net Investment to P/L

Transfer is not a
Transfer is a Sale
Sale

• Continue to recognize • Do not recognize the • Derecognize the

the underlying asset as underlying/ underlying asset • Recognize the underlying/
earlier transferred asset • Recognize ROU asset and transferred asset
• Treat the amount • Treat the amount Lease Liability • Apply lessor accounting
received as loan transferred as loan • Recognize gain/loss in P/L • Make adjustment as per relevant
(Financial liability as (Financial Asset as • Make adjustment as per scenario
per IFRS-9) per IFRS-9) relevant scenario

Linkedin.com/in/
muzammil-hussain- Scenarios
korai/ Treat differential amount
Treat differential amount as a loan
as a prepayment
Fair Value = Selling Price Fair Value > Selling Price Fair Value < Selling Price

Dr. Cr. Dr. Cr. Dr. Cr.

Cash/Bank xxx Cash/Bank xxx Cash/Bank xxx
1 2 3
Right-of-use asset xxx Right-of-use asset xxx Right-of-use asset xxx
Underlying Asset xxx Underlying Asset xxx Underlying Asset xxx
Lease Liability xxx Lease Liability xxx Lease Liability 4 xxx
Gain/loss (bal.) xxx / xxx Gain/loss (bal.) xxx / xxx Financial Liability 5 xxx
Gain/loss (bal.) xxx / xxx

1 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝐴𝑠𝑠𝑒𝑡 2 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝐴𝑠𝑠𝑒𝑡 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝐴𝑠𝑠𝑒𝑡

𝑅𝑂𝑈 = 𝑃𝑉 𝑜𝑓 𝐿𝑒𝑎𝑠𝑒 𝑃𝑎𝑦𝑚𝑒𝑛𝑡𝑠 × 𝑅𝑂𝑈 = 𝑃𝑉 𝑜𝑓 𝐿𝑃𝑠 + 𝐹𝑉 − 𝑆𝑎𝑙𝑒 𝑣𝑎𝑙𝑢𝑒 × 3 𝑅𝑂𝑈 = 𝑃𝑉 𝑜𝑓 𝐿𝑃𝑠 − 𝐹𝑉 − 𝑆𝑎𝑙𝑒 𝑣𝑎𝑙𝑢𝑒 ×
𝐹𝑎𝑖𝑟 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐴𝑠𝑠𝑒𝑡 𝐹𝑎𝑖𝑟 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐴𝑠𝑠𝑒𝑡 𝐹𝑎𝑖𝑟 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐴𝑠𝑠𝑒𝑡
4 Lease Liability = PV of Lease payments – Financial Liability
Please note that due to space constraints, these entries are w.r.t seller-lessee only. If you want me to prepare the
entries of buyer-lessor too, please leave me a message and I will try to explain them in a separate post shortly. 5 Financial Liability = Sale Value – Fair Value

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