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IFRS 16 – Content
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Lease: IFRS 16 


Overview
Accounting by lessee
 Accounting by lessor (for reference only)

1.Overview
Development of IFRS 16- Leases?

1982: IAS 17 originally issued

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 Development of IFRS 16- Leases?

 Objective and scope of IFRS 16? Substance over form Present value
 What is a lease? Essentially unchanged for 27 years
 Does the arrangement contain a lease?
 Lease components
2016: New standard IFRS 16
 Key terms

Operating vs Concept of Different reporting in

finance lease “right-to-use” the financial statements

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 Overview What is a lease?
Objective & scope IFRS 16: Leases
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 To specify the principles for recognition, = contract that conveys the right to use an asset for a period of time
objective
measurement presentation and disclosure in exchange for consideration
of LEASES

IFRS 16 does NOT apply to: Asset

CONTRACT Lessor
✓ Leases to explore for/use of minerals, oil, natural gas and similar Lessee
✓ Leases of biological asset (IAS 41)
✓ Intellectual property licenses (IFRS 15) Consideration
✓ Service concession arrangement (IFRIC 12)

✓ Rights under licensing agreements (IAS 38)

Does an arrangement contain a lease? Identified asset

= Throughout the period of use, the customer has both of the
following rights to the identified asset: In a contract, a asset is identified
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Explicity Implicity

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

Portion of asset
substantially all A capacity portion of an asset is an identified asset if it is
Economic benefits
✓ Physically distinct OR ✓ Substantially all of the capacity
User makes:
• Exclusive right of use
Example 1: In a contract, which of the following are identified assets?
• Including its primary output • Decisions about why and how
the asset is used Lessee has the right to use
and by- products
• Protective rights do not limit the
right to direct the use 60 m2 of the the basement of 90% capacity 50% capacity of
property as their the Building XYZ of a specific the Pipeline
warehouse as their warehouse Pipeline (x)
(x) (v) (v)

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 Does an arrangement contain a lease? Example 1.2a:
Does this contract contain a lease?
No
Q1: is there an identified asset?
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Yes ❑ Retailer enters into a contract with Airport Operator (AO) for the use
No
Q2: The right to obtain substantially of a space in an airport terminal for 5-years.
all of the economic benefits?  Retailer owns and utilizes a booth that’s easily transferrable to
Yes different boarding areas.
Customer Q3: The right to direct the asset’s use – Supplier  AO has many areas in the terminal that are available and would meet
customer? Suppliers? Neither party? Retailer’s specifications. AO can at its sole discretion relocate Retailer
to different boarding areas in the terminal throughout the period of
Neither
Yes use. AO would incur minimal costs associated with changing the space
Q4: The right operate the asset- that Retailer uses.
Customer?
No
NO  …………………….
LEASE Yes Q5: Did the customer design the asset No LEASE Source: ASC 842 paragraph 10-55-52
(predetermined use)?

Example 1.2b: Lease contract

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Does this contract contain a lease? 12
Component & non components of contract
 Retailer signed a contract with Airport Operator (AO) for the use of
retail unit A for 5 years. A is part of a terminal with many retail units. Lease contract
 AO can require Retailer to relocate to another retail unit in the
terminal. In that case, AO is required to provide Retailer with a similar
retail unit as A and to pay for Retailer’s all relocation costs.
Components Non-components
 AO would benefit economically from relocating Retailer only if a major
new tenant were to decide to occupy a large amount of retail space at
a rate sufficiently favorable to cover the costs of relocating Retailer
and other tenants. At contract inception it is not likely that those
circumstances will arise, and whether such circumstances occur is highly Non lease
Lease
susceptible to factors outside of AO’s control. component component
 ………………………….
Source: ASC 842 paragraph 10-55-52

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 Lease contract Example 1.3: Components of lease
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Component & non components of contract contract
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 components of lease contract: items or activities which

transfer goods or service to the lessee
 Lease component = the right to use identified asset

 Non lease component e.g., security or maintenance

 Non components of the lease contract = items/activities

do not transfer goods or services to the lessee

Example 1.4: Non Components of lease Separate a combined contract:

contract a lease & non-lease component
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Lessee need to split the lease payments into

+lease components (applies IFRS 16)
+non-lease components (applies other IFRS)

unless the lessee applies the practical expedient

Practical expedient
lessee may elect, by class of underlying asset, not to separate non-lease
components from lease components, and instead account for them as a single lease
component. This expedient is not apply to embedded derivatives under IFRS 9
Financial Instruments.

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 Accounting for leasing
Example 1.5 Key terms
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 Lessee leases a car from Dealership during three years for a fixed IFRS 16- key terms
payment of $415 per month.
 Lessee has to bring the car into Dealership once per quarter for Inception of contract Commencement date
Dates:
regularly maintenance. Lessee is required to pay for any
Earlier of
maintenance services required beyond the regularly maintenance. = when lessor makes an underlying
Lessee is required to maintain full coverage insurance on the car. asset available for use by lessee
✓Date of lease ✓Date of commitment
What are lease component? Non-lease component? Non component? agreement by the parties
What are the amount allocated to the lease component? Provided
that the maintenance agreement can be entered with other company for => Assessment of the contract is made => Accounting starts
$30 per month, and Dealership leases the same car on a standalone
basis for $400 per month.
- Contract signed: 20 jan 20X1 ✓Assess contract on 20 Jan 20X1
- Asset taken: 1 mar 20x1
- 1st rental payment: 1 may 20x1 ✓Recognize right – of- use asset on 1 mar 20X1

Accounting for leasing IFRS 16- key terms

Key terms 2. Accounting by lessee
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Lease term = non- cancellable period of the lease
+ period covered by an option to extend (if option exercised) 2.1. Lessee’s accounting at the commencement date
+ period covered by an option to terminate (if option not exercised) 2.2. Lessee’s accounting after the commencement date
=> Assess whether the option will be exercised
2.3. Presentation & disclosure
✓Terms and conditions of option ✓Costs of terminating the lease
✓ Leasehold improvements ✓Importance of underlying asset

- Non- cancellable term: 3 years

- Extension for another 2 years possible ✓ Lease term = 3 year

at market rates ✓Lease term = 5 year

- Lessee built expensive glass partitions

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 2.1. Accounting by lessee Leases: Accounting by lessees
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At the commencement date 22
!!! No classification of leases!!!

 Recognize a right-of-use asset and corresponding liability AT THE COMMENCEMENT

 Right of use asset = lease liability + other costs.

 Lease liability = present value of lease payments over Right - of – use asset Lease liability
the lease term.
✓ Amount for lease liability Lease payments
 Accounting entry ✓ Lease payments before/on not paid at the
Debit Right-of-use asset commencement date – commencement
lease incentives date
Credit Lease Liability ✓ Initial direct costs
✓ Estimate of dismantling
costs Discounted
Discount rate?

Lease liability
Right of use asset
What’s included in lease payments?
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Lease liability Fixed payments Includes in-substance fixed payments/incentives

Initial direct costs Variable lease payments Only for index or rate/rate at commencement
Right of Lease
Incentives
use asset received
prepayments Residual value guarantees At amount lessee expects to pay

Restore/dismantle Purchase option exercise price If lessee reasonably certain to exercise

Payments for terminating If lessee term reflects termination by lessee

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 How to determine the appropriate Discount rate ?
Exceptional cases Accounting by lessees
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AT THE COMMENCEMENT

Lessor Lessee

=> Interest rate implicit in the lease (IRR)  Interest rate implicit in the lease (IRR) Right - of – use asset Lease liability
(difficult to determine)
Except for (optional)
✓ PV of lease ✓ FV of
payments underlying asset  Incremental borrowing rate Lease term < 1 Underlying asset of low
year
✓PV of ✓Lessor’s initial
✓Similar term and security value when new
unguaranteed direct cost ✓Observable rates
residual value
=> Lease payments on a straight – line (or another
systematic) basic

Example 2.1 2.2. After the commencement

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 Lessee rents a building for 10 years.  Right - of – use asset & Lease liability
 Remeasurement
 Initially, the annual payment is $50.000, paid at the
 Modifications
beginning of each year
 After every 24 months, the annual payment will be
changed according to the inflation index.
 Incremental borrowing rate: 5%
Required: Record the transaction at the
commencement date.

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 Leases: Accounting by lessees Example 2.2 (continued to Ex 2.1)
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Required: Calculate & record the interest on LL and

Right - of – use asset Lease liability
the lease liability decrease when payment is made at
✓Interest on the LL Constant periodic
the beginning of year 2.
Debit: Credit:
P/L- depreciation ROU- accumulated interest rate
Ex depreciation
Debit: Credit:
✓Cost model (IAS 16) P/L- Interest Lease liability
✓Fair value model (IAS 40)
✓Reduction of the LL
✓Revaluation model (IAS 16)
✓Impairment test (IAS 36)
Debit: Credit:
Lease liability Cash/bank

Leases: Accounting by lessees

After the commencement Leases: Accounting by lessees
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A lessee shall remeasure the lease liability as an adjustment
to the right-of-use asset, when there are : Variable lease
payments
(a) changes in lease term Change
(b) changes in the assessment of an option to discount rate &
purchase the underlying asset lease payment Do they depend on the index or rate?

c) changes in residual value guarantee Unchanged

d) changes in future lease payments resulting from a discount rate ✓ Excluded from the lease payments
✓Included in the lease payments
change in an index or a rate used to determine those ✓Measured at the index/rate at the ✓ In profit or loss
payments Change lease
measurement date
payment

Change lease No change in

liability lease liability

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 Leases: Accounting by lessees
Example 2.3 (continued to Ex 2.2)
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Remeasurement 34

✓After the commencement date => Lessee remeasures  Given that:

Not below  At the commencement date: Consumer price index CPI is
0, rest in
P/L
125
 At the beginning of Year 3: CPI is 135
Lease liability As an adjustment Right – of – use asset  Require: Determine the accounting treatment for the
variable lease payment at the beginning of year 3

Leases: Accounting by lessees Leases: Accounting by lessees

35 Lease modifications 36 Lease modifications

= change in the scope, or consideration that was NOT part of original terms = change in the scope, or consideration that was NOT part of original terms
Lessee accounts:
Are the rights added to the lease contract to use No
one or more underlying assets? Lease modification Lease modification ✓ Allocates the consideration in the modified contract
Yes = =
No Change in existing Change in existing ✓Determines the lease term of the modified lease
Does the consideration increase matching with the lease lease ✓Applies revised discount rate to remeasure the lease liability
stand – alone price for the increase in scope?

Yes
✓ Adjustment to right – of – use asset
LEASE MODIFICATION =
SEPARATE LEASE

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 2.3. Presentation & disclosure 2.3. Presentation & disclosure
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Presentation Disclosures
✓ Present right – of – use asset separately from other asset  Or disclose 1. Disclosures of assets, liabilities, expenses and cash flows
✓ Present lease liabilities separately from other liabilities in the notes
✓In tabular format
✓ Present interest on the lease liability separately from depreciation of ROU asset
✓ Depreciation of ROU by class ✓ Income from subleasing of ROU assets
✓ Cash flows:
✓Interest expense on lease liabilities ✓Cash outflow for leases
• Payments for principal  Financing activities ✓Expense related to short – term leases ✓Addition to ROU assets
• Payments for interest  choice (Financing or operating) ✓Expense related to low – value leases ✓Gains/losses sale and leaseback
✓Expenses related to variable LP not ✓Carrying amount of ROU by class
• Payments for short – term  operating activities
within LL
leases, low – value asset
leases and variable payments
not within lease liability 2. Additional disclosures

3. Accounting by lessor 3.1. Classification of lease

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 3.1. Classification of leases

 3.2. Finance lease
 3.3. Operating lease
 3.4. Other: sublease; sale & leaseback
 3.5. Disclosure Are risks and rewards of ownership transferred to lessee?

RISK REWARDS

Finance lease Operating lease

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 Finance lease Example
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 An entity leases an asset. The lease is for three years with

Situations payments of $5,000 annually. The fair value of the asset is $
✓ Ownership transferred by the end of lease term 13,000 and the present value of the minimum lease payments
is $ 12,886. The useful life of the asset is 3 years and the
✓ Option to purchase the asset at price < fair value
entity is responsible for maintaining and insuring the asset
✓ Lease term => major part of economic life of asset
✓ Present value of lease payments => close to fair value
✓ Leased assets are specialized nature

Example Cancellation-cost to the lessee

Indicators of Situations
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Indicators of situations that could also lead to a lease being classified
as a finance lease are:
(1) if the lessee can cancel the lease, the lessor’s losses associated with
the cancellation are borne by the lessee;
(2) gains, or losses, from the change in the fair value of the residual
 You lease a photocopier for 7 years. If you cancel the lease, you
must pay all the remaining payments (till the end of the lease). This
is a finance lease, as there is no method of paying a reduced rental
for just the time elapsed since the start of the lease.

accrue to the lessee (for example, in the form of a rent rebate

equalling most of the sales proceeds at the end of the lease); and
(3) the lessee has the ability to continue the lease for a secondary

period, at a rent that is substantially lower than market rent.

This generally indicates that the lessor has no wish to take back
the asset and only wishes to finance the transaction

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 Accounting by lessors:
classification of leases Land and Buildings
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Land + Building => Land = indefinite economic life
 Leases of land and of buildings are classified as operating, or
finance, leases in the same way as leases of other assets.
However, land normally has an indefinite economic life and, if
Separate classification
title is not to pass to the lessee by the end of the lease term,
the lessee normally does not receive substantially all of the
risks and rewards incidental to ownership, and the lease of
Land Building land will be an operating lease.

Operating lease unless title

Operating or finance lease
passes at the end of lease term

=> Allocation of lease payments = based on proportion of fair value

3.2. Accounting by lessor: finance lease 3.2.1. At the commencement

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 3.2.1. At the commencement At the commencement

 3.2.1. After the commencement Credit:
Debit:
Lease receivable PPE

Credit:
P/L gain on sale of PPE
Net investment in the lease (or Debit if Loss)

✓ Fixed payments
Payments not
✓ Variable payments (index) + initial direct
paid at the
✓ Residual value guarantees costs
commencement
✓ Exercise price of purchase option
date
✓ Penalties for terminating

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 Accounting by lessor:
3.2.2. After the commencement Finance lease
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Manufacturer / Dealer lessors
After the commencement

LR: lease payments Selling profit Finance lease

Reduction of LR Finance income ✓ Revenue – costs of sales ✓ Initial direct costs in P/L
Debit: Cash Credit: lease receivable ✓ As outright sales under IFRS 15 ✓ If artificially low interest rate
P/L – interest income
=> selling profit is restricted

Constant periodic rate of return

Apply IFRS 9 to the net investment in the lease (impairment, derecognition)

Lease remeasurement and modification => Similar as lessees

3.3. Accounting by lessor: operating lease 3.3. Accounting by lessor: operating lease
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Accounting by lessor:  Accounting for operating leases:

Operating lease  Leased assets remain on B/S

 Recognize lease income on straight-line basis over lease term

Lease payments Underlying asset  Add initial direct costs to leased asset and depreciate over
lease term on same basis as lease income is recognized
 Depreciation and impairment covered by IAS 16, 38 and 36

✓ Revenue on straight – line (or other) basic ✓ Initial direct costs are added to
the asset
✓ Depretiation

Manufacturer / Dealer lessors => No selling profit

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 Lessor accounting 3.4. Accounting by lessor: other
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• Derecognise the right-of-use asset (1) and recognise instead a

 Sublease
lease receivable equal to the net investment in the sub-lease
(2);
 Sale & leaseback
• Recognise the difference between (1) and (2) as a gain or loss
Finance in the income statement;
lease • Retain the previously recognised lease liability in capacity as
lessee and recognise interest expense thereon; and
• Recognise interest income on the lease receivable in capacity
as finance lessor.

• Retain the right-of-use asset in capacity as lessee and continue to

recognise depreciation thereon;
Operating • Retain the lease liability in capacity as lessee and continue to
lease recognise interest expense thereon;
• Recognise lease income from the sub-lease in capacity as
operating lessor

Accounting by lessor:
sublease
Sale & leaseback
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Original lessee
Original lessee Lessee
Lessor Head lease Sublease (sublessee)
Intermediatelessor
Intermediate lessor

Sale
Seller = lessee
Type of sublease Accounting by the intermediate lessor

Operating Keeps recognizing the head lease as before

Debit Net investment in the lease / credit

Buyer = lessor
Finance ROU asset (difference in profit or loss)
Head lease = short - term Leases back
Recognition exemption; sublease = operating

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 Sale & leaseback 3.5. Accounting by lessor: disclosure
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Is the transfer of asset a sale under IFRS 15- Revenue from ✓In tabular format
contracts with customers?
=> For finance lease => For operating lease

✓Seller (lessee): ✓ Selling profit or loss ✓ Lease income

• Right – of – use asset at proportion
of the previous carrying amount
• Gain/loss related to the transferred
right only
✓Buyer (Lessor):
• Asset under applicable standards
• Lease under IFRS 16
✓Leaseback:
• As for any other (adjustment for
off – market terms)
✓ Seller (lessee):
• Continues to recognize an asset
• Financial liability (IFRS 9)
✓Buyer (lessor):
• Financial asset (IFRS 9)
✓Finance income on net inv. In the lease ✓Income related to variable
✓Income related to variable LP not within LR LP not depending on an
index/rate
✓Additional quantitative and qualitative
disclosures
✓Maturity analysis (refer to examples)

IFRS 16 how to implement?

= mandatory effective date
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(earlier application with IFRS 15 is permitted)

How to make a transaction?

Full retrospective adoption Modified retrospective adoption

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

✓No need to reassess whether contract ✓Comparatives presented under prior

is/contains a lease at the date of initial IFRS
application (if IAS 17/IFRIC 4 applied) ✓IFRS 16 applied to existing and new
contracts onwards
✓Adjustment to opening retained earnings

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