Accounting Changes – Our

Perspective
IFRS 16 – Leases
IFRS -16 Leases-Impact of changes
• Operating Lease becomes part of the balance sheet.
• Significant changes in financial metrics
• Liquidity ratios – Current ratio
• Gearing
• Assets turnover
• Return on Assets
• EBITDA
• Covenants
• Lease accounting for lessor remains largely
unchanged under IFRS 16
• IFRS 16 place more emphasis and focus on
operational benefits from assets rather accounting
benefit; to decide on accounting treatment (operating
or finance). Buy versus lease decisions becomes less
important.
IFRS -16 Leases

Definition
• A finance • IFRS 16 retains the definition of a lease in IAS 17 but
lease – a changes the guidance setting out how to apply it. The
lease that changes mainly relate to the concept of control used
transfers
within the definition—IFRS 16 determines whether a
substantially
all the risks contract contains a lease on the basis of whether the
and reward customer has the right to control the use of
of ownership.
an identified asset for a period of time.
• An operating
lease – any • If there is a combined contract – Separate lease and
lease that is non-lease element.
not a finance • Lease term commence at the commencement date
lease. including rent free periods.
• Exceptions : 1) Short term lease 2) Low value
assets
IFRS -16 Leases
IFRS -16 Leases
IFRS -16 Leases
Measurement & Recognition

1) Right-of-use asset: Initially, a right-of-use asset is measured at the amount of the lease
liability and initial direct costs. Then it is adjusted by the lease payments made before or on
commencement date, lease incentives received, and 
any estimate of dismantling and restoration costs (remember IAS 37).

2) Lease liability: The lease liability is in fact all payments not paid at the commencement
date discounted to present value using the interest rate implicit in the lease (or incremental
borrowing rate if the previous one cannot be set).These payments may include fixed
payments, variable payments, payments under residual value guarantees, purchase price if
purchase option will be exercised, etc.

Note: IFRS 16 may be applied using retrospective or modified reterosepctive approach.

IFRS -16 Leases
Subsequent measurement

Note: At the time of initial recognition and subsequent as well, the lessee has to reassess
carrying amount, lease term, and interest rate
 IFRS -16 Leases

Example: A company want to rent warehouse for storing goods.

Terms:
•Annual rental payments are Rs. 10 000, including the cleaning services (Rs. 1500
paid by lessor), if the warehouse is rented without cleaning service, the rent would
be Rs. 9000).
•Appropriate discount rate is 5%.
•The lease term is 3 years.
IFRS -16 Leases
IAS – 17 IFRS -16
At the commencement, •Is it a lease under IFRS 16
you do nothing; •Do we need to separate – lease or non lease
At the end of each year, payment. [9,000/(9,000+1,500)] X 10,000 = Rs
you simply book the rental 8,571
expense of Rs.10 000 in •At the commencement – Recognize right of
profit or loss. use asset after discounting Rs 8,571 for 3
years at 5% and lease liability for the same
amount that is (Rs 23,341)
•Recognize depreciation
Impact on Profit and loss Under IFRS 16, the impact on profit or loss in
is only for Rs. 10,000 the year 1 was:
Interest of Rs. 1,167, plus
Depreciation of Rs. 7,780, plus
Expense for cleaning services of Rs. 1,429.
TOTAL of Rs. 10,376.
IFRS -16 Leases
IFRS -16 Leases - Disclosures
IFRS -16 Leases - Disclosures
IFRS -16 Leases - Disclosures
IFRS -16 Leases - Disclosures
IFRS -16 Leases - Disclosures
IFRS -16 Leases - Disclosures
IFRS -16 Leases - Sublease