CFAS

PFRS 16
LEASES:
Underlying Asset
Lessee
Lessor
Operating Lease
Finance Lease
Right of Use
 Definition
• Under IFRS 16 a lease is defined as 'a contract, or part of a contract, that
conveys the right to use an asset (the underlying asset) for a period of time in
exchange for consideration’.
• A contract can be (or contain) a lease only if the underlying asset is 'identified’.
• Nov 22, 2018
• IFRS 16 introduces a single lessee accounting model and requires a lessee to
recognize assets and liabilities for all leases with a term of more than 12
months, unless the underlying asset is of low value.

• IFRS 16 Leases - IFRS Foundationhttps://www.ifrs.org › issued-standards › list-

of-standards
• The underlying asset is the subject of
a lease for which the right to use that
asset has been provided by the lessor
to the lessee.
• The lessee is the entity that obtains the
right to use an underlying assets for a period
of time in exchange for a consideration.
• The lessor is the entity that provides the
• right to use an underlying assets for a
• period of time in exchange for a
• consideration.
 Operating Lease Model for Lease
• IAS 17 classifies leases into two types:
• a finance lease if the lease transfers substantially all the
risks and rewards incidental to ownership; and.
• an operating lease if the lease does not transfer
substantially all the risks and rewards incidental to
ownership.

• IAS 17 Leases - IFRS Foundationhttps://www.ifrs.org › issued-standards › list-of-standards

• IFRS 16 paragraph 5 provides that a lease is permitted to apply the
operating lease made in two optional exemptions :
• Short-term lease
• Low value lease

Short Term lease is a lease with a term of twelve months or less at the
commencement date of the lease.
The Standard does not provide for a quantitative threshold for low-value asset.
Low value asset is a matter of professional judgement.

The lessee shall assess the value of an underlying asset based on the value of the
assets when it was new, regardless of the age of the asset being leased.
 Accounting for Operating Lease
If the lessee elects to apply the
operating lease accounting, the lessee
shall recognize the operating lease
payments as rent expense in
either the straight line basis over the
lease term or another systematic
basis if this is more representative of
the pattern of the lessees benefit.
Under the operating lease model, the
periodic rental is simply recognized as
rent expense on the part of the lessee.
 Finance Lease model for lessee
•A finance lease is a way of providing
finance – effectively a leasing company
(the lessor or owner) buys the asset
for the user (usually called the hirer or
lessee) and rents it to them for an agreed
period.
A finance lease is a leasing
arrangement in which the lessee obtains
ownership of the
leased asset by the end of the lease term.
May 21, 2022
INITIAL MEASUREMENT OF RIGHT OF USE OF ASSET

• A right of use asset is defined as an asset that represents the right of

a lessee to use the underlying asset over the lease term in a finance
lease
• The cost of right of use asset comprises
• a. The present value of the lease payments
• b. Lease payments made to lessor such as lease bonus less any lease
incentive received.
• c. Initial direct cost incurred by the lessee
• d. Estimate of cost of dismantling and restoring the underlying asset
for which the lessee has a present obligation
• Lease incentive is payment by the lessor to the lessee associated with a
lease or reimbursement or assumption by the lessor of the cost of the
lessee.
• The lease incentive should be deducted from the cost of the right of
use asset.
• Initial direct cost is incremental cost of obtaining the lease that would
not have been incurred if the lease have not been obtained.
• Leasehold improvement is not initial direct cost and not included in the
cost of the right of use asset.
• Any security deposit refundable upon the lease expiration is accounted
for as an asset by the lessee.
 PRESENTATION OF THE RIGHT OF USE ASSET
• For a lessee, a lease that is accounted for under IFRS 16 results in the
recognition of:
• a right-of-use asset and lease liability
• interest expense (on the lease liability)
• depreciation expense (on the right-of-use asset).
• The right-of-use asset and lease liability must be presented or disclosed
separately from other, non-lease assets and liabilities (except for
investment property right-of-use assets which are presented as investment
property). Where a lessee chooses not to present its right-of-use assets
separately on the face of the balance sheet, they must be presented in the
same line item that would be used if the underlying asset were owned. In
many, but not all, cases this will be property, plant and equipment.
• https://www.grantthornton.global/en/insights/ifrs-16/ifrs-16---presentation-and-disclosure/
 PRESENTATION OF THE RIGHT OF USE ASSET

• The lessee shall present the

right of use asset at cost less
any accumulated depreciation
and impairment loss as a
separate line item as non current
asset in the statement of
financial position.
 Depreciation of Right of Use Asset

• IFRS 16 paragraph 32 provides that lessee shall depreciate the right

of use asset over the useful life of the underlying asset under the
following conditions:
• a. The lease transfers ownership of the underlying asset to the lessee
at the end of the lease term.
• b. The lessee is reasonably certain to exercise a purchase option
• If there is no transfer of ownership to the lessee or if the purchase
option is not reasonably to be exercised , the lessee shall depreciate
the right of use asset over the shorter between the useful life of the
asset and the lease term.
 Measurement of lease liability
• Lease liability represents the amount recognized by a lessee on its
statement of financial position regarding its leases. It is initially
measured at the present value of lease payments and is remeasured
whenever there is a change in lease payments or lease modification.

• While IAS 17 required lessee to recognize a lease liability on its

finance leases only, IFRS 16 and its US GAAP equivalent requires
recognition of lease liability on almost all leases. IFRS 16 allows
exemption for short-term leases and leases of low-value assets.
Initial measurement of lease liability

• At the commencement date, a lessee recognizes a lease liability at the

present value of lease payments which are not yet paid determined at
the interest rate implicit in the lease if it is readily available, or at the
lessee’s incremental borrowing rate.