This blog is written by Mr. Sulaiman Khan. Please read this blog and provide your valued comments
IFRS 16 Leases brings significant changes in accounting requirements for lease accounting, primarily for lessees.
IFRS 16 replaces the existing suite of standard (IAS 17) and interpretations on leases
- The guidance relating to lessors remains substantially unchanged from IAS 17. Lessors continue to account for leases as either operating or finance leases depending on whether the lease transfers substantially all the risks and rewards incidental to ownership of the underlying asset to the lessee.
- Operating leases continue to be recorded as assets in the statement of financial position and lease income is recognized on a straight line basis over the lease term.
- For finance leases, a lessor is required to derecognize the underlying asset and record a receivable equal to the net investment in the lease, with a gain or loss on sale. Finance income is subsequently recognized at the rate inherent in the lease over the lease term.
- Almost all leases are recognized in the statement of financial position as a ‘right-of-use’ asset and a lease liability except (where lessee elect to apply recognition and measurement exemption):
- Short term leases, or Where the underlying asset is of low value.
- The asset is subsequently accounted for in accordance with the cost or revaluation model in IAS 16 Property, Plant and Equipment (IAS 16) or as investment property under IAS 40 Investment Property (IAS 40). The liability and right-of-use asset are unwound over the term of the lease giving rise to an interest expense and depreciation charge, respectively.
Short-term leases are defined as ‘leases that, at the commencement date, have a lease term of 12 months or less. A lease that contains a purchase option is not a short-term lease.’
Leases of Low Value Assets
The assessment of ‘low value’ for a leased asset is to be made on the basis of the value of an asset when it is (or was) new, regardless of whether the actual asset being leased is new.
An underlying asset in a lease can be of low value only if:
(a) The lessee can benefit from use of the underlying asset on its own or together with other resources that are readily available to the lessee; and
(b) The underlying asset is not highly dependent on, or highly interrelated with, other assets.
Recognition and measurement for lessee
At the commencement date of a lease, i.e. the date on which the lessor makes an underlying asset available for use by a lessee, lessee will record the lease liability and right-of-use asset
Lease liability will comprise of:
- Fixed Payments from commencement date
- Certain Variable Payments
- Residual Value Guarantee
- Exercise Price of Purchase Options
- Termination penalties
Right-of-use asset will comprise of:
- Lease Liability
- Initial Direct Costs
- Cost of removal and restoring
- Payments made at or prior to commencement
- Lease incentives received (if any)
So initial entry at commencement of lease will be
- Right-of-use asset xx
Cr. Lease liability xx
Cr. Cash xx (Initial recognition of lease)
|Statement of Financial Position
|Statement of Profit and Loss||Statement of Cash Flows|
|Right-of-use assets: present in its own line item or combine with property, plant and equipment, with separate disclosure.
Lease liabilities: present separately or include with other liabilities and disclose which line item they have been included.
|Interest expense with other finance costs.
Depreciation of right-of-use assets.
|Cash payments of lease liabilities as financing activities.
Cash payments for interest in accordance with IAS 7’s requirements for interest paid.
Short-term, low-value and variable lease payments within operating activities.
IFRS 16 has extensive disclosure requirements for lessees in both qualitative and quantitative form. Quantitative disclosure requirements by primary statement include:
|Quantitative Disclosure Requirements|
|Statement of Financial Position||Statement of Profit and Loss||Statement of Cash Flows|
– Additions to right-of-use assets.
– Carrying value of right-of-use -assets at the end of the reporting -period by class.
– Maturity analysis of lease liabilities
– Depreciation for assets by class.
– Interest expense on lease liabilities.
– Short-term leases expensed.
– Low-value leases expensed.
– Variable lease payments expensed.
– Income from subleasing.
– Gains or losses arising from sale-and-leaseback transactions.
– Total cash outflow for leases.
Qualitative Disclosure Requirements
- A summary of the nature of the entity’s leasing activities;
- Potential cash outflows the entity is exposed to that are not included in the lease liability, including: Variable lease payments;
- Extension options and termination options;
- Residual value guarantees; and
- Leases not yet commenced to which the lessee is committed.
- Restrictions or covenants imposed by leases;
- and Information about sale-and-leaseback transactions.
NOVEMBER 10, 2020