This blog is written by Mr. Muneeb Sultan, Associate Internal Audit Services. Please read this blog and provide your valued comments.
IFRS 16 LEASES
The transfer of right to control the use of leased asset from lessor to lessee for a period of time in exchange for consideration.
The objective of this standard is to specify the principles for recognition, measurement presentation and disclosure of leases.
IFRS 16 replaces IAS 17. It does not apply to
- Leases to explore for/use of minerals, oil, natural gas
- Leases of biological assets (IAS 41)
- Intellectual property licenses
- Rights under licensing agreements
IFRS 16 provides a single lessee accounting model to be applied to all leases and two model approach for lessors
Lessee recognizes a right of use asset and a lease liability on commencement of a lease.
The asset is initially recognized at the amount of lease liability plus initial direct costs; it is subsequently measured using the cost model unless the underlying asset is investment property measured at fair value of property plant and equipment measured under the revaluation model.
The liability is initially measured at the present value of the lease payments over the lease term, discounted at the rate implicit in the lease.
Lessor classify leases as either finance or operating leases
Operating lease income is recognized on a straight line basis over the lease term; the underlying asset is presented in the statement of financial position.
Finance lease income is recognized over the period of lease to reflect a constant periodic rate of return; the underlying asset is derecognized and a receivable recognized instead, measured initially at net investment in the lease.
DECIDING WHETHER IT’S A FINANCE LEASE OR AN OPERATING LEASE
If the lease agreement fulfils any one of the following conditions mentioned below, the lease would be a finance lease
- Lease agreement contains bargain purchase option.
- Ownership will be transferred from lessor to lessee at the end of lease term.
- Present value of lease payments are substantially (90% or more then 90%) equal to fair value of an asset.
- Lease term consist of major portion of useful life of an asset.
- The underlying asset is of specialized nature (no one can use that asset other then lessee).