IFRS-16 LEASE

1 Definitions
2 measurement Initial measurement
Subsequent measurement
3 Short-life and low value assets
4 Mid-year entry into a lease
5 Sale and leaseback

Definitions

1 A lease is 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

2 The lessor is the 'entity that provides the right to use an underlying asset
in exchange for consideration

3 The lessee is the 'entity that obtains the right to use an underlying asset in
exchange for consideration

4 A right-of-use asset 'represents the lessee's rights to use an underlying

asset for the lease term

Initial measurement = Present Value of lease Payments

Journal
Right-of-use asset A/C DR
To Lease Liabilty Present Value of lease
Payments

To cash ac

Lease payments
1 • Fixed payments

2 • Amounts expected to be payable under residual value guarantees

3 • Options to purchase the asset that are reasonably certain to be exercised

4 • Termination penalties, if the lease term reflects the expectation that these will be i

Note A residual value guarantee is when the lessor is guaranteed that the underlying
 asset at the end of the lease term will not be worth less than a specified
amount.

Note The discount rate should be the rate implicit in the lease. If this cannot be
determined, then the entity should use its incremental borrowing rate (the rate
at which it could borrow funds to purchase a similar asset).

Year Lease Payments Present Value Factor@

1 10,000.00 0.95
2 10,000.00 0.91
3 15,000.00 0.86

The right-of-use asset

Initial cost of the right-of-use asset comprises

1 The amount of the initial measurement of the lease liability

2 Lease payments made at or before the commencement date
3 Any initial direct costs
4 Estimated costs of removing or dismantling the underlying asset

The lease term

1 Non-cancellable periods
2 Periods covered by an option to extend the lease if reasonably certain to
be exercised
3 Periods covered by an option to terminate the lease if these are
reasonably certain not to be exercised.

Subsequent measurement
A carrying amount of the lease liability is increased by the interest charge
 Dr Finance costs (SPL) X
Cr Lease liability (SFP) X

B carrying amount of the lease liability is reduced by cash repayments

Dr Lease liability X
Cr Cash X

Payments in arrears

Year Balance B/F Interest

Payments in advance

Year Balance B/F Payment

Right-of-use asset=Cost - Depreciation - Impairment loss

Depreciation is calculated as follows:

• If ownership of the asset transfers to the lessee at the end of the lease
term then depreciation should be charged over the asset's useful life,

• Otherwise, depreciation is charged over the shorter of the useful life and
the lease term (as defined previously).

Short-life and low value assets

short-term (less than 12 months at the inception date) or of a low value then a simplified treatm

1 lessee can choose to recognise the lease payments in profit or loss on a straight line
2 No lease liability or right-of-use asset would therefore be recognised.
 Mid-year entry into a lease

1 If a company enters into a lease part-way through the year, the depreciation
and interest will need to be time-apportioned.

2 The liability table is likely to need extra columns to split the table between pre and
post-payment.

Sale and leaseback

Question: Does the transaction constitute a sale??

For this purpose, the seller must apply IFRS 15 Revenue from Contracts with
Customers to decide whether a performance obligation has been satisfied. This
normally occurs when the buyer obtains control of the asset. Control of an asset
refers to the ability to obtain substantially all of the remaining benefits.

Transfer is a sale

A Right of use Retained

CA * PV of lease payments 1.2*1.9

Fair Value 3

B Saler recognise profit

a Total Gain = Fair Value ( -) CA 1.8

b Gain that related to the right retained = Total Gain*PV of lease payment.
Fair Value
c Gain Related to right transfer= Total Gain (-) Gain that related to the right retained

Transfer is not a sale

Saller continues to recognise the assets

 Transfer proceeds are treated as a financial liabilty (IFRS-9)

The entry required is as follows

Cash Ac DR 3
Right to use assets account DR CA* PV of Lease payments / fair Value
To Assets CA of the assets
To Lease Liabilty PV of lease Rents
To PL on sale of assets c

Question On 1 January 20X1, Painting sells an item of machinery to Collage for its
fair value of $3 million. The asset had a carrying amount of $1.2 million
prior to the sale. This sale represents the satisfaction of a performance
obligation, in accordance with IFRS 15 Revenue from Contracts with
Customers. Painting enters into a contract with Collage for the right to
use the asset for the next five years. Annual payments of $500,000 are
due at the end of each year. The interest rate implicit in the lease is 10%.
The present value of the annual lease payments is £1.9 million. The
remaining useful life of the machine is much greater than the lease term.
Required:
Explain how Painting will account for the transaction on 1 January 20X1.
 IFRS-16 LEASE
A B
ER EE

DR Assets
Dr Right to use a n assets

ions

veys the right to use

in exchange for

e an underlying asset

an underlying asset in

o use an underlying

nt Value of lease Payments

34,551.67

31,551.67
3,000.00

alue guarantees

certain to be exercised

e expectation that these will be incurred.

aranteed that the underlying

less than a specified

lease. If this cannot be

tal borrowing rate (the rate

Present
Value of
Lease
payments
9,523.81
9,070.29
12,957.56
31,551.67

31,551.67
0
3000
derlying asset 0
34,551.67

reasonably certain to

if these are

easurement
y the interest charge
 cash repayments

Payment Balance C/F

Subtotal Interest Balance C/F

the end of the lease

asset's useful life, 15 10

er of the useful life and 10 or 15 10 or 3

10 3

DR prepaid 333.33
DR PL 1166.67
CR Cash 1500
w value assets
ow value then a simplified treatment is allowed.

n profit or loss on a straight line basis. 1500

fore be recognised. 1000
 1000
into a lease 3500
3
he year, the depreciation 1166.666667

o split the table between pre and

aseback

Contracts with IFRS-15

en satisfied. This
ontrol of an asset YES PO
CANTOL
RISK & ReWARD
NO

0.76 1.2/3*1.9

3 - 1.2
*PV of lease payment. 1.8 * 1.9 / 3 = 1.14 1.8/3*1.9
Fair Value
that related to the right retained
1.80 - 1.14 = 0.66 1.8 - 1.14
0.66

3 Total
1.9 Retain
1.1 Transfer
ease payments / fair Value 0.76
1.2
1.9
0.66

FV = 3
CA=1.2
PVLP = 1.9

January 20X1.
Question On 1 January 20X1, Dynamic entered into a two year lease for a lorry.
The contract contains an option to extend the lease term for a further
year. Dynamic believes that it is reasonably certain to exercise this
option. Lorries have a useful economic life of ten years.
Lease payments are $10,000 per year for the initial term and $15,000 per
year for the option period. All payments are due at the end of the year. To
obtain the lease, Dynamic incurs initial direct costs of $3,000. The
interest rate within the lease is not readily determinable. Dynamic’s
incremental rate of borrowing is 5%.
Required:
Calculate the initial carrying amount of the lease liability and the right-ofuse
asset and provide the double entries needed to record these
amounts in Dynamic's financial records.

Answer Year Lease Payments Present Value Present Value of

Factor@ Lease payments

1 10,000.00 0.95 9,523.81

2 10,000.00 0.91 9,070.29
3 15,000.00 0.86 12,957.56
31,551.67

The initial cost of the right-of-use asset is calculated as follows:

Initial liability value 31552

Direct costs 3000
34552

The double entries to record this are as follows:

Dr Right-of-use asset 34552
Cr Lease liability 31552
Cr Cash 3000

Question Riyad enters into an agreement to lease an asset. The terms of the lease
are as follows.
1 Primary period is for four years from 1 January 20X2 with a rental of
$2,000 pa payable on 31 December each year.

2 The present value of the lease payments is $5,710

3 The interest rate implicit in the lease is 15%.

 What figures will be shown in the financial statements for the year
ended 31 December 20X2?

Answer A non-current right-of-use asset is recorded at an initial value of

$5,710.

Annual depreciation charge = 1/4 × $5,710 = $1,428.

A liability is initially recorded at $5,710.

The total finance charge for the lease is calculated as the difference
between the total payments of $8,000 and the initial value of $5,710 =
$2,290. The allocation of this to each rental period is calculated using the
implicit interest rate on a lease liability table as follows:

Year Balance B/F Interest Payment Balance C/F

2002 5,710.00 856.50 2,000.00 4,566.50
2003 4,566.50 684.98 2,000.00 3,251.48
2004 3,251.48 487.72 2,000.00 1,739.20
2005 1,739.20 260.88 2,000.00 -

The format above will be used whenever the payments under a lease are
made in arrears. If the payments are due in advance, the rental paid is
deducted from the capital sum at the start of the period before the interest
is calculated.

Extracts from financial statements for the year to 31 December 20X2

Statement of profit or loss

Depreciation 1428
Finance cost 857

Statement of financial position

Non-current assets
Right-of-use asset (5,710 – 1,428) 4282

Non-current liabilities
Lease 3252

Current liabilities
Lease 1315

Questions This question follows on from the previous TYU.

 Required:
Prepare extracts from Dynamic's financial statements in respect of the
lease agreement for the year ended 31 December 20X1.

Answer Lease Liabilty Table

Year Balance B/F Interest Payment Balance C/F

1 31,552.00 1,577.60 10,000.00 23,129.60
2 23,129.60 1,156.48 10,000.00 14,286.08
3 14,286.08 714.30 15,000.00 -

Dr Finance costs (PL) 1577.6

Cr Lease liability 1577.6

Dr Liability 10000
Cr Cash 10000

The liability has a carrying amount of $23,130 at the reporting date. Of

this, $14,287 (W1) is non-current and $8,843 ($23,130 – $14,287) is
current.

Dr Depreciation (PL) 33552 / 3 11184

Cr Right-of-use asset 11184

The carrying amount of the right-of-use asset will be reduced to $22,368

($33,552 – $11,184).

Question On 1 April 20X6 Taggart acquires telephones for its sales force under a
two year lease agreement. The terms of the lease require an initial
payment of $2,000, followed by two payments of $8,000 each on 31
March 20X7 and 31 March 20X8.
Show the impact of this lease arrangement on the financial
statements of Taggart for the year ended 31 December 20X6.

Answer IFRS 16 Leases permits a simplified treatment for assets with a lease
period of 12 months or less, or of low value. Although the standard does
not give a numerical definition of ‘low value’ it does give examples of the
types of assets that may be included, and this includes telephones. The
simplified treatment allows the lease payments to be charged as an
expense over the lease period, applying the accruals concept.

Annual lease rental expense = Total rentals payable

 Total lease period

Expense to 31 December = $9,000 × 9/12 =

20X6

The expense in this period of $6,750 is not the same as the payment of
$2,000 so we need to accrue an additional expense of $4,750.

Statement of profit or loss for the year ended 31 December 20X6

Lease rental expense 6750

Statement of financial position 31 December 20X6

Current liabilities
Accrual 4750

Question Shaeen Ltd entered into an agreement to lease an item of plant on 1

October 20X8. The lease required four annual payments of $200,000
each, commencing on 1 October 20X8. The plant has a useful life of four
years and is to be scrapped at the end of this period. The present value
of the lease payments is $700,000. The implicit interest rate within the
lease is 10%.
Prepare extracts of the financial statements in respect of the leased
asset for the year ended 31 March 20X9.

Answer Statement of profit or loss extract 31/03/2009

Depreciation (W1) 87500

Finance costs (W2) 25000

Statement of financial position extract 31/03/2009

Non-current assets
Right-of-use asset (700,000 – 87,500) 612500

Non-current liabilities
Lease (W3) 350000

Current liabilities
Lease (525,000 – 350,000) 175000

(W1) Depreciation
 Depreciated over 4 years

Expense = 700,000/4 years × 6/12 = 87500

(W2) Lease
Bal b/f Interest Initial Paid Balance
@10% balance @ 1 Oct
× 6/12
3/31/2009 700000 200000 500000
3/31/2010 525000 25000 200000 350000

Question On 1 January 20X3 Rabbit acquires a new machine with an estimated useful life of 6 years
under the following agreement:

An initial payment of $13,760 will be payable immediately

5 further annual payments of $20,000 will be due, commencing 1 January 20X3

The interest rate implicit in the lease is 8%

The present value of the lease payments, excluding the initial payment, is $86,240
What will be recorded in Rabbit’s financial statements at 31 December 20X4 in respect of
the lease liability?

Answer Initial value of lease liability is the present value of lease payments, $86,240.

Year Balance B/F Payment Subtotal Interest Balance C/F

2003 86,240.00 (20,000.00) 66,240.00 5,299.20 71,539.20
2004 71,539.20 (20,000.00) 51,539.20 4,123.14 55,662.34
2005 55,662.34 (20,000.00) 35,662.34 2,852.99 38,515.32
2006 38,515.32 (20,000.00) 18,515.32 1,481.23 19,996.55
2007 19,996.55 (20,000.00) - - -

The non-current liability at 20X4 is the figure to the right of the payment in 20X5
The current liability is the total liability of $55,662 less the non-current liability

The finance cost is the figure in the interest column for 20X4
 2
1

Start 1 Inti
End 1 Subs
End 2 Subs
End 3 Subs
DR RTUA 5710
CR Lease Liability 5710

1 Year
1,315.03 CL
3,251.48 NCL

2 year

1,512.28 CL
1,739.20 NCL
 Start 1 Inti
End 1 Subs
End 2 Subs
End 3 Subs
PL
FC 1577.6
DEP 11184

BS
CA 8,843.52 Cr Right-of-use asset
33552
11184 22368
NCA 14,286.08

PL
FC 1,156.48
DEP 11184

BS
CA 14,286.08 Cr Right-of-use asset
33552
22368 11184
NCA -

2000 DR PL 6750
6750 Cr cash 2000
Cr Accrued 4750

$2,000 + $8,000 + $8,000

2 years

$9,000 per annum

$6,750

DR RTUA 700000
CR LL 700000
Interest Bal c/f
@10%
× 6/12
25000 525000 31/03/2009 CL 175000
NCL 350000

6 or 5
5

DEP
100000/ 5
20000

SEVA
DR RTUA 100000
CR LL 86240
CR Cash 13760

CL 20000
NCL 35,662.34

CL 20000
NCL 18,515.32
35,662.34
20,000.00 CL 20000
NCL 0
4,123.00