Have you been finding it difficult to implement IFRS 16 (Leases)?

Just a summary of the standards to get you started:

 

A. Introduction

  1. Effective Date: 1 January 2019
  2. This Standard supersedes the following Standards and Interpretations:

(a) IAS 17 Leases;

(b) IFRIC 4 Determining whether an Arrangement contains a Lease;

(c) SIC‑15 Operating Leases—Incentives; and

(d) SIC‑27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease.

 

B. Identifying a Lease

  1. Does the contract contain Lease?
  • To Identify whether a contract is a lease or contains a lease, consider whether, throughout the period of use, the customer has both of the following:
  • the right to obtain substantially all of the economic benefits from use of the identified asset
  • the right to direct the use of the identified asset. Either
    • the customer has the right to direct how and for what purpose the asset is used throughout the period of use; or
    • the relevant decisions about how and for what purpose the asset is used are predetermined and
      • the customer has the right to operate the asset throughout the period of use
      • the customer designed the asset for predetermined use throughout the period of use

 

  1. When should I assess to identify if there a contract contains lease?
  • Inception of a contract
  • Terms and conditions of a contract is changed

 

C. Lease Term

  1. The Lease Term is the non-cancellable period of a lease, together with both:
  • periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option; and
  • periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option.

 

D. Lessee Accounting

  1. Initial Recognition
  • Lessee shall recognize the right-of-use asset and a liability when a leased asset is available for use to the lessee.

 

  • Amount to recognize as the “right-of-use asset” include:
    • Present value of the lease payments that are not paid at initial recognition
    • any lease payments made at or before the commencement date, less any lease incentives received
    • any initial direct costs incurred by the lessee
    • an estimate of costs to be incurred by the lessee in dismantling and removing the underlying asset, restoring the site on which it is located or restoring the underlying asset to the condition required by the terms and conditions of the lease, unless those costs are incurred to produce inventories

 

  • Amount to recognize as lease liability include:
    • Present value of the lease payments that are not paid at that date

 

  1. Exception
  • A lessee may elect not to apply the full requirements of the IFRS 16 guidance for:
    • Short term leases
    • leases for which the underlying asset is of low value

 

 

  1. Classification
  • A lessor shall classify each of its leases as either an operating lease or a finance lease

 

  1. Finance Lease
  • At the commencement date, a lessor shall recognize assets held under a finance lease at an amount equals to net investment in the lease
  • Net investment at initial recognition:
    • present value of the lease payments that are not paid at commencement  date
    • Initial direct costs
  • Finance income over the lease term based on a pattern reflecting a constant periodic rate of return
  • Impairment: The  requirements of IFRS 9 are applied on the net investment of the lease
  • Disclosure
    • Statement of Financial Position (Including notes)
      • Net investment
    • Statement of profit or loss (Including notes
      • selling profit or loss;
      • finance income on the net investment in the lease; and
      • income relating to variable lease payments not included in the measurement of the net investment in the lease
    • Disclosures
      • the nature of the lessor’s leasing activities
      • how the lessor manages the risk associated with any rights it retains in underlying assets.
      • qualitative and quantitative explanation of changes in the carrying amount of the net investment
      • maturity analysis of the lease payments receivable, showing the undiscounted lease payments to be received on an annual basis for a minimum of each of the first five years and a total of the amounts for the remaining years

 

  1. Operating Lease
  • Income Recognition:
    • A lessor shall recognize lease payments from operating leases as income on either a straight-line basis or another systematic basis
  • Cost of an underlying asset e.g. Purchase cost, Direct costs etc. are recognized as an expense over the lease term on the same basis as the lease income.
  • No net investment recognized
  • Depreciation of leased asset:  Leased asset is depreciated based on the manner in which income on the asset is recognized
  • Direct Cost: A lessor shall add initial direct costs incurred in obtaining an operating lease to the carrying amount of the underlying asset
  • Impairment assessment on Assets on Operating Lease: Apply the guidance of IAS 38 to determine if there is impairment
  • Disclosure
    • Statement of Financial Position (Including notes)
      • PPE
    • Statement of profit or loss (Including notes
      • lease income,
    • Disclosures
      • PPE assets under operating lease shall apply the disclosure requirements of IAS 16
      • maturity analysis of lease payments, showing the undiscounted lease payments to be received on an annual basis for a minimum of each of the first five years and a total of the amounts for the remaining years

 

 

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