IFRS 16 Leases – Summary with examples – PDF

IFRS 16 Leases – Summary with examples – PDF

IFRS 16 Leases Overview

IFRS 16 full text establishes principles for the recognition measurement presentation and disclosure of leases, with the objective of ensuring that lessee and lessor provide relevant information that faithfully represents those transactions. (Effective from 2019: see IFRS 16 changes 2019 below)

Understanding IFRS 16 Leases

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  • The previous version IAS-17 (Leases) was criticized because it did not required Lessees to recognize assets and liabilities arising from Operating lease.
  • IFRS 16 introduces a single lessee accounting model and requires a lessee to recognize assets (right-of-use) and liabilities for All leases with a term of more than 12 months ( unless the underlying asset is of low value ).

Key IFRS 16 Definition

  • Inception date of lease: The earlier of lease agreement and the date of commitment by the parties. The type of lease is identified at the date of inception.
  • Interest rate implicit in lease: That makes present value of lease payment and UN-guaranteed value equal to fair value and ( any ) initial direct costs of lessor.
  • Economic and Useful life:
    • Economic life is the total life of an asset excepted to be economically usable by one or more users.
    • Useful life is the Period over which an asset is expected to be available for use by an entity.
  • Residual Value: this may be Guaranteed or UN-guaranteed ;
    • Guaranteed: A guarantee made to a lessor by a party unrelated to lessor that the value of an asset at the end of lease will be at least a specified amount.
    • UN-Guaranteed: is that portion of residual value of asset, the realization of which is not assured by a party related to the lessor.
  • Lease Receipts and Payments: The term lease Payments refer to the payments that a lessee expects to make over a lease term or the Receipts that a lessor expects over the economic life of the asset. Payment by a lessee to lessor during a lease term may comprises of ;
    • fixed payments (less) any lease incentives.
    • variable lease payments.
    • purchase option price.
    • payment of penalties for terminating the lease.
  • Lease Classification:
    • Finance lease where it transfers substantially all the risks and rewards incidental to ownership.
    • Operating lease where it does not transfers substantially all the risk and rewards incidental to ownership.

The following IFRS 16 presentation explain IFRS 16 calculation example.

IFRS 16 Lessee accounting: Accounting for lease By Lessee

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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 leases for which underlying asset is of low value.

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At commencement date, a lessee should measure the right of use asset at cost.

Cost comprises;

  • present value of lease payments.
  • any lease payment made at or before the commencement date (less) any lease incentives received.
  • any initial direct cost incurred by lessee.
  • any disposal/dismantling costs, incurred by lessee.

Subsequent measurement

  • Account for any depreciation expense and accumulated impairment losses ( if any ).
  • If asset is owned at the end of lease term:
    • Depreciate on useful life.
  • If asset is not owned at the end of lease term:
    • depreciate, Earlier of: useful life or lease term.

At commencement date, a lessee should measure the lease liability at the Present valve of the lease payments, that are not paid at that date.

Subsequent measurement

  • After the initial recognition the lease liability is measured at amortized cost using the effective interest method.
  • Each lease payment consists of TWO elements:
    1. Finance charge on the liability to the lessor, by adding a periodic charge to lease liability, with other side of entry as an expense to P/L.
    2. Partial repayment of liability.
  • Total liability must be divided between:
    • current liability.
    • non-current liability.
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  • After the commencement date, a lessee should remeasure the lease liability (IF ANY CHANGE OCCURS) using either unchanged discount rate or revised discount rate to reflect changes in lease payments.
  • A lessee should account for re-measurement of lease liability as an adjustment to the right-of-use asset to the extent covered by right-of-use asset and remaining amount is recognized in P/L.
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  • A lessee may ELECT not to apply the recognition and measurement of right-of-use asset and liability to:
    1. short term lease (12 months or less).
    2. asset of low value:
      • Examples include; office furniture, laptops, tables, telephones.
  • Expense these out on straight line basis or any other method.

IFRS 16 Lessor accounting: Accounting for lease By Lessor

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  • In finance lease the lessor does not record the leased asset in its financial statements ,as its has transferred the risks and reward. Instead, he records the amount as Receivable.
  • Receivable is described as :
    • Net investment( N.I ) = Present value of Gross investment or;
    • Net investment (N.I) = Fair value + Initial direct cost.

Subsequent measurement

  • Record payments received during the year by making;

Cash/Bank Debit
                    Net Investment Credit

  • Record finance income, adding a period return to the N.I and other side as income in P/L:

Net Investment Debit
                     Finance Income Credit

IFRS 16 operating lease

  • The lessor records the leased asset in its financial statement , as he has not transferred the risk and reward of ownership.
  • At commencement the lessor add initial direct costs incurred by lessor.

Subsequent measurement

  • Lessor records the depreciation expense, the policy must be consistent with lessor’s policy.
  • Account for any impairment loss.
  • Records Rental Income on a straight-line basis over lease term.

Accounting for lease By Lessor (Manufacturer Dealer LESSOR)

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  • A manufacturer or dealer often offers to customers to the choice of either buying or leasing an asset.
  • As these are Lessors, therefore lessors accounting treatment are applied.
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A finance lease gives rise to two types of income:

  • Profit or loss (difference between sales and cost)
  • Finance income.

Initial Measurement

  • Record Sales as:

Lease receivable Debit
Sales Credit (lower of fair valve or Present of Lease payments)

  • Record cost of Sales:

Cost Debit
Inventory (Asset)Credit

  • Transfer Present valve of UN-Guaranteed valve of Net Investment:

Lease Receivable Debit
Inventory (Asset) Credit

  • Expense-out initial direct costs:

Income Statement Debit
Cash/Bank Credit

  • Record finance income subsequently

Initial Measurement

  • Does not Record Sales
  • Record Asset:

Asset Debit
Inventory Credit

  • Record depreciation.
  • Record impairment.
  • Record Rental income.

Sale and Lease Back

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  • Sale and lease back transactions involve one entity selling an asset to another entity and then immediately leasing it back.
  • The main purpose is to allow the entity to release cash, that is ‘ tied up ‘ in the asset.
  • Accounting for sale and lease back depends on whether Transfer is sale or not a sale.
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If the transfer of an asset by seller lessee satisfies the requirement of IFRS 15 then the lessee shall:

Sale at Fair value:

  • De-recognize the carrying value of the asset.
  • Recognize the Gain/Loss [ = (fair value – carrying value) * (f.v – p.v) divide by fair value]

Sale Above Fair value:

  • If the sales proceeds are above F.V, the difference between sales proceeds and F.V shall be treated as Additional financing provided by the buyer lessor (additional financing= sales – F.V) and to be deducted from lease payments (NPV) for calculation of ” Right of use ” & ” Gain/Loss “.
  • The entity should make following adjustments, others remaining same as above:
    • Record lease liability at present value of lease payments including additional financing.
    • Right of use asset: = [carrying value * NPV (i.e. is lease payments net off additional financing)] divide by fair value (F.V).
    • Gain/Loss: = (F.V – C.V) * (F.V – NPV) divide by F.V.

Sale Below Fair value:

  • If the sales proceeds are below F.V, the difference between sales proceeds and F.V shall be treated as prepayments of lease payments. It is added to the lease payments ( to make it Total lease payments ) for calculation of “Right of use” & “Gain/Loss”.
  • The entity shall make following adjustments, others remaining the same;
    • Record lease liability (at P.V of lease payment).
    • Record right-of-use (C.V * Total P.V of lease payments) divide by F.V.
    • Gain/Loss: [=(F.V – C.V)* (F.V – Total P.V of lease payments)] divide by F.V.

If the transfer of an asset by seller lessee satisfies the requirements of IFRS 15, then the lessor shall;

  • Account for Purchase of asset according to IAS 16 and treat it as operating lease according to IFRS 16. Make following entries;

Asset Debit
Cash/Bank Credit

Dep. expense Debit
Acc. dep. credit (over remaining useful life)

Cash Debit
Rental Income Credit (over straight line)

  • Account for any initial direct investment.
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If the transfer of an asset by seller lessee does not satisfies the requirements of IFRS 15, then the lessor shall;

  • continue to recognize the transferred asset.
  • shall recognize a Financial liability equal to the transferred proceed, in accordance with IFRS 9.

Cash Debit
Financial liability Credit

  • Lease amortization schedule will be needed for principal and interest charge over the lease term;

Interest charge Debit
Financial liability Debit
                            Cash Credit

If the transfer of an asset by seller lessee does not satisfies the requirements of IFRS 15, then the lessor shall;

  • Not recognize the transfer of asset.
  • Recognize a Financial Asset, equal to the transferred proceed in accordance with IFRS 9;

Financial asset Debit
                        Cash Credit

  • Lease amortization schedule will be needed for principal and interest income over the lease term;

Cash Debit
Interest income Credit
Financial asset Credit

IFRS 16 pdf

The above IFRS 16 summary is the most simplified version. Moreover, Click here to Download IFRS 16 standard pdf

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