IFRS 16 Leases

Objective Accounts for acontractor part ofa contract that conveysthe right to use underlying identifiable assets for aperiod of time in exchange of
some consideration.
Terms
Leaser Contract for right to use an underlyingidentifiable assetsin exchange of some consideration.
Lessee The party who receive the right to use assets under the lease contract.
Lessor a party that dellver the assets under the lease contract
Lease term time period for which lessee is able to derive benefit out from right to use assets contract.
Right to use asset right oflessee to controlan identifiable assets for a certain time period.
Specific to the lease contract.
1 ldentifiable Asset ifthere is no identifiable asset under the contract then there is no lease contract at all.
2 Restriction on use of asset restriction on use of asset basically define the scope oflease contract.
Lessee accounting

Recognition Criteria |Leasecontract approved by lessorand lessee

Lessee Accounitng
Initial measurment
1Leaseobligation LO_
Right to use Asset RTUA

1 Lease obligation Note: any future payment made against the lease contract.
1 Fixed future payments against lease contract
2 Variable fututre payments RVG Actual value
300,000 any payment against residual value guarantee. 500,000 200,000
4 Optionto purchaseif resonably certain.
5 lease termination paymentsif resonably certain.
6 Option to extend leaseterm if resonably certain.

Next StepAll the future payments must be discounted to asertain the present value offuture lease obligations.
Time value of money concept requires adiscount factor
|Lease states discountfactor is:
1 It must be the implicit rate oflease. 1stPriority
2 if implicit rate of leaseis not availabe then incremental borowing cost 2nd Priority
2 RTUA
IAS16 Rules 1 PV of Future Lease Obligation
2 Advance payment for the lease contract
carriage inward
4site preprations
s instalation
6 any other directl Att Cost
7 Borrowingcost
8 Dismentling cost
Susequent measurment
1 Lease oblgation
Unwinding of dsicount using implicit rate of lease on priority and if implicit rate is not available then use incremental borrowing rate.
OpLO Implicit/icremnt
Open 8al LOo interest Exp Total LO Payment of LO Closing LO Current Portion of LO Non current portion of LO

2 RTUA
As per IAS 16
thisRTUA must bedepriciated
Assets cost is availabe from initial measurment
2 Normally residual is zero
Usefull life Lease teterm
 Lease term

whether there is an option ot purchase assets or not

if option to purchase assets is
if option to purchase
availbal and its resonably
assets not availbe
certain that will be exercised

Then Then

lease term is alwasys usefull life Lease term is always

of asset. lower or

Usefull Lease duration

years |8 years
Example 1 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. ll payments are due at the end of the year. To obtain the lease, Dynamic incurs initial direct costs of $3,000. The lessor immediately
reimburses $1,000 of these costs. 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-of-use asset and provide the double entries needed to record these amounts in Dynamic's
financial records.

Lease contract
Lessee 1 Lease obligation Present value of all future payments

Year Cash Flows DF5 % PV

10,000 0.952 9,524

10,000 0.907 9,070
15,000 0.864 12,958
Lease obligation 31,552

odels? 2 RTUA

1 Lease obligation 31,552

rty 2 initial direct cost 2,000

RTUA 33,552

Dr Cr
RTUA 33,552
Lease Obligatoin 31,552
Cash 2,000
 31Dec 2Ox1
TotalPayment Principle Interst Interst Exp ,578
31,552
10,000 8,844 ,156 1,578 10,000 1,578
15,000 14,286 714 2 LO 10,000
Cash 10,000
Subequent measunmene 129
Year pen LO
pen 31 Dec 20x2
interestExp Total Lo Payment Closing LO Current LO NCLO 33,129 33,129
31,552 1,578 33,129 10,000 B,19 8844 4,285 Interst Exp 1,156
23,129 1,156 24,286 10,000 14,286
4,286 1,156 LO
14,286 714 15,000 15,000 0 10,000 23,129
Cash 10,000 10,000 1,156

,286
Subequent measurment 24,286 24,286
edr Extratcs SOCI SOFP
33,552 Interest E) 1,578 *TUA 22,368
Residual Value p Exp 11,184 23,129 Current 8844 Non Current 14286

Dericiatblae value 33,552 Dep PA 11,184 Year 2 Extratcs CI SOFP

Interest E 1,156 TUA 11,184
Lease termn Dep Exp 11,184 LO 14,286 Current- 14286 Non Curent- 0

f'no option
Usefult file Lease duration Year 2 Extratcs SOCI SOFP
10 3 Interest Exxp 714 TUA
Dep Exp 11,184 LO OCurrent-0 Non Current-0
2 Mid year lease
|
On 1 April 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 on 31 March each year. To obtain the lease, Dynamic incurs initial direct costs of $3,000. The lessor
immediately reimburses $1,000 of these costs. 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-of-use asset providing dynamic year end is 31 Dec each year.

LO RTUA
YEAR Cash flows PV
DF@ 5%
10,000 0.952 9,524 LO 31,552 5,592
2 10,000 0.907 9,070 Initial payment 3,000
15,000 0.864 12,958 Reimbust 1,000

31,552 33,552 11,184

lst Jan 3 months 31st March 1st April 9 months 31st Dec
OLO interest Exp TLO Payment RLO interest Exp Closing LO Current LO Non Current LO
20X1 O 31,552 1,183 32,735 9,606 23,129
20X2 32,735 394 33,12 10,000 23,129 367 23,997 9,711 14,286
20X3 23,997 289 24,286 10,000 ,286 S36 14,821 14,821
20X4 14,821 179 15,000 15,000

SOCI SOFP
interest Exp Dep Exp Lease Obligation RTUA

20X1 1,183 5,592 32,735 27,960

20x2 1,262 11,184 23,997 16,776
Extracts
20X3 825 11,184 14,821 5,592
20X4 179 5,592 O
3 Advance payments oflease
On1 Jan 20OX1, Dynamic enteredinto atwo year lease for alorry. The contractcontains an option to extend the lease term for afurther year. Dynamic
believesthat itis reasonably certain to exercise this option. Lorries have a useful economiclife of ten years. Llease paymentsare $10,000 per year for the
initial term and $15,000 per year for the option period. All paymentsare due on 1Jan each year startingfrom 1st Jan 20X1 being the first payment.To
obtainthe lease, Dynamicincursinitialdirect costs of$3,000.The lessorimmediately reimburses S1,000 of these costs.Theinterest rate within the leaseis
notreadily determinable. Dynamic's incremental rate of borTowing is 5%.
Required:
Calculate the initialcarryingamount of the lease liabilityand the right-of-use asset and providing dynamic year end is 31 Deceach year. IF advance payment is considered asL O
Ist Jan Cr
RTUA 35,129
LO 33,129
Cash 2,000
LO RTUA 35,129 35,129
YEAR CashflowsDF@
5% V 1st Jan
LO 33,129 LO 10,000
10,000 1.000 10,000 Initial payment 3,000 Cash 10,000
1 10,000 0.952 9524 Reimbust -1,000
15,000 0.907 13,605 |IFadvance paymentis not considered as LO
33,129 35,129 11,710 Dr Cr

RTUA 35,129
Year OLO Payment RLO interest Exp Closing LOo Curent L NonCurent Lo LO 23,129
33,129 10,000 23,129 1,156 24,286 10,000 14,286 Cash 12,000
24,286 10,000 14,286 14 15,000 5,000
15,000 15,000 35,129 35,129
ihort Life or low value assets FRS26recommend simplified accountins for all such Aasets scquired with lease contrct.

Short f Assets are those assets havinga useftul ite of less than a year.
Acquired abuilding on rent for one year with an anuual rent of S1,000. Im plicit rate of lease is 10 DFO 10% Amortization Schedu
C 1,000 D.909 Op Interest Ep Lo Payment LO
Rental tx 91 1,000 1,00
1,000 0D
RTUA Extrates SOCI SOFP
O Dep Exp 909 RTUA
InterestExp
Total Exp 1,000
2 Low Value assets Must met 2 conditoins.
1 Low value means which is not material amount when the asset was brand new
2 Assets was independent of other assets to use by entity.
tablets phone tablet Low value asset Fx Suzuki Car
200,000
small computer 80,000 to 150,000

telephones
small items of furniture.

80,000 Never be considered Low value assets

Brand new Suzuki Fx
1.5M

Simplified accounting

CompanyA Contacted to lease a mobile phone for three year time at a pyment of Rs. 100,000 per annum

Dr Cr
Rent Exp 100,000
Cash 100,000
Sale and lease back transaction
3,900 NBV Sale transacton is met FR5 15 Criteria
eller Buyar whether transfer is a sale or not under IFRS 15.
5,000 FV

Retain
Lessee LEGSE
2,000 PV of lease obligation
RTUA is different from the simple lease contract Sale transaction Evaluatrion
A compny a sold an assets XYZ at its FVof 5,000 and leased it back at a PV of lease obligation of 2,000. at the date of sale NBV of assets XYZ is 3,900.

f transfer is sale under f transfer ls not sale

under IFRS15
1 Consider that seller had sold out portion of assets. IFRS15
2 Lessee had retained the RTUA from the NBV of assets.

=PV of lease obligation / FV of assset sold only then it can be a its simply a secured
%age of NBV retined. 40% lease transaction loan under IFRS 9
RTUA 1560

RTUA created under Sale an lease back transaction is different than simply a lease transaction.

RTUA (PV of LO on disposal date/FV of Assets on Disp Date)" NBVof asset on Disp Date
1,560
Sales 3,000 Lo 2,000
NBV 2,340 RTUA 1,560 Sales proceeds 5,000 3,000
Assets Disposed 3,900 2,340
gdin 660 Casn 5,000
RTUA 2,000 Assets XYZ- NBV 1,100 660
-

900
r Cr RTUA 1,560
RTUA LO
440
2,000
Revalutoin Surp 40 Gain on Disposal

6,560 D,300
On 1 January 20X1, Mosaic sells an item of machinery to Ceramic for $3 million. Its fair value was $3 million. The asset had a carrying amount of $1.2 million prior to

the sale. This sale represents the satisfaction of performance obligation, in accordance with IFRS 15 Revenue from Contracts with Customers. Mosaic enters into a

contract with Ceramic for the right to use the asset for the next five years. Annual payments of S500,000 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.

Requlred:
Explain how the transaction will be accounted for on 1 January 20X1 by both Mosaic and Ceramic.
Solution
Sales proceeds 3,000 Dr
FVD D 3,000 Cash 3,000
NBV
1,200 Assets NBV 1,200
PV of future lease obligation 1,900 RTUA 760
LO 1,900
Gain on Disp 660
RTUA 3,760 3,760
%age Retained 63%
RTUA 760
r

ash 3,000
Assets 1,200
RTUA 760
LO 1,900
Gain/Loss on Disposal 660

3,760 3,760