11.1 IFRS 16 Leases

Question 1

IFRS 16 Leases

Answer 1

• An entity may need a particular asset for its operations but may not have the cash available to purchase it outright
• As a result the entity may enter into a lease agreement where it gets to use the asset on a day to day basis and pays periodic rental payments
• This is a common method of financing used by many businesses

Question 2

Definition of lease

Answer 2

it 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

Question 3

Definition of lessor

Answer 3

is the entity that provides the right to use and underlying asset for a period of time in exchange for consideration

Question 4

Definition of lessee

Answer 4

is the entity that obtains the right to use an underlying asset for a period of time in exchange for consideration

Question 5

Definition of a right of use asset

Answer 5

is an asset that represents the lessees right to use an underlying asset for the lease term

Question 6

At the commencement of the lease, the lessee should recognise

Answer 6

• a lease liability
• a right of use asset

Question 7

Accounting treatment considers the

Answer 7

• initial measurement
• subsequent treatment of a lease

Question 8

Initial measurement - Lease liability

Answer 8

is initially measured at the present value of the lease payments that have not yet been paid

Question 9

Lease payments should include the following

Answer 9

• Fixed payments over the lease term
• Variable lease payments that depend on an index or rate, initially measured using the index or rate as at commencement date
• Amounts expected to be payable under residual value guarantees (provided by lessee and states that the asset will not be worth less than a specified amount at end of lease term, reduces risk of damage and unauthorized usage)
• The exercise price of a purchase option if the lessee is reasonably certain to exercise that option
• Payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate the lease

Question 10

To determine the PV of lease payments not yet paid

Answer 10

• the discount rate should be the rate implicit in the lease
• if this cannot be determined then it should use its incremental borrowing rate ( rate at which it could borrow funds to purchase a similar asset)

Question 11

The right of use asset is initially recognised at

Answer 11

Cost
The initial cost comprises:
- The amount of the initial measurement of the lease liability
- Lease payments made at or before the commencement date
- Any initial direct costs
- The estimated costs of removing or dismantling the underlying asset, as per conditions of the lease

Question 12

The lease term

Answer 12

• is the length of time that the lessee has the right of use of an asset
• the lease term must be considered when calculating the initial value of the liability and right of use asset

Question 13

The lease term comprises:

Answer 13

• Non cancellable periods
• Periods covered by an option to extend the lease, if reasonably certain to be exercised
• Periods covered by an option to terminate the lease, if reasonably certain not to be exercised

Question 14

Subsequent measurement - Lease liability

Answer 14

The carrying amount of the lease liability is increased by the interest charge (also recorded in SPL)
Dr Finance costs (SPL)
Cr Lease liability (SFP)

The carrying amount of the lease liability is reduced by cash repayments
Dr Lease liability
Cr Cash

Layout of the lease table will depend on whether payments are made at the end of the year (in arrears) or at the start of the year (in advance)

Question 15

Subsequent measurement - Right of use asset

Answer 15

• is measured using the cost model
• this means it is measured at its initial cost less accumulated depreciation and impairment losses

Question 16

Subsequent measurement - Right of use asset - Depreciation is calculated as follows

Answer 16

• If ownership of the asset transfers to the lessee at the end of the lease term then depreciation should be charged over the assets remaining useful life
• Otherwise, depreciation is charged over the shorter of the useful life and the lease term

Question 17

Short life and low value assets

Answer 17

• If the lease is short term (less than 12 months at inception date) or of a low value (tablets, pc’s, telephones) then a simplified treatment is allowed
• the lessee can choose to recognise the lease payments in profit or loss on a straight line basis
• no lease liability or right of use asset would be recognised