Chapter 9 (Leases)

Question 1

How is a lease defined in IFRS16?

Answer 1

“A contract that gives the holder the right to use an asset for a period of time and pays for it”

IFRS16 defines a lease as “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”. Two further definitions given in IFRS16 are as follows:

1. The inception date of a lease is “the earlier of the date of a lease agreement and the date of commitment by the parties to the principal terms and conditions of the lease”
2. The commencement date of a lease is “the date on which a lessor makes an underlying asset available for use by a lessee”.

Question 2

Throughout the period of use, the customer in a lease transaction must have two
requirements fulfilled - which?

Answer 2

Throughout the “period of use” specified in the contract, the customer must have both of the following:

1. The right to obtain substantially all of the economic benefits from use of the underlying asset (e.g. by having exclusive use of it), and
2. The right to direct the use of that asset

Question 3

How is the lease-term defined?

Answer 3

“As the non-cancellable period of the lease”

IFRS16 defines the length of a lease (the “lease term”) as “the non-cancellable period of the lease, together with both:

1. Periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option; and
2. Periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option.”

Question 4

When can a user chose not to apply a lease accounting treatment?

Answer 4

Short-term or low value assets

The requirement to recognise a right-of-use asset and a lease liability generally applies to all leases. However, an entity may elect not to apply this accounting treatment to:

1. Short-term leases (i.e. leases of 12 months or less), and
2. Leases for which the underlying asset is of low value

Question 5

How is the right of use asset initially measured?

Answer 5

“At cost (present value of the sum of future rents)”

The right-of-use asset which is recognised at the commencement of a lease is measured initially AT COST.

The cost of the right-of-use asset is obtained by adding together the following elements:

1. The amount of the initial measurement of the lease liability
2. Any lease payments made at or before the commencement date (e.g. deposits)
3. Any initial direct costs incurred by the lessee
4. An estimate of any costs to be incurred by the lessee in dismantling or removing the underlying asset at the end of the lease term, restoring the site on which it is located or restoring the asset as required by the terms of the lease

Question 6

What is the incremental borrowing rate?

Answer 6

“The interest rate the lessee would have to pay to borrow money”

A lessee’s “incremental borrowing rate” is the rate of interest that the lessee would have to pay over a similar term to borrow the funds necessary to acquire an asset of a similar value to the leased asset

Question 7

How is the right of use asset measured subsequently?

Answer 7

Current cost, less depreciations and impairments

In most cases, the right-of-use asset established at the commencement of a lease should be measured subsequently at cost less any accumulated depreciation and accumulated impairment losses (the “cost model”)

Question 8

How is the reduction of the liability to the lessor calculated?

Answer 8

It is lowered with the lease payment, less calculated interest costs presented in the income statement