IFRS 16 - Lease

Question 1

Capital lease criteria – Lessee (IFRS)

Answer 1

• A lease is a contract that conveys the right to control the use of an identified asset for a period of time in exchange for consideration
• Expensing lease payments is only available for short-term leases or those with a low underlying asset value
• Recognition:
  o A right of use asset and a lease liability are recorded at the commencement date of the lease
• Initial measurement:
  o Lease liability is equal to the present value of future lease payments, discounted using the rate implicit in the lease (if unknown, use lessee’s incremental borrowing rate)
  o Right of use asset initially includes initial direct costs, dismantling costs, and value of the lease liability, less any lease incentives
• Subsequent measurement:
  o Lease liability increases to reflect interest and decreases to reflect payments
  o Right of use asset is amortized over its useful life (if asset is transferred to lessee at end of lease term or lessee is expected to exercise bargain purchase option) or the lease term

Reference: IFRS 16

Question 2

Capital lease criteria – Lessor (IFRS)

Answer 2

• Each lease is classified as financing or operating:
  o Financing — Substantially all of the risks and rewards incidental to ownership of the asset are transferred to the lessee
  o Operating — No substantial transfer of the risks and rewards incidental to ownership of the asset to the lessee
• Finance lease:
  o Initially measured as a receivable equal to the net investment in the lease, which is future lease payments discounted using the interest rate implicit in the lease
  o Finance income is recognized over the lease term at a constant rate of return
• Operating lease:
  o Lease payments received are recognized in income either on the straight-line basis or another systematic basis

Reference: IFRS 16