IFRS 16 - Leases

Question 1

A contract contains a lease if it conveys…

Answer 1

the right to control the use of an identified asset for a period of time in exchange for consideration.

Question 2

The customer controls the assets use if it has:

Answer 2

• The right to substantially all of the identified asset’s economic benefits and;
• The right to direct the identified assets use.

Question 3

Capping the assets use is defining the scope of the asset. Does this prevent the leasee from directing its use?

Answer 3

No

Question 4

IFRS 16 states that lease payments include the following (5)

Answer 4

• Fixed payments
• Variable payments that depend on index/rate
• Amount expected to be payable under residual value guarantees
• Options to purchase the asset that are reasonably certain to be exercised
• Termination penalties

Question 5

What is a residual value guarantee?

Answer 5

The lessor is promised that the underlying value of an asset at the end of lease term will not be worth less than a specified amount.

Question 6

What should the discount rate be?

Answer 6

The rate implicit in the lease.

If this cannot be determined, then the entity should use its incremental borrowing rate.

Question 7

A right of use asset should be initially included at cost. IFRS 16 says that the initial cost of the right-of-use asset comprises:

Answer 7

• Initial measurement of the lease liability
• Lease payments made at or before the commencement date
• The estimated cost of removing or dismantling the underlying asset as per the conditions of the lease.

Question 8

What does IFRS 16 say the lease term comprises?

Answer 8

• Non-cancellable periods
• Periods covered by an option to extend if reasonably certain to be exercised.
• Periods covered by an option to terminate if reasonably certain not to be exercised.

Question 9

If the right of use assets is considered to be an investments property (sub - let), and it’s the business model to measure investment property using the fair value model, how is the lease measured?

Answer 9

Using the fair value model

Question 10

If the right of use asset belongs to a class of property plant and equipment which is measured using the revaluation model, how should the right of use asset be treated?

Answer 10

Entity MAY apply IAS 16 to all right of use assets within that class.

Question 11

Separating components - a contract may contain a lease component and a non lease component.

Unless the entity choses otherwise, how would the consideration in the contract be accounted for?

Answer 11

Allocated to each component based on the standalone selling price of each component.

Question 12

What would be the impact is an entity choses to account for the lease and non lease components as a single lease?

The choice must be made for each class of right of use asset

Answer 12

Increased lease liability a the inception of the lease

Negatively impacting the perception of the entities performance.

Question 13

IFRS 16 says the lease liabilities should be recalculated using a revised discount rate if:

Answer 13

• the lease term changes

- the entity’s assessment of an option to purchase the underlying asset changes

Question 14

Lessor accounting:

What is a finance lease?

Answer 14

A lease where substantially all of the risks and rewards of the underlying asset transfer to the lessee

Question 15

Lessor accounting:

What is an operating lease?

Answer 15

A lease that does not meet the definition of a finance lease.

Question 16

IFRS 16 says a lease is probably a finance lease if one or more of the following apply

Answer 16

1. Ownership of the lease is transferred at the end of lease
2. The lessee has the option to purchase the asset for less than its expected fair value (if reasonably certain it will be exercised)
3. Lease term is for major part of the assets economic life.
4. At inception, the PV of lease payments amounts to at least substantially all of the fair value of the leased asset
5. The leased assets are of a specialised nature so that only the lessee can use them without major modifications being made.
6. The lessee will compensate the lessor for their losses if the lease is cancelled
7. Gains/losses from fluctuations in fair value of the residual fall to the lessee.
8. The lessee can continue the lease for a secondary period for lower than market rent payments.

Question 17

What is the initial treatment of a finance lease?

Answer 17

Held as a lease receivable - present value of:

• Fixed payments
• Variable payments
• Residual value guarantees and unguaranteed
• Purchase options reasonably certain to be exercised
• Termination penalties if expectation that these will be incurred.