IFRS 16 Leases

Question 1

How are leases initially measured in the financial statements

Answer 1

Per IFRs 16 leases, the lease liability is initially measured at the present value of the lease payments that have not yet been paid.

Lease payments should include the following:

• Fixed payments over the lease term
• Amounts expected to be payable under residual value guarantees. A residual value guarantee is provided by the lessee and states that the underlying asset at the end of the lease term will not be worth less than a specified amount. This reduces the risk of damage and unauthorised usage of the asset
• Options to purchase the asset that are reasonably certain to be exercised
• Termination penalties if the lease term reflects the expectation that these will be incurred.

The discount rate should be the rate implicit in the lease.
If the implicit rate of the lease cannot be determined, then the entity should use tis incremental borrowing rate (the rate at which it could borrow funds to purchase a similar asset).

Right of use asset

The right of use asset is initially recognised at cost
Per IFRS16 Leases, the initial cost of the right of use asset comprises:

• The amount of the initial measurement of the lease liability (see above)
• 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 the conditions of the lease

Question 2

What is the lease term

Answer 2

The lease term is the length of time the lessee has the right-of-use of an asset.

To calculate the initial value of the lease liability and right of use asset, the lessee must consider the length of the lease term. As per IAS16 Leases, the lease term must comprise of

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

Question 3

What are the subsequent measurements

Answer 3

Lease liability

The carrying amount of the lease liability is increased by the interest charge. Interest is also recorded in the statement of profit or loss.

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

Payments can be made in arrears (at the end of the year or month and after the interest charge has been added)
Payments can also be made in advance (at the beginning of the year or month and before the interest charge has been added)

The liabilities will also be split into current and non-current.
Current will be the total liability that falls within 1 year
Non-current will be remaining liability.

Right of use asset

The right of use asset is measured using the cost model. This means that it is measured at its initial cost less accumulated depreciation and impairment losses.

Deprecation is calculated as follows:

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

Question 4

How are short life and low value assets treated

Answer 4

If the lease term is short-term (less than 12 months at inception date) or of a low value, then a simplified treatment is allowed.

In these cases, the lease can choose to recognise the lease payments in the profit or loss on a straight-line basis. No lease liability or right of use asset would be recognised