IFRS 16: Lessee Flashcards
Identified Asset [2]
The leased asset must be identified:
- Can be explicitly/ implicitly identified.
- Can be a portion, if it is
physically distinct; or reflects substantially all the asset’s capacity
An asset is not identified if the supplier has a substantive right to substitute it.
Substantive right to substitute [2+2]
NO LEASE IF SUPPLIER HAS THESE RIGHTS
The supplier’s right to substitute an asset is substantive if the supplier:
* has the practical ability to substitute throughout the lease; &
* would benefit economically if it did substitute the asset.
If it is difficult to determine if the right to substitute is substantive, we assume it is not substantive
Right to control the use of the asset [2+1]
We have the right to control the use of an identified asset if, during the period of use, we have
the right to:
* obtain substantially all the economic benefits from the use of the asset; and
* direct the use of the asset
The requirement to refund/pay part of the economic benefits to the lessor/third party is ignored.
Right to direct how and for what purpose the asset is used [3]
The entity (customer) has this right if it:
* can decide how and for what purpose the asset is used; OR
* cannot decide this because the ‘how and what for’ is predetermined. but it can operate the asset; OR
* cannot decide this because the ‘how and what for’ is predetermined. but the entity designed the asset AND it is this design that is the reason why the ‘how and what for’ is predetermined’
Short-term leases [3]
- Lease term must be 12m/less from commencement date & the ease may not include a purchase option.
- The choice to opt for the simpler approach is available by ‘class of asset’ (it’s an accounting policy choice)
How to see if the Lessee is reasonably certain to exercise extension option or terminate lease [4]
See if there are necessary economic benefits due to extension option or avoiding termination, like:
1. There are significant penalties to terminate the lease
1. Underlying asset is critical for the operations of an entity, being of such a specialized nature that it will be needed beyond the non-cancellable period.
1. Lessee has incurred significant leasehold improvements or initial installation costs
1. Extension option would result in lower than market-related lease payments during an optional extension period
Interest Rate implicit in the lease
The rate of interest that causes
* the present value of (a) the lease payments and (b) the unguaranteed residual value
to equal
- the sum of (i) the fair value of the underlying asset and (ii) any initial direct costs of the lessor.
Lessee’s incremental borrowing rate [3]
The rate of interest the lessee would have to pay
* to borrow over a similar term, and with similar security
* the funds necessary to obtain an asset of a similar value to the right-of-use asset
* in a similar economic environment.
Remeasurements/Reassessment
When to use the new discount rate?
- Change in the estimated lease term
-
Change in decision to exercise the option to purchase
[if there is change in the economic benefits from use of underlying asset]
Remeasurements/Reassessment
When to use the original rate?
- Change in amount expected to be payable in terms of GRV
- Change in variable lease payments based on index or rate
Unless the above changes resulted from a change in floating interest rate, then revised discount rate would be used
[if there is no change in the economic benefits from use of underlying asset]
Modification
Increase in Asset base, rentals are market based
- Treat the new asset base separate from the initial lease.
- Value of RoUA and LL (of new asset base) should be calculated @ new rate.
- Old and new LL are separately amortised @ different rates.
Modification
Increase in Asset base, rentals are below market price
- Recalculate a combined LL by discounting: combined rentals @ new rate
- Addition in LL is taken to RoUA
- One amortization schedule for the whole lease @ new rate
- No PNL impact as there is no lease termination
Modification
Reduction in asset base [3+2]
2 impacts
A) Reduction in Asset base:
- Pro rata reduction in ROUA i.e. eliminate the % of asset which is terminated
- Pro rata reduction in LL i.e. eliminate % of LL which is terminated (can calculate PV of rentals of that particular asset eliminated)
- Record Gain/Loss on termination (bal fig)
B) Further Impacts
- PV of revised rentals @ new rate = New LL
- Adjust LL and ROUA accordingly
Modification
Increase in Lease term [4]
- Calculate New LL = PV of revised rentals (remaining all) @ new rate.
- Adjust RoUA and LL accordingly
- No PNL impact as no termination
- Depreciate RoUA over new revised remaining term
Modification
Decrease in Lease term [6]
Lessor might charge higher rentals, rate might change in market
- Eliminate lease payments that pertain to the terminated period/s
- Find new PV of rentals (old) @ old rate for Revised LL (find reduction in LL by calculating the difference)
- Reduce RoUA on pro-rata basis (Keep remaining depreciable amount only)
- The Entry is going to look like:
LL (dr) Loss (dr) RoUA (cr) Gain (cr) - Due to increased rentals by lessor, Recalculate new LL with PV of higher rentals @ new rate
- Adjust RoUA and LL accordingly
