IFRS 16 Leases will start to apply on all the financial years starting after 1st January, 2019. After that IAS 17 will no longer be applicable. Early application of the IFRS 16 Leases is only allowed with IFRS 15.
Objective of IFRS 16 Leases
The main objective of this standard is to specify the principles for recognition, measurement, presentation and disclosure of LEASES.
Does Not Apply to;
IFRS 16 does not apply to the below mentioned arrangements;
Lease to explore for / use of mineral, oil, natural gas and similar
Lease of biological assets deals under IAS 41
Service concession arrangements deals under IFRIC 12
Intellectual property licenses IFRS 16
Rights under licensing agreements IAS 38
There are two optional exemptions;
Lease term which is under or less than 12 months for example motors; this will be applied to all class. You cannot apply to only one motor and not on the other motor vehicle.
Underlying asset for low value when new such as personal computer, it’s not for the whole class you can apply it to only a single. Don’t need to worry about right to use the asset. Account for lease payments on straight line basis or any other basis.
Commencement of Lease under IFRS 16 Leases
At the inception of each contract and entity should asses’ whether the contract contain lease or not. “There is lease if you have right to use the asset for a specified time period against the consideration.”
According to new IFRS 16 lessee are not required to classify the leases into Finance and operating. They have to account for all leases in the same manner except the exemptions. (Lease term less than twelve months and low value asset)
At the commencement the lessee will recognize;
The right of use of asset and
The right of use of asset should be equal to the lease liabilities. Under this standards all assets will be recognized in the financial statements because in the previous standard IAS 17 operating lease standards were not recognized and payments deals in the profit and loss.
Right of use of assets includes
Amount for lease liability
Lease payments before or on commencements
Initial direct costs
Dismantling cost at the end of the lease contract
Lease Liability includes
All the payments which were not paid are discounted to the present value by using the interest rate implicit in the lease.
Fixed payments, variable payments, residual value guarantees, exercise price of purchase option is lessee will purchase it at the lease end and any penalties for terminating.
Lessee account for the lease as;
Right of use of asset
Debit Depreciation Exp.
Credit Accumulated Depreciation
This is the application of IAS 16
Fair value model IAS 40 depending what you are using for your property plant and equipment.
Impairment test is also compulsory
Interest on the lease liability
Debit Profit loss interest
Credit Lease Liability
Reduction of lease liability
Debit Lease Liability
Credit Cash or bank account
Accounting by lessor
Classify the lease first and then account for according to the classification.
If all the risk and rewards transferred to the lessee then the lease is finance lease if not then it is operating lease. This classification is done at the commencement of the lease.
There are situation under IFRS 16 Leases
Option to purchase the asset at price less than the fair value if lessee purchase the assets at the lease end
Lease term is major part of the economic life of the asset
Present value of all the lease payments is equal or close to the fair value
Lease assets are specialized nature only lessee can used the assets without any modification.
Lessor account for
Lease receivable (net investment in the lease)
Residual value guarantees
Exercise price of purchase option
Credit entry is underlying assets
Credit lease payments
Lease payments received recognized as revenue in profit and loss and lessor keep the asset in the financial statement and depreciate it. In under new IFRS 16 both lessee and lessor can recognize the asset.
Sale and lease back
Seller sells the asset and gets it lease back, transfer of asset under IFRS 15 yes. Control of asset transfer then lease will recognize
Right of use of asset at proportion of the previous carrying amount
Gain loss related to the transferred rights only
Buyer will recognized under the applicable standard and under IFRS 16 leases. If not sale then seller and continues to recognize an asset and the payments under IFRS 9 financial liability. It’s a sort of financing arrange.