IFRS 16 Leases Vs IAS 17 Leases

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IFRS 16 Leases

IFRS 16 Leases will start to apply on all the financial years starting after 1^st 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;

1. Lease to explore for / use of mineral, oil, natural gas and similar
2. Lease of biological assets deals under IAS 41
3. Service concession arrangements deals under IFRIC 12
4. Intellectual property licenses IFRS 16
5. Rights under licensing agreements IAS 38

There are two optional exemptions;

1. 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.
2. 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
• Lease liability.

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

1. This is the application of IAS 16
2. Fair value model IAS 40 depending what you are using for your property plant and equipment.
3. 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.

Finance Lease

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

1. Ownership transferred
2. Option to purchase the asset at price less than the fair value if lessee purchase the assets at the lease end
3. Lease term is major part of the economic life of the asset
4. Present value of all the lease payments is equal or close to the fair value
5. Lease assets are specialized nature only lessee can used the assets without any modification.

Lessor account for

1. Lease receivable (net investment in the lease)
2. Fixed payments
3. Variable payments
4. Residual value guarantees
5. Exercise price of purchase option
6. Penalties

Credit entry is underlying assets

• Debit cash
• Credit lease payments

Operating lease

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.