Chapter 11 IFRS 16 Leases Definitions Lease v
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Chapter 11 IFRS 16 Leases
Definitions Lease v. Contract/ part of a contract v. That conveys Right to use an asset v for a Period of time (lease term) v. In exchange for consideration Right-of-use asset represents the lessee’s rights to use an underlying asset for the lease term IMAS 2
Identifying a lease A contract contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration a) The contract conveys the right to control • Obtain substantially all the economic benefits from the use of the asset, within the parameters of the lease • Direct the use of the asset IMAS 3
Identifying a lease b) Identified asset • Explicitly or implicitly stated in the contract • Maybe a portion of an asset if physically distinct *** Customer does not have right to use an identified asset if supplier has substantive rights to substitute the asset throughout the period of use c) Period of time • Maybe described in terms of use of underlying asset IMAS 4
Lease term The lease term is the non-cancellable period for which a lease has the right to use an underlying asset, together with both: a) Periods covered by option to extend b) Periods covered by option to terminate IMAS 5
Lessee Accounting Initial recognition: v. Right-of-use of asset v. A lease liability IMAS 6
Initial measurement Lease liability: present value of lease payments not paid at the commencement date ** Discount rate – implicit interest rate/ incremental cost of borrowing Lease payments will include the following: v. Fixed payments over the lease term v. Amounts to be payable under residual value guarantees v. Options to purchase the asset that are reasonable certain to be exercised v. Termination penalties, if the lease term reflects the expectation that these will be incurred (x) IMAS 7
Right-of-use-asset Present value of future lease payment x Lease payments made at or before the commencement date Initial direct costs incurred by lessee x Estimated dismantling and restoration costs x Lease incentives received x
Subsequent measurement Liability Increasing it by the interest on the lease liability and reducing it by lease payments made Right-of-use asset is normally measured using the cost model (IAS 16) Depreciation : *** from commencement date to the earlier of end of its useful life and the end of the lease term IMAS 9
Depreciation is calculated as follows: v. If ownership of the asset transfers to the lessee at the end of the lease term then depreciation should be charged over the asset’s remaining useful life v. Otherwise, depreciation is charged over the shorter of the useful life and the lease term
Optional Recognition v. Short term leases (less than 12 months at the inception date) v. Leases for which the underlying asset is low value (assessment is made when the asset was new) Recognition; v. Expense on a straight line basis over the lease term or any other systematic basis IMAS 11
