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Chapter 6 Transition

This document discusses the transition approaches and requirements for applying IFRS 16 on leases. It provides details on the retrospective and modified retrospective approaches, and explains how to account for different types of leases under each approach. Practical expedients for transition are also covered.

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19 views4 pages

Chapter 6 Transition

This document discusses the transition approaches and requirements for applying IFRS 16 on leases. It provides details on the retrospective and modified retrospective approaches, and explains how to account for different types of leases under each approach. Practical expedients for transition are also covered.

Uploaded by

Mahedi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Chapter 6: Transition

Date of initial application: Beginning of the annual reporting period.

On transition:
- new definition of a lease to all contracts or
- practical expedient/grandfather previous assessment to existing contracts
Entity that chooses practical expedient:
- applies IFRS 16 to leases previously identified per IAS 17/IFRIC 4
- does not apply IFRS 16 to contracts previously identified as not containing lease
- applies IFRS 16 definition of a lease to contracts entered into after initial application

Recognition exemption:

May elect not to apply the lease accounting model to:

a. short-term leases (less than 12 months/no purchase option) ; and


b. Low value assets (e.g. $5,000)

Approach:
Permitted to adopt:
1. Retrospective approach
2. Modified retrospective approach
Apply consistently to all leases.

Balance sheet 31/12/2019 Year 2019 Year 2018 Equity adjustment


Retrospective approach IFRS 16 IFRS 16 (Comparative) 1 January 2018
IAS 17 (Priory year)

Balance sheet 31/12/2019 Year 2019 Year 2018 Equity adjustment


Modified Retrospective IFRS 16 IAS 17 1 January 2019
approach
A. Retrospective approach:
- Applies all leases;
- Restate PY FS
- Adjustment in equity at 1/1/2018 (beginning of earliest PY)
- Makes disclosures per IAS 8 para 28

B. Modified retrospective approach:


- Apply from the beginning of the current period (CP)
- Lease assets/liability at the beginning of the CP
- Does not restate PY FS
- Adjust equity at 1/1/2019 (beginning of the CP)
- Disclosure and exemption
For previously classified operating lease: Measure lease liability at initial application at PV
of remaining lease payments.
Use Incremental Borrowing Rate

FINANCE LEASE:
Right of use asset: Previous carrying amount of finance lease
Lease liability: Previous carrying amount of finance lease liability

PREVIOULY CLASSIFIED OPERATING LEASE:


Measure ROU Assets using either:
Option 1: As if IFRS 16 had always been applied (Use IBR at initial application) or
Option 2: Amount equal to lease liability

Question 18:
SQC Super Store
1. Leases a retail outlet for a fixed rental of Tk100 per year paid at the end of each
year.
2. Start date 1/1/2014
3. IBR at start date 7%
4. Term 10 years (non-cancellable)
5. Renewal: Further 5 years.
6. Initial direct cost: Nil
Classified under IAS 17 as operating lease. Lease payments on straight line basis. Operating lease
expense Tk100 per year.
Depreciation policy: ROU Asset on straight line basis over lease term.
Discuss the impact under modified retrospective approach. As at 1/1/2019 SQC is not reasonably
certain to exercise the renewal option. IBR at 1/1/2019 is 5%.

Answer 18:
1. Initial application: 1/1/2019.

2. Lease term: remaining 5 years.

3. IBR: 5%

OPTION 1:

4. Lease liability: Tk433. (Tk100 per annum over remaining 5 years at 5% IBR)

5. Right of use asset: Tk 386. Calculate carrying amount of the ROU Asset on 1/1/2014. This is
the PV of lease payments over 10 year at Tk100 per annum using IBR 5%. The amount is
Tk772.
Carrying amount at 1/1/2019 = (772 x 5)/10 = Tk386.
6. Journal Entry

ROU Asset Dr 386


Lease liability Cr 433
Retained earnings Cr 47

OPTION 2: Equal to lease liability.

ROU Asset Dr 433


Lease liability Cr 433
PRACTICAL EXPEDIENT UNDER MODIFIED RETROSPETIVE APPROACH:
Apply on a lease by lease basis:
o Single discount rate to portfolio of leases with similar characteristics
o Rely on previously assessed onerous leases per IAS 37 as an alternative to impairment
review
o Short term lease if lease term ends within 12 months of date of initial application
o Exclude initial direct costs from measurement of ROU Asset at initial application
o Use hindsight in determine lease term if there is renewal/termination option.

SHORT REMIAING TERM ON TRANSITION TO IFRS 16

Question 19:
NETZEN Ltd lease a car for an annual rental of Tk100.
- Commencement date 1/1/2017;
- Term: 3 year non-cancellable
- Renewal: 2 years at same rental
- Vehicle useful life 10 years
Classified as operating lease. In 2017 NETZEN is reasonably certain to exercise the renewal option.
In 1/1/2019, NETZEN is not reasonably certain to exercise the renewal option.
What is the impact of modified retrospective application as on 1/1/2019? Remaining lease term is
1 year.

Answer 19:
Can account for the lease in 2 ways:
1. Measure right of use asset and lease liability applying IFRS 16. Lease liability Tk100 using
IBR at 1/1/2019.
ROU Asset retrospectively or at an amount equal to lease liability
Recognize depreciation and interest expense.
Practical expedient not to apply IFRS 16. Account for straight expense of Tk100 and disclose short
term lease

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