IFRS16 : LEASES

Lease- contract, that conveys the right to use the underlying asset for a period in exchange for
consideration

Lessor (supplier) – entity, that provides the right of use the asset, in exchange of receive
consideration

Lessee (customer) – entity, that obtain the right of use the assets, in exchange, transfer
consideration.

Lessee Accouting (customer)

-contract/part of contract that contain a lease

-contract is a lease if :

 Convey the right to control : (HOW?)

1) Obtain substantially all of the economic benefits
2) Right to direct identified asset’s use
 Use identified assets – specific
 For a period of time
 In exchange for consideration

- If contract contain lease :

Recognise : (DR) Right of use (ROU) and (CR) lease liability (LL)

Measurement : -

IM : Cost model – ROU & LL

SM :

 LL increase by interest charge : Finance cost and LL

 LL decrease by cash repayment : LL and Cash
 ROU : lower of
Lease term OR estimated useful life

Seperating component – contract contain lease and non-lease component (underlying asset +
service ) – require to split the rental or lease payment

- lease component – IFRS 16

- non lease component – expense in p/l

- EXEMPTION :
a) Short term - <12 months

b) Minimal value – low value

- Not have ROU if :

 Underlying asset has been substitute for alternative

 It would be economically beneficial for supplier/lessor

- If NO lease :

Recognise – Rental expenses

- Deferred Tax

Compare between CA (ROU – LL) with Tax Base (nil) lead to deducible temporary difference (DTD)

BPP : CALENDER

IFRS 16 Lease says that a contract contain leases if it convey the right to control and assets must be
identified.

Calendar has the right to use identified asset (specified aircraft) for a period of time (3 years).

Calendar has the right to control the use of specified aircraft throughout 3 years period of use
because it has the right to obtain substantially all economic benefits from use of aircraft due to
exclusive use of ship throughout the period of use and in exchange of annual payments.

Although Diary can substitute the aircraft for alternative, the cost of doing so will not prohibit
because of strict specifications outlined in the contract.

Calendar has control over aircraft for a period of 3 years because no other parties can use this
aircraft during this time and Calendar can make decisions about aircraft’s destination and the cargo
and passengers which will be transported.

There are some legal and contractual restrictions which limit the aircraft’s use but this protective
rights define the scope of Calendar right of use but do not prevent it from having right to direct use
of aircraft.

This contract contains lease due to the lease term is long (3 years) and high value of assets, so LL
should be recognized.

A ROU should be recognized and ROU should have be depreciated which is lower of lease term or
useful life of asset. So here, depreciation is recognized over the lease term of 3 years and
depreciation charge is recognized in p/l.

As conclusion, the cost has been expensed in p/l was incorrectly treated and should be removed.
This cost should be deducted from carrying amount of LL.

BLACKUTT
In this case, Blackutt outsourced to Waste & Co, contain a lease even there is no legal of form. The
substance of the arrangement need to be considered in relation to IFRS 16.

Contract contain a lease if lessee has right of control on underlying asset, in order to obtain
substantial economic benefit or direct the use of asset and within a lease term, no substantive
alternative for in that period.

Vehicles are identifiable asset and even Waster & Co can substitute to another vehicle if existing
needs repairing or no longer works, this substitution right is not substantive because the significant
cost to fitting out for use of Blackutt.

Blackutt can use the vehicle and use them exclusively for waste collection for nearly all of the asset’s
life, this indicate that Blackutt has the right to obtain substantially all economic benefits from use of
asset.

Blackutt control the vehicles due to vehicle are painted with Blackutt local gov organization name
and colours. This indicate that Blackutt has right to direct and for what purpose assets is used.

Blackutt has right to operate the asset throughout the period of use, although it has outsourced the
driving to Waste & Co.

The arrangement is lease, hence ROU and LL should be recognized equal to PV of future lease
payments.

The service elements related to waste collection must be considered as separate component and
charge to p/l.

TYU 3

Lease term is 3 years – option to extend the lease is reasonably certain to be exercised

LL calculated as follow :

Date Cash flow ($) Discount rate Present value

31/12/x1 10000 1/1.05 9524
31/12/x2 10000 1/1.05^2 9070
31/12/x3 15000 1/1.05^3 12958
31552

Initial cost of ROU :

$
Initial LL 31552
Direct cost 3000
Reimbursement (1000)
33552

Debit Credit
ROU 31552
LL 31552
 ROU 3000
CASH 3000

CASH 1000
ROU 1000

Subsequent measurement

Finance charge and LL will be recognized equal to $1578. The carrying amount of LL at the reporting
date will be $23130

*WORKING LL

Year end Opening Interest 5% Payments Closing

31/12/X1 31552 1578 -10000 23130

ROU is depreciated over 3 years lease term because it is shorter than usual life. The depreciation
charge is $11184. ($32552/3 years)

LESSOR ACCOUNTING (SUPPLIER)

Lessor must classify it leases as :

 Finance lease : 1) if transfer risk & rewards of underlying assets to the lessee

Indicators :
1. transfer of ownership by end of term
2. Option to purchase at bargain price
3. PVLP is substantially all of FV
4. Assets very specialized
5. Cancellation losses borne by lessee
6. Gain/loss on residual value accrue to lessee
7. Secondary term at bargain rent (below market value)

- Derecognize the asset

- Recognize net investment in the lease :

PV of lease receivable X
PV of unguaranteed residual value X
Net investment in the lease XX

 Operating lease :
Not transfer risk & rewards – recognize rental income on straight line basis
TYU 6 ( DANBOB )

IFRS 16 Lease classify as finance lease if lease where substantially all risk & rewards of ownership
transfer from lessor to lessee.

- lease term only 60% (30/50 yrs) of asset’s useful life – major part of asset’s economic life

- legal title not pass at the end of lease term – this is operating lease.

- However, lessee can continue to lease asset at the end of lease term for a value that is lower
substantially below market value – indicate lessee will benefit from building over its useful life

-Lessee unable to cancel the lease without paying to DanBob – indication that DanBob guaranteed to
collect its investment and shows that risk & rewards been transferred.

- The PV of minimum lease payment will be substantially all of the assets’s FV – will receive 40% of
asset’s value upfront

Sale & leaseback

- Entity (seller-lessee) transfer asset to another entity (buyer- lessor) and leases it back.

- Transfer in substance a sale

 Seller – lessee :
- Derecognize the lease assets
- leaseback – recognize ROU asset on the carrying amount proportion to FV
 Formula – ( CA x LL/ fv)
 Gain/ loss on the right transfer
 Need to compare the SP and FV
 If SP < FV (different prepayment)
 If SP > FV (different additional financing)

Double entry :

Dr. Cash
Dr. ROU asset
Dr. Gain/loss
Cr. CA of asset (derecognize)
Cr. LL
Cr. Financial liability

 Buyer – lessor :
- recognize the asset under IAS 16
- Receive net investment in lease (IFRS 16)
Transfer in substance – not for sale
 Seller-lessee :
- Continue to recognize transferred asset
- Recognize financial liability equal to transfer proceeds

 Buyer – lessor :
-Does not recognize transfer assets
HAVANNA

A) Key changes to financial statement investors will see when apply IFRS 16

Lessee will recognize ROU asset and LL. ROU will recognize at the same amount and LL will be
measured at PV of lease payment still to be paid lease term.

The recognition of ROU asset and LL will provide more info about leases on SOFP and notes as this
provide more accurate reflection of the impact of lease arrangements.

Reduce complexity in FS as it allow comparison to made between who lease asset and who borrow
to buy asset.

CA of lease asset will reduce more quickly than CA of LL. This lead to reduction in reported equity for
company with previous material off-balance sheet leases.

LL is reported separately from other liability, which is relevant to understanding the lessee’s financial
position and LL also will be presented split between CL and NCL based on timing payments.

B) How to account for sale of the main office building at start of lease,, including gain on sale

IFRS16 requires initial assessment to be made regarding whether transfer constitute sale, in this
case, IFRS 15 have been met.

Havanna should derecognize the CA of asset of $4.2m and recognize ROU asset at the proportion of
previous CA.

A gain or loss should recognize in relation to the right transferred to the buyer-lessor. Although,
there is gain on disposal amount of $0.8m, but this is not.

A gain or loss should recognize LL at PV of lease payment of $3.85m

The ROU assets at the start of leaseback is calculated as follow :

CA x LL/FV = 4.2 X 3.85 / 5 = $3.234m

Havanna should recognize gain on sales of building, in relation to right transferred :

Profit on disposal – (Profit x PV / FV) = 800k – (800 x 3.85 / 5) = 184k

At the start of lease. Havanna should account the transaction as follow :

Dr. Cash (fv) 5

Dr. ROU asset 3.234

Cr. CA of asset (derecognize) 4.2

Cr. LL (pv) 3.85
Cr. Gain on right transferred 0.184

The ROU asset should be depreciated over 10 years and the gain will be recognized in p/l. LL will
increase by interest charged and reduced by lease payment.