IFRS 16 Leases Handout PDF

11/6/2024 IFRS 16 Leases 1 Leases – lessee accounting IFRS 16 requirements Accounting, presenting and...

11/6/2024 IFRS 16 Leases 1 Leases – lessee accounting IFRS 16 requirements Accounting, presenting and disclosing leases 2 Introduction Definitions P.215-218 Old standard IAS 17 – no longer applies IFRS 16 applies for annual reporting periods beginning on or after 1/1/2019 3 1  11/6/2024 IFRS 16 Leases (In the books of the Lessee)  Standard sets out the principles for the recognition, measurement, presentation and disclosure of leases.  The objective is to ensure that lessees provide relevant information in a manner that faithfully represents those transactions.  This information allows users of financial statements to assess the effect that leases have on the financial position, financial performance and cash flows of an entity. 4 What is a lease? P.220-221 A lease is a contract or a part of a contract that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. 5 Controlling the use of an asset P.220-221 To control the use of an asset the lessee must have the right to: 1.Obtain substantially all of the economic benefits from use of the 2.The right to direct the use of the identified asset 6 2  11/6/2024 Separating both lease and non-lease components  An entity shall account for each lease component within the contract as a lease, separately from non-lease components of the contract.  For a contract that contains more than one lease component or a lease and a non-lease component, a lessee shall allocate the consideration in the contract to each component on the basis of the relative stand-alone prices of each. 7 Separating both lease and non-lease components  The relative stand-alone prices are to be determined on the basis of the price a supplier would charge an entity for that component separately.  If an observable stand-alone price is not readily available, the lessee shall estimate the stand-alone price.  8.6, 8.21 8 No separation of lease and non-lease components P.225  As a practical expedient, a lessee may elect, by class of underlying asset, not to separate non-lease and lease components. 9 3  11/6/2024 Application of IFRS 16  Standard applies to almost all leases. Company may elect however not to apply the requirements to: (a) short-term leases; and (b) leases for which the underlying asset is of low value (less than $5,000 when new)  If lessee chooses not to apply the requirements then the lessee shall recognise the lease payments associated with those leases as an expense on either a straight-line basis over the lease term or another systematic basis if that basis is more representative of the pattern of the lessee's benefit. Ref 8.7, 8.8, 8.11 10 Application of IFRS 16  The election for short-term leases shall be made by class of underlying asset to which the right of use asset relates.  The election for leases for which the underlying asset is of low value can be made on a lease-by- lease basis. 11 Lease term P.232 The non-cancellable period of a lease, together with both: (a) periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option; and (b) periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option. 12 4  11/6/2024 Interest rate implicit in the lease This rate will be supplied in any question on this topic 13 Accounting for leases in the books of the lessee  At the commencement date, a lessee shall recognise a right-of-use asset and a lease liability 14 Cost of the right-of-use asset  The cost of the right-of-use asset shall comprise (Ref 231) o amount of the initial measurement of the lease liability, o any lease payments made at/before the commencement date, o any initial direct costs incurred by the lessee – incremental costs of obtaining a lease such as finder’s fee ; o an estimate of costs to be incurred by the lessee in dismantling & removing the underlying asset. 15 5  11/6/2024 Accounting for leases in the books of the lessee P.232  At the commencement date, a lessee shall measure the lease liability at the present value of the lease payments that are not paid at that date.  The lease payments shall be discounted using the interest rate implicit in the lease, if that rate can be readily determined.  If that rate cannot be readily determined, the lessee shall use the lessee's incremental borrowing rate. 16 Subsequent measurement of the right-of-use asset – cost model P.234/5 After the commencement date, a lessee shall measure the right-of-use asset applying a cost model or the revaluation model (IAS 16 assets). 17 Depreciation of asset P.235  A lessee shall apply the depreciation requirements of IAS 16 (PPE) in depreciating the right-of-use asset, subject to the following:  If the lease transfers ownership of the underlying asset to the lessee by the end of the lease term or if the cost of the right-of-use asset reflects that the lessee will exercise a purchase option, the lessee shall depreciate the right-of-use asset from the commencement date to the end of the useful life of the underlying asset. 18 6  11/6/2024 Depreciation of asset  Otherwise, the lessee shall depreciate the right- of-use asset from the commencement date to the earlier of the end of the useful life of the right-of- use asset or the end of the lease term. 19 Measurement of the lease liability P.235 Subsequent measurement of the lease liability After the commencement date, a lessee shall measure the lease liability at amortised cost namely by: (a) increasing the carrying amount to reflect interest on the lease liability; (b) reducing the carrying amount to reflect the lease payments made; and (c Ref 8.17, 8.18, 8.19 (payments in advance) 20 Interest P.239 Interest on the lease liability in each period during the lease term shall be the amount that produces a constant periodic rate of interest on the remaining balance of the lease liability. The discount rate used to discount the payments at commencement date. After the commencement date, a lessee shall recognise in interest on the lease liability in profit or loss 21 7  11/6/2024 Accounting for a leased asset with non-lease components Ref ex 8.21 22 Presentation of right of use assets & lease liabilities P.248 A lessee shall either present in the statement of financial position, or disclose in the notes: (a)right-of-use assets separately from other assets. (b) lease liabilities separately from other liabilities. 23 SOCI presentation In the SOCI a lessee shall present:  interest expense on the lease liability (component of finance charge)  And separately depreciation charge for the right-of-use asset. 24 8  11/6/2024 Disclosures A lessee shall disclose information about its leases for which it is a lessee in a single note or section in its FS. A lessee shall disclose the following for the reporting period: (a) depreciation charge for right-of-use assets by class of underlying asset; (b) interest expense on lease liabilities; (c) the expense relating to short-term leases and expense relating to leases of low value 25 Disclosures AND (d) additions to right-of-use assets; AND (e) the carrying amount of right-of-use assets at the end of the reporting period by class of underlying asset. A lessee shall disclose a maturity analysis of lease liabilities using its judgement to determine appropriate time bands. 26 9