Answer-1

The International Accounting Standards Board (IASB) has issued the revised conceptual framework
for financial reporting in March 2018. The revised conceptual framework is applicable for annual
periods beginning on or after 1 January 2020.  
The revised conceptual framework introduces new concepts on measurement, presentation and
disclosure, derecognition and has updated the definition of assets and liability,
and derecognition criteria for assets and liabilities in financial statements. The revised framework also
introduces clarification on prudence, stewardship, measurement uncertainty and substance over
form. 
The concept on measurement describes the factors to be considered when selecting a measurement
bases on historical cost and current value. The factors to consider when selecting a measurement
basis are relevant and faithful representation. 
Presentation and disclosure concept include guidance on including income and expenses in profit or
loss and other comprehensive income. The revised conceptual framework describes how information
should be presented and disclosed in the financial statements. 
The concepts on derecognition specifies guidance on derecognition of assets and liabilities to faithfully
represent both assets and liabilities. 
The revised framework has updated the definition of the assets and liabilities reflecting the concepts
in the new standards developed by IASB. 
SL Revised Conceptual Previous Is there
No. Item Framework conceptual any What are the
framework change? changes??
Yes/ No
01. Asset “A present economic “A resource Yes “The main changes
(i) resource controlled by controlled by the to definition of
the entity as a result of entity as a result asset clarifies that an
past events. of past events asset is not an inflow
An economic resource and from which of economic benefits
is a right that has the future economic rather it is the
potential to produce benefits are economic resources
economic benefits.” expected to flow controlled by the
the entity.” entity. The flow of
economic benefits to
the entity need to not
be certain or even
likely.”
01. Liability “A present obligation of “A present Yes “A liability is an
(ii) the entity to transfer an obligation of the obligation to transfer
economic resource as a entity arising economic
result of past events. from past events, resource not an
An obligation is a duty the settlement of ultimate flow of
or responsibility that which is expected economic resource,
the entity has no to result in an and entity should not
practical ability to outflow from the have practical ability
avoid.” entity of the to avoid transfer of
resources the resources, which
embodying includes
economic responsibilities that
benefits.” arise from the entity
customary
practices, published
policies or specific
statements.”
02. Recognition There are two In the past, an Yes The previous
recognition criteria: entity should recognition criteria
 relevance and recognize an were that an
  Faithful item that met the entity should
representation. definition of an recognize an item
Recognition is suitable element if it was that met the
if it results in both probable that definition of an
relevant information economic element if it was
about assets, liabilities, benefits would probable that
equity, income flow to the entity economic benefits
and expenses and a and if the item would flow to the
faithful representation had a cost or entity and
of those items, because value that could if the item had a cost
the aim is to make be determined or value that could be
available information reliably. determined reliably.
that The revised
is useful to investors, recognition criteria
lenders and other refer explicitly
creditors. to the qualitative
characteristics of
“The framework also useful
notes a cost information.
constraint.”
03. Measurement Historical cost New The previous version
measurement bases: of the Conceptual
• historical cost Framework
provides information included little
resulting, at least in direction on
part, from the price of measurement.
the transaction or other The revised
event that gave rise to Conceptual
the item being Framework describes
measured what
• historical cost of information
assets is reduced if measurement bases
they become impaired provide and
and historical cost of clarifies the factors to
liabilities is increased if consider when
they become selecting
burdensome a measurement basis.
• one way to apply a
historical cost
measurement basis to
financial assets and
financial liabilities is to
measure them at
amortized cost.

Current value
measurement bases:
• current value
provides information
modernized to reflect
conditions at the
measurement date
• current value
measurement bases
include
 Fair value
 value in use
 (for assets)
fulfilment
value (for
liabilities)
 current cost
04. Presentation The statement of New This chapter is new.
and profit or loss
disclosure • The statement of Better information
profit or loss is the
primary source of Information about
information about an assets, liabilities,
entity’s financial equity, income
performance for the and expenses is
reporting period interconnected
• Profit or loss could be through presentation
a section of a single and disclosure in the
statement of financial financial statements.
performance or a Effective
separate statement communication of
• The statement(s) of information in
financial performance financial
include(s) a total statements makes
(subtotal) for profit or that information more
loss relevant and
• In principle, all contributes to a
income and expenses faithful representation
are classified and of an entity’s
included in the assets, liabilities,
statement of profit or equity, income and
loss. expenses.
The revised
Other Conceptual
comprehensive Framework includes
income concepts that
• In exceptional describe how
circumstances, the information should
Board may decide to be presented and
exclude from the disclosed in financial
statement of profit or statements
loss
income or expenses
arising from a change
in current value of an
asset or liability and
include those
income and expenses
in other comprehensive
income
• The Board may make
such a conclusion when
doing so would result in
the statement of profit
or loss
providing more related
information or a more
faithful representation
05. Derecognitio The removal of all or New Normally, a faithful
 n part of a recognized representation of a
asset or liability from transfer
an entity’s of an asset or liability
statement of financial is achieved by
position. derecognition of
Derecognition the asset or liability
normally happens: with appropriate
For an asset presentation
 “when the and disclosure.
entity loses However, in limited
control of all or cases, it may be
part of the necessary to
continue to recognize
recognized
a transferred
asset” component of
For a liability an asset or liability
 ”when the together with a
entity no longer liability or asset
has a present for the proceeds
obligation for received or paid, with
all or part of appropriate
the recognized presentation and
liability” disclosure.
06. Prudence Neutrality is supported Clarified This chapter was
by the exercise of issued in 2010 and
prudence. went through
Prudence is the widespread due
exercise of carefulness procedure at that
when making time. Therefore,
judgements under in revising the
conditions of Conceptual
uncertainty. Prudence Framework the Board
does not allow for did not fundamentally
overstatement or reconsider this
understatement of chapter.
assets, liabilities, However, the Board
income or expenses. clarified the roles of
07. Measurement Measurement Clarified prudence,
uncertainty uncertainty does not measurement
prevent uncertainty and
information from being substance over form
useful. However, in in assessing whether
some cases information is useful.
the most applicable
information may have
such a high
level of measurement
uncertainty that the
most useful
information is
information that is
slightly less relevant
but is subject to lower
measurement
uncertainty.
08. Substance The Board concluded Clarified
over form that substance over
 form was not a distinct
component of faithful
representation. The
Board also decided
that, if financial
statements represented
a legal form that
fluctuated from the
economic substance,
then they could not
result in a faithful
representation
09. Stewardship Stewardship Clarified This chapter was
Users of financial issued in 2010 and
reports need went
information to through widespread
assistance them due procedure at that
evaluate management’s time.
stewardship. The Therefore, in revising
Conceptual Framework the Conceptual
clearly discusses this Framework,
need the Board did not
as well as the need for fundamentally
information that helps reconsider this
users chapter. However, it
evaluate the predictions clarified why
for future net cash information
inflows to the used in evaluating
entity. stewardship is needed
to
realize the objective
of financial reporting.

Answer-2

International Financial Reporting Standard (IFRS-16) – Leases -  was issued in January 2016 and, in
comparison to its predecessor International Accounting Standard (IAS-17) makes significant changes
to the way in which leasing transactions are reported in the financial statements of lessees (although
not in the financial statements of lessors). The purpose of this article is to summaries the key
changes introduced by IFRS 16 from the perspective of the lessee and how these impact on their
financial reporting.

A lease is an agreement whereby the lessor (the legal owner of an asset) conveys to the lessee (the
user of the asset) the right to use an asset for an agreed period of time in return for a payment or
series of payments.

The approach of IAS 17 was to distinguish between two types of lease. Leases that transfer
substantially all the risks and rewards of ownership of an asset were classified as finance leases. All
other leases were classified as operating leases. The lease classification set out in IAS 17 was
subjective and there was a clear incentive for the preparers of lessee’s financial statements to ‘argue’
that leases should be classified as operating rather than finance leases in order to enable leased
assets and liabilities to be left out of the financial statements.
It was for this reason that IFRS 16 was introduced.

Is
SL Item IFRS 16 IAS 17 there What are the
N any changes??
o change
?
Yes/N
o
01 Definition IFRS 16 defines a IAS 17 states Yes The change in lease
. lease as “A that there are classification affects what
contract, or part of two types of actually constitutes a lease
a contract, that lease, a finance agreement as IFRS 16
conveys the right lease and an contains a new lease
to use an asset for operating lease. definition. The actual
a period of time in The definitions wording of the definition in
exchange for of these leases IFRS 16 does not change
consideration”. In are vital and too much from the IAS 17
order for such a could be one. However, there is a
contract to exist required when greater emphasis and
the user of the preparing an weight surrounding how a
asset needs to answer in the lease differs from a
have the right to: exam. service. This is aimed at
 Obtain Finance lease: improving the
substantial A finance lease comparability of financial
ly all of is a lease statements, capturing
the that transfers useful material information
economic substantially all on leases rather than
benefits the risks and additional components.
from the rewards
use of the incidental to
asset. ownership of an
 The right asset to the
to direct lessee.
the use of
the asset. Operating
lease:
An operating
lease is defined
as being any
lease other than
a finance lease.
02 Operating Operating leases Operating leases Yes Improved comparability
. lease recognize assets off-balance sheet and transparency on
accounting and liabilities on as a single balance sheet. Financial
treatment balance sheet. expense. Finance statement users can
Operating leases leases on clearly see the effect of
to report balance sheet. operating leases and have
depreciation and a useful basis for
interest comparability with other
separately. companies. Currently,
under IAS 17, it is difficult
to compare companies
who lease with those who
buy.
03 Lessor Lease type has a Focus on lease Yes Although lease accounting
. interaction lower impact from type from an is removing the operating
an accounting operational lease and finance lease
standpoint, perspective. classification for lessees,
however, a greater Many lessees lessor accounting remains
focus is placed used operating largely unchanged and the
upon on the deal leases to avoid operational differences
types that can be balance sheet between operating leases
negotiated. recognition. and finance leases remain.
Others prefer the Businesses may look for
reduced risk and more inventive ways to
reward, as well lease to continue to get
as the the most out of their
competitive assets.
pricing that
operating leases
offer.
04 Accountant Under the new The accounting Yes As operating leases have
. involvemen standard, treatment of not needed to appear on
t however, as all operating leases balance sheet, accountants
leases will be is less complex have had a less
treated under the than the challenging interaction
same accounting treatment of with them. The difference
treatment, finance leases will be particularly for
accounting and the volume internal accountants,
departments will of operating where the company does
have a higher leases is not have many finance
volume of complex predominantly leases.
amortisation higher than that
calculations to of finance
perform. leases. So,
currently,
accounting
departments
have a lower
volume of the
challenging
calculations to
make.
05 Measuring Measures the Finance leased Yes One of the main aims of
. PV and rate lease liabilities at assets and IFRS 16 is to provide a
the PV of the lease liabilities are consistent view of lease
payments that are measured at the obligations in financial
not paid at the fair value of the statements. To achieve
date discounted leased property this, the definitions of the
using the implicit or, if lower the leased asset and liability
rate if known, PV of the measures need to be
otherwise, the minimum lease specifically defined to
incremental payments. The ensure a consistent
borrowing rate. discount rate to measurement approach.
There is no be used in
reference to the calculating the
fair value and the PV of the
measurement does minimal lease
not relate to the payments is the
minimal lease implicit rate if
payments. known,
Instead, the lease otherwise, the
 payments that are lessee’s
not paid. borrowing rate.
Any initial direct
costs of the
lessee are added
to the value of
the asset.
06 Depreciatio The right of use Following the No N/A
. n asset is initial
subsequently capitalization of
depreciated. the leased asset,
Depreciation is depreciation
over the shorter of should be
the useful life of charged on the
the asset and the asset over the
lease term, unless shorter of the
the title to the lease term or the
asset transfers at useful economic
the end of the life of the asset.
lease term, in The accounting
which case for this will be:
depreciation is
over the useful life Dr. Depreciation
expense

Cr. Accumulated
depreciation

07 Disclosures Disclosures do Disclosures cover Yes As IFRS 16 requires all the

. away with the the specific lessee leases to be shown
separate requirement of on balance sheet, the
presentation of finance leases distinction between finance
finance and separate from and operating leases is
operating leases operating leases. mute. It, therefore, makes
for lessees and sense to redefine the
instead requires disclosure requirements to
disclosures of the give more information on
right of use assets the leasing activity to
and liabilities. achieve the goal of lessees
There are also reporting on a level playing
additional field.
disclosures to
specifically state
whether the lessee
has elected not to
apply IFRS 16 to
short-term
and low-value
leases. Specifically,
disclosures are
required for short-
term and low-
value lease
express if these
elections have
been made, so too
are variable lease
 payments not
included in the
measurement of
lease liabilities.

Example: Car Lease

Company A leases a car for a period of four years starting on 1 Jan 20x9. The investment value is
CU35,845. The lease requires payments of CU668 on a monthly basis for the duration of the lease
term (i.e., CU8,016 pa). The annual lease component of the lease payments is CU6,672 and the
service component is CU1,344. The residual value of the car at the end of the lease term is
CU14,168. There is no option to renew the lease or purchase the car, and there is no residual value
guarantee. The rate implicit in the lease is 5%.

The net present value of the lease payments using a 5% discount rate is CU24,192.

The overall impact on the net profit is the same under IFRS 16 and IAS 17, however, with the
application of the right-of-use model the presentation of lease payments in the statement of
comprehensive income will change. Lease payments of an operating lease under IAS 17 are
presented within operating expenses, while under the right-of-use model, depreciation and interest
expense will be recognized separately, having a positive impact on EBITDA. The overall cumulative
effect on the net profit is the same under IFRS 16 and IAS 17, however, with the application of the
right-of- use model the lease expense recognition pattern during the lease term and presentation of
lease payments in the statement of comprehensive income will change. Also a right-of-use asset and
lease liability is recognized in the financial statements of the lessee.

IFRS 16 – Impact on financial position and income

Particulars Jan 20X9 Dec 20X9 Dec Dec Dec Total

20x0 20x1 20x2
Right-of-use asset 24,192 18,144 12,096 6,048 0 0
Lease Liability (24,192) (18,580) (12,687) (6,498) 0 0
Operating expense- 0 1,344 1,344 1,344 1,344 5,376
service
0 0 0 0 0 0 24,192
0 0 0 0 0 0 2,496
0 8,016 8,016 8,016 8,016 32,064 (32,064)
(8,016) (8,016) (8,016) (8,016) (32,064)

IAS 17 – Impact on financial position and income

Particulars Jan 20X9 Dec 20X9 Dec Dec 20X1 Dec 20X2 Total
20X0
Right-of-use asset
Lease liability
Operating expense-
lease and service
Net income

Example: Extension options

Company A leases a building from a real estate company which provides the right of use of the asset
for five years with an option to extend it for another five years. The option to extend is at market
conditions and there are no specific economic incentives for Company A to exercise the option at the
commencement of the contract.

The lease period at the commencement of the contract is 5 years.

What if… Company A undertook a significant investment for a leasehold improvement prior to the
commencement of the lease. The economic life of the leasehold improvement is estimated at ten
years.

Company A should consider if the leasehold improvement has a significant economic value at the end
of the initial five year lease period. If the improvements result in the underlying asset having greater
utility to the lessee than alternative assets that could be leased for a similar amount, Company A
concludes that it has a significant economic incentive to exercise the option to extend the lease.

The full retrospective approach

The transition accounting under the full retrospective approach requires entities to retrospectively
apply the new standard to each prior reporting period presented as required by IAS 8 Accounting
Policies, Changes in Accounting Estimates and Errors. Under this transition approach, entities need to
adjust equity at the beginning of the earliest comparative period presented.

The modified retrospective approach

Under this approach, a lessee does not restate comparative information.

Consequently, the date of initial application is the first day of the annual reporting period in which a
lessee first applies the requirements of the new leases standard. At the date of initial application of
the new leases standard, lessees recognize the cumulative effect of initial application as an
adjustment to the opening balance of equity as of 1 January 2019.

Lessees with leases previously classified as operating leases:

• Recognise a lease liability, measured

At the present value of the remaining lease payments, discounted using the lessee’s incremental
borrowing rate at the date of initial application.

• There are two options for measuring the right-of-use asset on transition (on a lease-by-lease
basis): by measuring the asset as if IFRS 16 had been applied since the commencement date of
a lease using a discount rate based on the lessee’s incremental borrowing rate at the date of
initial application; or by measuring the asset at an amount equal to the lease liability, adjusted
by the amount of any prepaid or accrued lease payments recognised immediately before the
date of initial application.

Under the modified retrospective approach lessees are permitted on a lease-by-lease basis to
apply the following practical expedients:
• apply a single discount rate to a portfolio of leases with reasonably similar characteristics;

• adjust the asset on transition by the amount of any previously recognised onerous lease
provision, as an alternative to performing an impairment review;

• apply an explicit recognition and measurement exemption for leases for which the term ends
within 12 months or fewer of the date of initial application and account for those leases as
short-term leases;

• use hindsight in applying the new leases standard, for example, in determining the lease term if
the contract contains options to extend or terminate the lease; and
 • Exclude initial direct costs in the measurement of the right of use asset.

Lessees with leases previously classified as finance leases:

• The carrying amount of the right-of-

• Use asset and the lease liability at the date of initial application shall be the carrying amount of
the lease asset and lease liability immediately before that date measured applying IAS 17.

• Apply subsequent accounting in line with the requirements of IFRS 16.

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