MODULE 6

Accounting for leases and specialized assets

 IFRS 16 - Leases

will learn
What you

IAS 41 – Agriculture

IFRS 6 – Exploration and evaluation of mineral resource

IFRS 16
Leases
 IFRS 16

“A lease is a contract or 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”.

Non-lease
components
Lessee Accounting

Lessee

Initial Subsequent
Measurement Measurement

Lease liability
Right to use of asset
Right to use of Opening balance
Lease liability =Cost
asset - Accumulated dep.
+ Liability for the year
- Lease payment
- impairment losses
= Closing balance

Present value of future

+ Initial lease liability lease payments
- lease incentives Discount rate = Implicit
+ Initial direct cost of lease rate
+ Dismantling costs
Lease term

Shorter of

Useful life of asset Lease term

 Simplified
accounting

Lease term less than 12

Low value items
months
Shop Co enters into a 10 year lease on 1 January 20X5 in order to acquire a property from Building Co.

Details are as follows:

• Lease payments are €50,000 per annum payable in advance

• Shop Co incurs initial direct costs of €20,000, being €5,000 paid as commission to the property agent
that arranged the lease and €15,000 paid to the former tenant of the property
• As an incentive, Building Co agreed to reimburse Shop Co with the property agent's fees
• The interest rate implicit in the lease is 5% and the present value of the lease payments at 1 January
20X5 is €355,391.
 Lessor
accounting

Operating
Finance Lease
lease

Remove asset Retain asset

Recognize receivable Recognize income = Straight line basis
Finance lease:

• Transfer of ownership of the asset by the end of the lease term

• The lessee has the option to purchase the asset at end of the lease term and pricing means this is

reasonably certain to be exercised

• The lease term is for the major part of the asset's useful life

• At the start of the lease the present value of minimum lease payments is substantially all of the fair value

of the asset

• The asset is so specialised that only the lessee can use it without major modification
 Example

Roost Co leases plant and machinery to manufacturing companies. It has a year-end of 30 September. On 1

June 20X8 it leased a machine to a customer for a 6 year period. The agreed lease payments were $400 per

calendar month payable in arrears. In addition, the customer was required to pay an initial non-refundable

amount of $1,200.
 Sale and lease
back

Is it a sale? Not a sale?

Proceeds are Proceeds are less Proceeds are more Keep recorded as asset
equal to FV than FV than FV + Financial liability

Derecognize asset
Prepayment of Addition financing
Gain or loss on
lease arrangement
disposal
 IAS 41
Agriculture
 IAS 41 -
Agriculture

Biological Agricultural
Bearer plants
assets produce

FVLCS IAS 16 FVLCS

 IFRS 06
Exploration for and Evaluation of mineral resources
 IFRS 6

IFRS 6

Develop policy for "Capitalization" Impairment test Disclosures

Policy
Relevant Reliable Frequently
Impact on financial statements