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Learning objectives
IFRS 16
After studying this topic, you should be able to:
LEASES • Identify a lease.
• Understand the recognition and measurement
of leases.
• Discuss the information of leases that is
presented and disclosed in financial statements.

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Contents 4 Scope

1. What is a lease? IFRS 16 does not apply to:

 Does the arrangement contain a lease?
 Determine the lease components
2. Accounting by lessee
 Recognition, Measurement and Disclosures
3. Accounting by lessor
 Recognition, Measurement and Disclosures
• Leases to explore for / use of minerals, oil,
natural gas and similar
• Leases of biological assets (IAS 41)
• Intellectual property licenses (IFRS 16)
• Service concession arrangements (IFRIC 12)
• Rights under licensing agreements (IAS 38)

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1. What is a lease? 6 1.1. Does an arrangement contain a lease?
Throughout the period of use, the customer has
A lease is contract that conveys the right to use an asset both of the following rights to the identified asset
for a period of time in exchange for consideration
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(Lease term) (Lease payments)

✓ The right to obtain substantially ✓ The right to direct the use

all economic benefits
Asset User makes:
• Exclusive right of use • Decisions about why and
how the asset is used
CONTRACT Lessor Lessee • Including its primary output and
by-products • Protective rights do not limit
the right to direct the use
Consideration

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7 1.1. Does an arrangement contain a lease? 8 1.1. Does an arrangement contain a lease?
No
Throughout the period of use, the customer has Q1: is there an identified asset?
both of the following rights to the identified asset
Yes
(Explicity or Implicity) No
Q2: The right to obtain substantially all
of the economic benefits?
Yes
Capacity portion = Identified asset IF… Supplier
Customer Q3: The right to direct the asset’s use –
customer? Suppliers? Neither party?
Physically distinct OR Substantially all of the capacity
Neither
Yes Q4: The right operate the asset –
Ex: Warehouse Ex: Pipeline Customer?
No
Unit XYZ (yes) 60 m2 (no) 90% (yes) 50% (no)
Yes NO
Q5: Did the customer design the asset LEASE
LEASE
(predetermined use)? No

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24 Combined contract: a lease & some services

IAS 17
When you lease some assets
under operating lease (as called
by older IAS 17), in most cases, a
lessor provides certain services to
you, such as maintenance,
repairs, cleaning, etc.
Under older IAS 17, you did not
need to think about it too much,
because you put all lease
payments as some rental
expense to your profit or loss.
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IFRS 16
Under new IFRS 16, you need
to split the rental or lease
payments into lease element
and non-lease element, because
you need to:
- Account for a lease element as
for a lease under IFRS 16 (if it
meets the criteria in IFRS 16);
and
- Account for a service element as
before, in most cases as an
expense in profit or loss.

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25 Combined contract: a lease & some services

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1.2. Lease components - Dates 30
1.2. Lease components - Lease term
Inception of contract Conmmencement date Lease term = non-cancellable period of the lease
+ period covered by an option to extend (if option exercised)
Earlier of when lessor makes an underlying + period covered by an option to terminate (if option not exercised)
asset available for use by lessee
Date of lease Date of commitment
agreement by the parties Note: Assess whether the option will be exercised
✓ Terms and conditions of option ✓ Costs of terminating the lease
Assessment of the contract is made Accounting starts ✓ Leasehold improvements ✓ Importance of underlying asset

Ex:
Ex: - Non-cancellable term: 3 years
- Contract signed: 20 jan 20X1 - Extension for another 2 years possible ✓ Lease term = 3 year
✓Assess contract on 20 Jan 20X1
- Asset taken: 1 mar 20x1 at market rates
✓Recognize right–of–use asset on 1 mar 20X1 ✓ Lease term = 5 year
- 1st rental payment: 1 may 20x1 - Lessee built expensive glass partitions

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1.2. Lease components - Lease payments
Lease payments = payments made by a lessee to a lessor for the right-of use
of an underlying asset during the lease term

Include:
✓Fixed payments (also in-substance fixed payments) less any incentives
✓ Variable payments depending on an index or a rate
→ Include at prevailing rate/index at measurement date, remeasure
only when changed
✓ Exercise price of purchase option (if to be exercised)
✓ Penalties for terminating the lease
✓ Residual value guarantees
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2. Accounting by lessee

2.1. At the commencement

2.2. After the commencement
2.3. Presentation & disclosure

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2.1. At the commencement 42 2.1.1 Right-of-use asset & lease liability
!!! No classification of leases !!!
2.1.1. Right-of-use asset and lease liability
2.1.2. Interest rate implicit in the lease Right-of-use asset Lease liability
✓ Amount for lease liability Lease payments not paid
at the commencement date
✓ Lease payments before/on
commencement date – lease incentives
✓ Initial direct costs Discounted
✓ Estimate of dismantling costs Interest rate implicit in the lease

Except for (optional)

Underlying asset of
Lease term < 1 year
low value when new

Lease payments on a straight – line (or another systematic) basic

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43 Right-of-use asset 44 Lease payments

Fixed payments Includes in-substance fixed payments/incentives

Lease liability

Variable lease payments Only for index or rate/rate at commencement

Right of Initial direct costs Lease
use Incentives
asset received Residual value guarantees
Prepayments At amount lessee expects to pay

Restore/Dismantle Purchase option exercise price If lessee reasonably certain to exercise

Payments for terminating If lessee term reflects termination by lessee

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45 Example (cont) 46 2.1.2. Interest rate implicit in the lease

 At the commencement: Discount rate

◼ You need to recognize right-to-use a warehouse in the
amount equal to the lease liability plus some other items Lessor Lessee
like initial direct costs. Interest rate Interest rate
implicit in the lease (IRR) implicit in the lease (IRR)
◼ The lease liability is calculated at present value of (difficult to determine)
lease payments over the lease term. In this case you
need to calculate the present value of 3 payments of CU ✓ PV of lease Incremental borrowing rate
8.571 (only lease element) at 5%, which is CU 23.341. ✓ FV of
payments
underlying asset ✓Similar term and security
◼ Accounting entry is then ✓Observable rates
✓ PV of
Debit Right-of-use asset: EUR 23.341 ✓ Lessor’s initial
unguaranteed
direct cost
residual value
Credit Lease Liability: EUR 23.341

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2.2. After the commencement 48 2.2.1. Right–Of–Use Asset & Lease Liability

Right-of-use asset Lease liability

2.2.1. Right–Of–Use Asset and Lease Liability Debit: Credit:
✓ Interest on the lease liability
P/L-Depreciation ROU-Accumulated
2.2.2. Remeasurement Expense Depreciation Constant periodic interest rate

Debit: Credit:
2.2.3. Modifications ✓ Cost model (IAS 16) P/L-Interest Expense Lease Liability
✓ Fair value model (IAS 40)
✓ Reduction of the lease liability
✓ Revaluation model (IAS 16)
✓ Impairment test (IAS 36) Debit: Credit:
Lease liability Cash/bank

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49 Example (cont.) 50 Example (cont..)

 Subsequently, when you make a payment and/or at the Lease Add (+) Less (-) Lease
end of reporting period, you need to: Year Liability b/f Interest at 5% amounts paid Liability c/f

◼ Recognize depreciation of the right-of-use asset over 1 23.341 1.167 - 8.571 15.937

the lease term, in this case CU 7.780 (CU 23.341 / 3) 2 15.937 797 - 8.571 8.163
per year (I took straight-line depreciation); 3 8.163 408 - 8.571 0
Total 2.372 - 25.713
◼ Recognize remeasurement of the lease liability to
include interest, exclude amounts paid and take any
Note:
lease modifications into account.
“b/f” means “brought forward (at the beginning of the year)”,
“c/f” means “carried forward (at the end of the year)”.

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51 Summary of accounting entries under IFRS 16 52 Complications - Variable lease payments

How
When What Debit Credit Variable lease payments
much
At the ROU asset
ROU asset Lease liability 23.341
commencement Lease liability
Do they depend on the index or rate?
P/L: Interest
Interest Lease liability 1.167
expense
Lease liability 8.571
P/L: Expenses ✓ Included in the lease payments ✓ Excluded from the lease payments
At the end of Rental for cleaning 1.429 ✓ Measured at the rate prevalent ✓ In profit or loss
the year 1 payment services at the measurement date
Cash (bank account) 10.000

Depreciation P/L: Depreciation ROU asset 7.780

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53 Complications - Initial direct costs 54 2.2.2. Remeasurement

After the commencement date
Not below 0,
Initial direct costs Lessee remeasures rest in P/L

= Incremental costs of obtaining a lease that would NOT Lease liability As an adjustment Right – of – use asset
have been incurred without the lease (except for
manufacturer or dealer lessors) HOW? => Discount revised lease payments

Revised discount rate Unchanged discount rate

✓ Legal fees (contract drafting…) ✓ Internal cost
WHEN?
✓ Commissions ✓ Certain legal advices ✓ Change in lease term ✓ Change in amounts for residual value
✓ Change in option to purchase ✓ Change in future payments due to
assessment index/rate

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55 2.2.3. Modifications 56 2.2.3. Modifications

= change in the scope or consideration that was NOT part of original terms = change in the scope or consideration that was NOT part of original terms

Are the rights added to the lease contract to use No Lessee accounts:
one or more underlying assets? Lease
modification
Yes Lease ✓ Allocates the consideration in the modified contract
=
modification
Does the consideration increase No CHANGE IN
= ✓ Determines the lease term of the modified lease
commensurate with the stand – alone price for EXISTING LEASE
CHANGE IN
the increase in scope?
EXISTING LEASE ✓ Applies revised discount rate to remeasure the lease liability
Yes

Lease modification = SEPARATE LEASE ✓ Adjustment to right–of–use asset

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57 2.3. Presentation & disclosure 58 2.3. Presentation & disclosure

Presentation Disclosures

✓ Present right – of – use asset separately from other asset 1. Disclosures of assets, liabilities, expenses and cash flows
Or disclose in
✓ Present lease liabilities separately from other liabilities the notes ✓In tabular format

✓ Present interest on the lease liability separately from depreciation of ROU asset
✓ Depreciation of ROU by class ✓ Income from subleasing of ROU assets
✓ Cash flows: ✓ Interest expense on lease liabilities ✓ Cash outflow for leases
• Payments for principal  Financing activities ✓ Expense related to short – term leases ✓ Addition to ROU assets

• Payments for interest
• Payments for short–term leases,
low–value asset leases and
variable payments not within
lease liability
 Choice (Financing or operating)
 Operating activities
✓ Expense related to low – value leases ✓ Gains/losses sale and leaseback
✓ Expenses related to variable LP not ✓ Carrying amount of ROU by class
within LL
2. Additional disclosures

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3. Accounting by lessor 60
3.1. Classification of leases

3.1. Classification of leases

3.2. Finance lease
3.3. Operating lease
3.4. Other: sublease; sale and leaseback
Are risks and rewards of ownership transferred to lessee?
3.5. Disclosure
RISK REWARDS

Finance lease Operating lease

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Finance lease 62
Example

✓ Ownership transferred by the end of lease term
Situations
✓ Option to purchase the asset at price < fair value
✓ Lease term => major part of economic life of asset
✓ Present value of lease payments => close to fair value
✓ Leased assets are specialized nature
An entity leases an asset. The lease is for three years with
payments of $5,000 annually.
The fair value of the asset is $13,000 and the present value
of the minimum lease payments is $12,886.
The useful life of the asset is 3 years and the entity is
responsible for maintaining and insuring the asset.

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Indicators of Situations
Indicators of situations that could also lead to a lease being
classified as a finance lease are:
(1) if the lessee can cancel the lease, the lessor’s losses
associated with the cancellation are borne by the lessee;
(2) gains, or losses, from the change in the fair value of the
residual accrue to the lessee (for example, in the form of a
rent rebate equalling most of the sales proceeds at the
end of the lease); and
(3) the lessee has the ability to continue the lease for a
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Example: Cancellation-cost to the lessee
You lease a photocopier for 7 years. If you cancel the lease,
you must pay all the remaining payments (till the end of the
lease).
→ This is a finance lease, as there is no method of paying a
reduced rental for just the time elapsed since the start of the
lease.

secondary period, at a rent that is substantially lower than

market rent.

This generally indicates that the lessor has no wish to take back
the asset and only wishes to finance the transaction

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Land and Buildings 66
Land and Buildings

Land has indefinite Land and Building Leases of land and of buildings are classified as operating,
economic life
or finance, leases in the same way as leases of other
assets. However, land normally has an indefinite economic
Separate classification life and, if title is not to pass to the lessee by the end of the
lease term, the lessee normally does not receive
substantially all of the risks and rewards incidental to
Land Building ownership, and the lease of land will be an operating lease.

Operating lease unless title Operating or finance lease

passes at the end of lease term

→ Allocation of lease payments based on proportion of fair value

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3.2. Finance lease 68 3.2.1. At the commencement

At the commencement
3.2.1. At the commencement
3.2.1. After the commencement Debit: Credit:
Lease Receivable PPE

Credit:
P/L gain on sale of PPE
Net investment in the lease (or Debit if Loss)

✓ Fixed payments
✓ Variable payments (index)
Payments not paid
✓ Residual value guarantees at the + Initial direct
commencement costs
✓ Exercise price of purchase option date
✓ Penalties for terminating

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69 3.2.2. After the commencement 70 Manufacturer / Dealer lessors

Manufacturer / Dealer lessors

After the commencement

Selling profit Finance lease

Lease Receivable : Lease payments

Reduction of LR Finance income ✓ Revenue & Costs of sales ✓ Initial direct costs in P/L
✓ As outright sales under IFRS 15 ✓ If artificially low interest rate
Debit: Cash Credit:
Lease Receivable → selling profit is restricted
P/L – Interest Income

Constant periodic rate of return

Apply IFRS 9 to the net investment in the lease (impairment, derecognition)

Lease remeasurement and modification => Similar as lessees

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3.3. Operating lease 72
3.3. Operating lease

Accounting by lessor: Operating lease  Accounting for operating leases:

 Leased assets remain on B/S
Lease payments Underlying asset
 Recognize lease income on straight-line basis over
lease term
 Add initial direct costs to leased asset and depreciate
✓ Revenue on straight – line ✓ Initial direct costs are added over lease term on same basis as lease income is
(or other) basic to the asset
recognized
✓ Depreciation  Depreciation and impairment covered by IAS 16, 38
and 36
Manufacturer / Dealer lessors → No selling profit

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3.4. Other 74 3.4.1. Sublease

3.4.1. Sublease Original lessee Lessee

Lessor Head lease Sublease
Intermediate lessor (sublessee)
3.4.2. Sale & leaseback

Type of sublease Accounting by the intermediate lessor

Operating Keeps recognizing the head lease as before

Debit Net investment in the lease

Finance Credit ROU asset
Debit or Credit Difference in profit or loss

Head lease = short - term Recognition exemption; sublease = operating

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75 3.4.1. Sublease 76 3.4.2. Sale & leaseback

• Derecognise the right-of-use asset (1) and recognise Sale

instead a lease receivable equal to the net investment in
the sub-lease (2);
• Recognise the difference between (1) and (2) as a gain or
Finance loss in the income statement;
lease • Retain the previously recognised lease liability in capacity
as lessee and recognise interest expense thereon; and Seller = lessee Buyer = lessor
• Recognise interest income on the lease receivable in
capacity as finance lessor.
Leases back
• Retain the right-of-use asset in capacity as lessee and
continue to recognise depreciation thereon;
Operating • Retain the lease liability in capacity as lessee and
lease continue to recognise interest expense thereon;
• Recognise lease income from the sub-lease in capacity as
operating lessor

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77 3.4.2. Sale & leaseback
Is the transfer of asset a sale under
✓ Seller (lessee):
• Right – of – use asset at proportion
of the previous carrying amount
• Gain/loss related to the transferred
right only
✓ Buyer (Lessor):
• Asset under applicable standards
• Lease under IFRS 16
✓ Leaseback:
• As for any other (adjustment for off
– market terms)
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IFRS 16 how to implement?
= mandatory effective date
(earlier application with IFRS 15 is permitted)
How to make a transaction?
Full retrospective adoption
= retrospectively to
each prior reporting period
✓No need to reassess whether contract
is/contains a lease at the date of initial
application (if IAS 17/IFRIC 4 applied)
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3.5. Disclosure
IFRS 15 - Revenue from contracts ✓ In tabular format
with customers?
Did control of an underlying For finance lease For operating lease
asset passed to the buyer?
✓ Selling profit or loss ✓ Lease income
✓ Seller (lessee):
• Continues to recognize an asset ✓ Finance income on net inv. In the lease ✓ Income related to variable LP
• Financial liability (IFRS 9) ✓ Income related to variable LP not within LR not depending on an index/rate
✓ Additional quantitative and qualitative disclosures
✓ Buyer (lessor):
• Financial asset (IFRS 9) ✓ Maturity analysis (refer to examples)
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The end
Modified retrospective adoption
Thank you!
= retrospectively with cumulative effect
at the date of initial application
✓Comparatives presented under prior IFRS
✓IFRS 16 applied to existing and new
contracts onwards
✓Adjustment to opening retained earnings
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