Study unit 8
IFRS 16 Leases
Lease in terms of IFRS 16:
A contract or part of a contract that conveys the right to use an asset for a period of time in exchange
for consideration
Important definitions
Inception date The earlier of the date of agreement and the date of commitment by the
principle parties to the principle terms and conditions of the lease.
Date on which the lease will be classified
Commencement date The date on which the lessor makes an underlying asset available for use
by lessee
Date on which lease is recognised and measured
Lease term Non-cancellable period for which a lessee has the right to use an
underlying asset, together with both:
Periods covered by an option to extend the lease if the lessee is
reasonably certain to exercise that option, and
Periods covered by an option to terminate the lease if the lessee is
reasonably certain not to exercise that option
Residual value Guarantee made to the lessor by a party unrelated to the lessor that the
guarantee value of the underlying asset will at least be a specified amount at the
end of the lease
Unguaranteed Portion of the residual value of the underlying asset of which the
residual value realisation is not assured/guaranteed by a party related to the lessor
Never part of lease payments!
Lease payments
Payments from lessee to lessor comprising:
Unguaranteed residual value Never
Fixed payments less lease incentives
part of lease payments
Variable lease payments depending on index or rate
Exercise price of purchase option is lessee is reasonably certain to exercise that option
Payment of penalties for terminating lease if lease term reflects lessee exercising option to
terminate lease (if certain)
Amounts expected to be payable by the lessee under residual value guarantees
Fixed payments Payments made by lessee to lessor for the right to use an underlying asset
during the lease term (excl. variable lease payments)
Lease incentives Payments made by lessor to lessee associated with a lease or the
reimbursement/assumption by a lessor of costs of a lease
Variable lease The portion of payments made by a lessee to a lessor for the right to use an
payments underlying asset during the lease term that varies because of changes in facts or
circumstances after the commencement date, other than the passage of time
DISCOUNT RATE
2 rates: Interest rate implicit in the lease
Lessee’s incremental borrowing rate
, 1. Implicit interest rate:
Rate of interest which causes:
The present value of the a) lease payments and the b) unguaranteed residual value
Equal to:
The sum of i) the fair value of the underlying asset and ii) any initial direct costs of the lessor
PV of lease payments + unguaranteed residual value = FV + IDC of the lessor
Financial calculator:
PV Entered as a negative (-)
PMT (+) Sum of future cash amounts
FV (+) discounted @ this rate
n lease term (always from lessor’s POV)
comp = implicit interest rate
2. Incremental borrowing rate:
Rate of interest that lessee would pay to borrow over similar term, and with similar security, the funds
necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic
environment.
Solution:
Lease term PV = 315 000 + 3 000
N=6
PMT = 5 000
Inception date
FV = 256 000 + 6 4000
Commencement date = 15, 79%
Lease pmts 50 000 x 6 + 256 000
GRV = 256 000
UGRV = 64 000 Depreciation:
If ownership is transferred 8 years
Economic life Useful life = 8 If ownership not transferred 6 y
Incremental borrowing rate
Initial direct cost of lessor
RECOGNITION
On the commencement date:
Dt Right of use asset
Cr Lease liability
Initial measurement:
1. Right of use asset
Cost = amount @ which lease liability is initially measured
+ lease payments made on/before commencement (Cr Bank); less incentives received (Cr ROUA,
Dt Bank/receivables)
+ initial direct cost for lessee (Cr Bank/payables)
+ PV of estimate of dismantling and/or removing cost for asset (Cr provision)
2. Lease liability
Present value of future lease payments Lessee’s POV includes guaranteed
(discounted at implicit interest rate) residual value made by lessee
Input: n, i, PMT (-) Comp PV
IFRS 16 Leases
Lease in terms of IFRS 16:
A contract or part of a contract that conveys the right to use an asset for a period of time in exchange
for consideration
Important definitions
Inception date The earlier of the date of agreement and the date of commitment by the
principle parties to the principle terms and conditions of the lease.
Date on which the lease will be classified
Commencement date The date on which the lessor makes an underlying asset available for use
by lessee
Date on which lease is recognised and measured
Lease term Non-cancellable period for which a lessee has the right to use an
underlying asset, together with both:
Periods covered by an option to extend the lease if the lessee is
reasonably certain to exercise that option, and
Periods covered by an option to terminate the lease if the lessee is
reasonably certain not to exercise that option
Residual value Guarantee made to the lessor by a party unrelated to the lessor that the
guarantee value of the underlying asset will at least be a specified amount at the
end of the lease
Unguaranteed Portion of the residual value of the underlying asset of which the
residual value realisation is not assured/guaranteed by a party related to the lessor
Never part of lease payments!
Lease payments
Payments from lessee to lessor comprising:
Unguaranteed residual value Never
Fixed payments less lease incentives
part of lease payments
Variable lease payments depending on index or rate
Exercise price of purchase option is lessee is reasonably certain to exercise that option
Payment of penalties for terminating lease if lease term reflects lessee exercising option to
terminate lease (if certain)
Amounts expected to be payable by the lessee under residual value guarantees
Fixed payments Payments made by lessee to lessor for the right to use an underlying asset
during the lease term (excl. variable lease payments)
Lease incentives Payments made by lessor to lessee associated with a lease or the
reimbursement/assumption by a lessor of costs of a lease
Variable lease The portion of payments made by a lessee to a lessor for the right to use an
payments underlying asset during the lease term that varies because of changes in facts or
circumstances after the commencement date, other than the passage of time
DISCOUNT RATE
2 rates: Interest rate implicit in the lease
Lessee’s incremental borrowing rate
, 1. Implicit interest rate:
Rate of interest which causes:
The present value of the a) lease payments and the b) unguaranteed residual value
Equal to:
The sum of i) the fair value of the underlying asset and ii) any initial direct costs of the lessor
PV of lease payments + unguaranteed residual value = FV + IDC of the lessor
Financial calculator:
PV Entered as a negative (-)
PMT (+) Sum of future cash amounts
FV (+) discounted @ this rate
n lease term (always from lessor’s POV)
comp = implicit interest rate
2. Incremental borrowing rate:
Rate of interest that lessee would pay to borrow over similar term, and with similar security, the funds
necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic
environment.
Solution:
Lease term PV = 315 000 + 3 000
N=6
PMT = 5 000
Inception date
FV = 256 000 + 6 4000
Commencement date = 15, 79%
Lease pmts 50 000 x 6 + 256 000
GRV = 256 000
UGRV = 64 000 Depreciation:
If ownership is transferred 8 years
Economic life Useful life = 8 If ownership not transferred 6 y
Incremental borrowing rate
Initial direct cost of lessor
RECOGNITION
On the commencement date:
Dt Right of use asset
Cr Lease liability
Initial measurement:
1. Right of use asset
Cost = amount @ which lease liability is initially measured
+ lease payments made on/before commencement (Cr Bank); less incentives received (Cr ROUA,
Dt Bank/receivables)
+ initial direct cost for lessee (Cr Bank/payables)
+ PV of estimate of dismantling and/or removing cost for asset (Cr provision)
2. Lease liability
Present value of future lease payments Lessee’s POV includes guaranteed
(discounted at implicit interest rate) residual value made by lessee
Input: n, i, PMT (-) Comp PV
