[1] IFRS 16 LEASE IDENTIFICATION
, [2] IFRS 16 LESSEE ACCOUNTING (TENANT) PVFLP: Present value of future lease payments
EXAMPLE 1: RIGHT OF USE ASSET
"Co A commenced a 5-year lease to acquire
machinery on 1-Jul-X4. The machinery has a
UEL of 10 years. Co A has paid an initial deposit
of £1,450 to secure the lease, incurred legal
fees of £800 relating to the contract. On
commencement of the lease, the PVFLP was
£29,500. Co A will have to train its staff to use
the new machinery at a cost of £1,000. At the
end of the lease, Co A will incur costs of £400
(at PV) to remove the machinery and return it
to the lessor. YE 31-Dec-X4."
Initial measurement
PVFLP 29,500
Deposit 1,450
Legal fees 800
Removal 400
Total 32,150
Note: costs of staff training cannot be
capitalised.
Subsequent measurement
The right-of-use asset should be depreciated
over 5-years, pro-rata. Depreciation is
therefore £3,215 (£32, years x
6/12months) and the carrying amount of the
right-of-use asset at 31-December-X4 is
£28,935 (£32,150 - £3125).
EXAMPLE 2: LEASE LIABILITY (LL)
"Co A has a YE 31-Dec. It entered into a new
lease, commencing on 1-Jan-X2. The lease
contract requires three annual payments of
£100,000 to be made, commencing on 31-Dec-
X2. The payments will increase by 2% per
annum to reflect inflation. The rate of interest
is 8%." [1] LL initial measurement: £4m pa payable in arrears so:
The key financial reporting implication is to determine whether the contract results in a DR LL £4m CR Cash £4m (ie payment of lease rental)
right of use asset and an associated liability under IFRS 16. Key questions to ask are as Initial measurement
follows: The initial lease liability is the PVFLP,
• Is there a contract between a supplier and a customer? Can you identify an asset or discounted using the rate of interest implicit in
group of assets or part of an asset? the least of 8%. The 2% inflationary
• Does the customer have 'right of use' - can the customer direct what happens to the adjustment is a variable payment which
asset? Does the customer have the economic benefits of the identified asset? Or can should be taken account of. The lease liability
the supplier benefit from the asset when the customer is not using it. is initially measured as:
• Even if a contract specifies a particular asset, a customer does not have the right to direct the use that asset if the
supplier has a substantive right to substitute the asset throughout the period of use.
E.g. stored in lessees premises when not in use and specifically constructed for lessee Yr Lease paym DF PV
1 100K 1.08 92,593
• Does the supplier have 'substitution rights'? I.e. can the supplier use the asset for its 2 100K x 1.02 1.08^2 87,449
other customers? If Yes - not lease. If no - lease. 3 102K x 1.02 1.08^3 82,590
[see next page] 262,631
E.g. Practical ability to substitute alternative assets throughout the period of use
Supplier would benefit economically from the exercise of its right to substitute the asset - are
there other costs e.g. cost of cleaning or collection which makes the substitution not economically At 31-12-X2 Subsequent measurement
viable
Total liability: 183,642 Initial LL FC @ 8% Paym LL @ YE
If not readily determinable whether supplier has substitution substantive NCL: 96,333 262,631 21,011 -100K 183,642
rights, a lessee must preusme that any substitution right is not substantive
CL (bal): 87,309 183,642 14,691 -100K 96,333
96,333 7,707 -104K 0
At 31-12-X3
Total liability: 96,333 [2] Interest charged using amortised cost method: DR
NCL: 0 Profit or loss - FC: PVFLP x IR%, CR LL
[3] Split between NCL and CL
CL (bal): 96,333
, [2] IFRS 16 LESSEE ACCOUNTING (TENANT) PVFLP: Present value of future lease payments
EXAMPLE 1: RIGHT OF USE ASSET
"Co A commenced a 5-year lease to acquire
machinery on 1-Jul-X4. The machinery has a
UEL of 10 years. Co A has paid an initial deposit
of £1,450 to secure the lease, incurred legal
fees of £800 relating to the contract. On
commencement of the lease, the PVFLP was
£29,500. Co A will have to train its staff to use
the new machinery at a cost of £1,000. At the
end of the lease, Co A will incur costs of £400
(at PV) to remove the machinery and return it
to the lessor. YE 31-Dec-X4."
Initial measurement
PVFLP 29,500
Deposit 1,450
Legal fees 800
Removal 400
Total 32,150
Note: costs of staff training cannot be
capitalised.
Subsequent measurement
The right-of-use asset should be depreciated
over 5-years, pro-rata. Depreciation is
therefore £3,215 (£32, years x
6/12months) and the carrying amount of the
right-of-use asset at 31-December-X4 is
£28,935 (£32,150 - £3125).
EXAMPLE 2: LEASE LIABILITY (LL)
"Co A has a YE 31-Dec. It entered into a new
lease, commencing on 1-Jan-X2. The lease
contract requires three annual payments of
£100,000 to be made, commencing on 31-Dec-
X2. The payments will increase by 2% per
annum to reflect inflation. The rate of interest
is 8%." [1] LL initial measurement: £4m pa payable in arrears so:
The key financial reporting implication is to determine whether the contract results in a DR LL £4m CR Cash £4m (ie payment of lease rental)
right of use asset and an associated liability under IFRS 16. Key questions to ask are as Initial measurement
follows: The initial lease liability is the PVFLP,
• Is there a contract between a supplier and a customer? Can you identify an asset or discounted using the rate of interest implicit in
group of assets or part of an asset? the least of 8%. The 2% inflationary
• Does the customer have 'right of use' - can the customer direct what happens to the adjustment is a variable payment which
asset? Does the customer have the economic benefits of the identified asset? Or can should be taken account of. The lease liability
the supplier benefit from the asset when the customer is not using it. is initially measured as:
• Even if a contract specifies a particular asset, a customer does not have the right to direct the use that asset if the
supplier has a substantive right to substitute the asset throughout the period of use.
E.g. stored in lessees premises when not in use and specifically constructed for lessee Yr Lease paym DF PV
1 100K 1.08 92,593
• Does the supplier have 'substitution rights'? I.e. can the supplier use the asset for its 2 100K x 1.02 1.08^2 87,449
other customers? If Yes - not lease. If no - lease. 3 102K x 1.02 1.08^3 82,590
[see next page] 262,631
E.g. Practical ability to substitute alternative assets throughout the period of use
Supplier would benefit economically from the exercise of its right to substitute the asset - are
there other costs e.g. cost of cleaning or collection which makes the substitution not economically At 31-12-X2 Subsequent measurement
viable
Total liability: 183,642 Initial LL FC @ 8% Paym LL @ YE
If not readily determinable whether supplier has substitution substantive NCL: 96,333 262,631 21,011 -100K 183,642
rights, a lessee must preusme that any substitution right is not substantive
CL (bal): 87,309 183,642 14,691 -100K 96,333
96,333 7,707 -104K 0
At 31-12-X3
Total liability: 96,333 [2] Interest charged using amortised cost method: DR
NCL: 0 Profit or loss - FC: PVFLP x IR%, CR LL
[3] Split between NCL and CL
CL (bal): 96,333
