IFRS 16:
LEASES
, IFRS 16: LEASES: LESSEE
◦ Most leases = general approach
◦ Control over assets when we are the lessee
This is an overall summary of what we are going to cover in IFRS 16.
The standard is divided into three main sections:
1. Lessees à covered in detail
2. Lessors à covered in detail
3. Sale and lease back à This is only awareness level, thus only the detail included in the notes are examinable.
Appendix A and B to IFRS 16 are also very important and you must work through the Appendix where applicable. Where, for example, in the slide
we refer to B9, it is in Appendix B of the standard.
We are going to distinguish between the general approach and the simplified approach when accounting for a lease in the lessee’s records, while
we will distinguish between an operating lease and a finance lease when we account for the lease in the records of the lessor.
For each type of lease we are going to cover in detail the calculations, journals, disclosure, as well as current tax and deferred tax. Please note all
VAT implications will only be covered in honours
Your knowledge to date regarding the recording of a lease transaction from the lessee and lessor's point of view is as above.
However, IFRS 16 has its own set of rules and the recording of lease transactions as above is not how any lease transactions are accounted
for in accordance with IFRS 16. So please forget any previous knowledge.
Brief overview
Substance over Legally, the lessee is not the owner of the leased asset and is not required to take ownership of the leased asset at the end of the lease
form term.
However, the substance of the agreement and its financial reality is that the lessee obtains the right to use the asset to generate
economic benefits for itself over the lease term.
With the exception of scope exclusions and optional simplifications (short-term leases and low-value asset leases), the lessee must
recognise the lease by recognising:
On SFP A “right of use” asset; and à ito IAS 16 distinguish: Assets own & ROU assets
a lease liability à IFRS 9 financial liability @ amortised cost
Legally, the lessee of an asset does not become the owner of the asset.
If we however look at the substance of the lease agreement:
• the lessee obtains the right to use the asset and to generate economic benefits from the asset
• thus the lessee obtains control over the asset.
We now have to consider whether the recognition of the lease is correct of if there perhaps should be an asset recorded in the records of the lessee. For accounting
purposes the rule substance (lessee obtains control over the asset) over form (legal contract – lessee is not the owner) applies.
Thus, IFRS 16 lays down the following rule with regards to lessees
à this is known as the general approach according to IFRS 16:
1. The lessee must account for an asset in his records, namely a right-of-use asset, that is treated the same as an IAS 16 asset with depreciation and
impairment losses.
2. The lessee must account for a liability in his records, namely a lease liability, which is a financial liability at amortised cost ito IFRS 9.
There are exceptions where the lessee will not recognise the above in his accounting records (scope exclusions / if the simplified approach is applicable), but this is the
general rule that applies to lessees when recording any lease agreement.
,Identification
When is an agreement a lease agreement and are you going to record it ito IFRS 16?
For an agreement to be accounted for ito IFRS 16, it has to be a lease agreement.
The first important thing is thus to identify whether the agreement is a lease agreement.
For FA379 purposes we will explicitly say that the agreement is a lease agreement, or we will mention a lessee or lessor which will indicate that this is a lease
agreement.
4 requirements:
1. When does a contract exist ? written / verbal agreement
2. Give lessee right to use the asset
3. For period of time they have control of asset
4. Lessee gives consideration to the lessor
The detail regarding identification is technical and will only be covered in honors. Par 9 – 17 and the related paragraphs in Appendix B will thus only be covered in honors.
You only need to know the detail in the next two slides.
Identify whether there is a lease
(.9-.17 and B9 to B14)
§ Before IFRS 16 can be applied, there must be a lease
§ A lease is defined as a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for
consideration (Appendix A)
The definition of a lease as included in Appendix A, contains 4 basic elements:
1. It is a contract / part of a contract
2. That conveys the right to use an asset
3. For a period of time
4. In exchange for consideration
Thus, the lessor transfers the right to use the asset to the lessee, and the lessee pays the consideration to the lessor.
• Analyse all contracts at inception for existence of a lease
• Definition of a Lessee - an entity that obtains the right to use an underlying asset for a period of time in exchange for consideration.
Honours:
◦ Separating components of a contract (.12-.16 and B32 – B33)
◦ Combination of contracts (B2)
The lessee refers to the entity that obtains the right to use the asset. This section only covers the lessee in detail.
RECOGNITION AND MEASUREMENT
Two approaches
There are two options regarding the recognition of leases:
• The lease qualifies for the optional recognition option and the entity chooses this option (simplified approach); or
• The lease is recognised on the balance sheet (general approach)
Form the lessee’s perspective the are two options regarding the recognition of leases:
1. The option that everyone is supposed to use according to the standard, namely the general approach
OR
2. If certain criteria are met and the entity chose, the simplified approach can be used.
The information in the question will clearly indicate if the criteria are met for the entity to apply the simplified approach or enough information will be given for
you to decide if the criteria are met. In all other instances the general approach must be used.
, Recognition and measurement: exception = simplified approach
An entity may elect not to apply the single lessee accounting model in the following cases:
◦ Leases of 12 months or less (short-term leases); and
◦ Leases for which the underlying asset is of low value, for example tablets, personal computers and small items of office furniture.
◦ Lease payments are recognised as an expense on a straight-line basis over the lease term (in SCI), unless another systematic basis is more
representative of the pattern of the lessee’s benefit.
An entity can choose to not use the general approach in only two cases:
\ use the simplified approach
1. If it is a short-term lease
2. If the asset that is leased, is a low-value asset
FOR SIMPLIFIED APPROACH TO APPLY:
- The criteria must be met
AND
- The entity must choose the simplified approach
• If a lessee elects this exemption, it has to be made by class of underlying asset (.6)
• Any subsequent modification or change in lease term shall be treated as a new lease (.6)
An entity can still apply the general approach even if the lease is a short-term lease / the asset is a low value asset.
If the simplified approach was chosen, how do we account for the lease?
The lease payments are recognised as an expense on a straight-line basis.
This means we do not recognise the amount paid as an expense.
• Mathematical average of undiscounted fixed lease payments
Lease expense (P/L) = Total lease payments
Total lease term
à To recognise the lease on a straight-line basis means the total lease payments are divided by the total lease term to get the lease expense per period.
If cash flows are not equal, the difference between the cash flows (actual lease payments paid) and the calculated equalised
expense will result in either an accrued expense or a prepaid expense in the statement of financial position
DIFFERENCE
Actual payment is less than straight line amount = accrued
Actual payment is more than straight line amount = prepaid expense
à As a result what we pay is not always equal to what we record as an expense, and the difference will the be the balancing leg which is either an accrued
expense or a prepaid expense.
option to extend or to should be considered in determining if the lease term is 12 months or less.
terminate a lease that is A short-term lease is a lease that extends over a period of less than 12 months.
reasonably certain to be
exercised Take into account option to extend on 1st day
Expect to extend beyond 12 months = general approach
lease that contains a not a short-term lease (general approach)
purchase option
Important to note, if the lease includes a purchase option (thus the lessee has the option to buy the asset at the end of the lease
term), then the lease cannot be a short-term lease and the general approach must be used.
Lease with purchase option à not short-term lease (option to buy it)
EXAM à MUST KNOW WHEN TO USE THE SIMPLIFIED OR GENERAL APPROACH
• General = default option
• Simplified approach = exception
◦ lease is for 12 months or less OR
◦ lease is short term or a low value item eg: lease value = R2 000 for 2 years (value is so small it takes away the relevance for users)
- low value item = individual asset less than R50 000
Entity must CHOOSE the simplified approach
à Then create asset and create liability
LEASES
, IFRS 16: LEASES: LESSEE
◦ Most leases = general approach
◦ Control over assets when we are the lessee
This is an overall summary of what we are going to cover in IFRS 16.
The standard is divided into three main sections:
1. Lessees à covered in detail
2. Lessors à covered in detail
3. Sale and lease back à This is only awareness level, thus only the detail included in the notes are examinable.
Appendix A and B to IFRS 16 are also very important and you must work through the Appendix where applicable. Where, for example, in the slide
we refer to B9, it is in Appendix B of the standard.
We are going to distinguish between the general approach and the simplified approach when accounting for a lease in the lessee’s records, while
we will distinguish between an operating lease and a finance lease when we account for the lease in the records of the lessor.
For each type of lease we are going to cover in detail the calculations, journals, disclosure, as well as current tax and deferred tax. Please note all
VAT implications will only be covered in honours
Your knowledge to date regarding the recording of a lease transaction from the lessee and lessor's point of view is as above.
However, IFRS 16 has its own set of rules and the recording of lease transactions as above is not how any lease transactions are accounted
for in accordance with IFRS 16. So please forget any previous knowledge.
Brief overview
Substance over Legally, the lessee is not the owner of the leased asset and is not required to take ownership of the leased asset at the end of the lease
form term.
However, the substance of the agreement and its financial reality is that the lessee obtains the right to use the asset to generate
economic benefits for itself over the lease term.
With the exception of scope exclusions and optional simplifications (short-term leases and low-value asset leases), the lessee must
recognise the lease by recognising:
On SFP A “right of use” asset; and à ito IAS 16 distinguish: Assets own & ROU assets
a lease liability à IFRS 9 financial liability @ amortised cost
Legally, the lessee of an asset does not become the owner of the asset.
If we however look at the substance of the lease agreement:
• the lessee obtains the right to use the asset and to generate economic benefits from the asset
• thus the lessee obtains control over the asset.
We now have to consider whether the recognition of the lease is correct of if there perhaps should be an asset recorded in the records of the lessee. For accounting
purposes the rule substance (lessee obtains control over the asset) over form (legal contract – lessee is not the owner) applies.
Thus, IFRS 16 lays down the following rule with regards to lessees
à this is known as the general approach according to IFRS 16:
1. The lessee must account for an asset in his records, namely a right-of-use asset, that is treated the same as an IAS 16 asset with depreciation and
impairment losses.
2. The lessee must account for a liability in his records, namely a lease liability, which is a financial liability at amortised cost ito IFRS 9.
There are exceptions where the lessee will not recognise the above in his accounting records (scope exclusions / if the simplified approach is applicable), but this is the
general rule that applies to lessees when recording any lease agreement.
,Identification
When is an agreement a lease agreement and are you going to record it ito IFRS 16?
For an agreement to be accounted for ito IFRS 16, it has to be a lease agreement.
The first important thing is thus to identify whether the agreement is a lease agreement.
For FA379 purposes we will explicitly say that the agreement is a lease agreement, or we will mention a lessee or lessor which will indicate that this is a lease
agreement.
4 requirements:
1. When does a contract exist ? written / verbal agreement
2. Give lessee right to use the asset
3. For period of time they have control of asset
4. Lessee gives consideration to the lessor
The detail regarding identification is technical and will only be covered in honors. Par 9 – 17 and the related paragraphs in Appendix B will thus only be covered in honors.
You only need to know the detail in the next two slides.
Identify whether there is a lease
(.9-.17 and B9 to B14)
§ Before IFRS 16 can be applied, there must be a lease
§ A lease is defined as a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for
consideration (Appendix A)
The definition of a lease as included in Appendix A, contains 4 basic elements:
1. It is a contract / part of a contract
2. That conveys the right to use an asset
3. For a period of time
4. In exchange for consideration
Thus, the lessor transfers the right to use the asset to the lessee, and the lessee pays the consideration to the lessor.
• Analyse all contracts at inception for existence of a lease
• Definition of a Lessee - an entity that obtains the right to use an underlying asset for a period of time in exchange for consideration.
Honours:
◦ Separating components of a contract (.12-.16 and B32 – B33)
◦ Combination of contracts (B2)
The lessee refers to the entity that obtains the right to use the asset. This section only covers the lessee in detail.
RECOGNITION AND MEASUREMENT
Two approaches
There are two options regarding the recognition of leases:
• The lease qualifies for the optional recognition option and the entity chooses this option (simplified approach); or
• The lease is recognised on the balance sheet (general approach)
Form the lessee’s perspective the are two options regarding the recognition of leases:
1. The option that everyone is supposed to use according to the standard, namely the general approach
OR
2. If certain criteria are met and the entity chose, the simplified approach can be used.
The information in the question will clearly indicate if the criteria are met for the entity to apply the simplified approach or enough information will be given for
you to decide if the criteria are met. In all other instances the general approach must be used.
, Recognition and measurement: exception = simplified approach
An entity may elect not to apply the single lessee accounting model in the following cases:
◦ Leases of 12 months or less (short-term leases); and
◦ Leases for which the underlying asset is of low value, for example tablets, personal computers and small items of office furniture.
◦ Lease payments are recognised as an expense on a straight-line basis over the lease term (in SCI), unless another systematic basis is more
representative of the pattern of the lessee’s benefit.
An entity can choose to not use the general approach in only two cases:
\ use the simplified approach
1. If it is a short-term lease
2. If the asset that is leased, is a low-value asset
FOR SIMPLIFIED APPROACH TO APPLY:
- The criteria must be met
AND
- The entity must choose the simplified approach
• If a lessee elects this exemption, it has to be made by class of underlying asset (.6)
• Any subsequent modification or change in lease term shall be treated as a new lease (.6)
An entity can still apply the general approach even if the lease is a short-term lease / the asset is a low value asset.
If the simplified approach was chosen, how do we account for the lease?
The lease payments are recognised as an expense on a straight-line basis.
This means we do not recognise the amount paid as an expense.
• Mathematical average of undiscounted fixed lease payments
Lease expense (P/L) = Total lease payments
Total lease term
à To recognise the lease on a straight-line basis means the total lease payments are divided by the total lease term to get the lease expense per period.
If cash flows are not equal, the difference between the cash flows (actual lease payments paid) and the calculated equalised
expense will result in either an accrued expense or a prepaid expense in the statement of financial position
DIFFERENCE
Actual payment is less than straight line amount = accrued
Actual payment is more than straight line amount = prepaid expense
à As a result what we pay is not always equal to what we record as an expense, and the difference will the be the balancing leg which is either an accrued
expense or a prepaid expense.
option to extend or to should be considered in determining if the lease term is 12 months or less.
terminate a lease that is A short-term lease is a lease that extends over a period of less than 12 months.
reasonably certain to be
exercised Take into account option to extend on 1st day
Expect to extend beyond 12 months = general approach
lease that contains a not a short-term lease (general approach)
purchase option
Important to note, if the lease includes a purchase option (thus the lessee has the option to buy the asset at the end of the lease
term), then the lease cannot be a short-term lease and the general approach must be used.
Lease with purchase option à not short-term lease (option to buy it)
EXAM à MUST KNOW WHEN TO USE THE SIMPLIFIED OR GENERAL APPROACH
• General = default option
• Simplified approach = exception
◦ lease is for 12 months or less OR
◦ lease is short term or a low value item eg: lease value = R2 000 for 2 years (value is so small it takes away the relevance for users)
- low value item = individual asset less than R50 000
Entity must CHOOSE the simplified approach
à Then create asset and create liability
