Lease Accounting as per IFRS 16

Lease Accounting as per IFRS 16

Summary of the key provisions of IFRS 16

  • IFRS 16 covers Lease Accounting, and this has replaced the earlier accounting standard IAS 17
  • A lease is an agreement by which the owner known as ‘lessor’, of a specific asset allows another person known as the ‘lessee’ to use the asset for a specified period in exchange for certain periodic payments known as ‘lease rentals’ to the lessor.
  • A finance lease is like buying an asset with the finance provided by an external party. It allows a lessee to own an asset with the help of finance from the lessor. The lessee has the option to be the permanent owner of the asset at the end of the lease term, subject to certain terms.
  • An operating lease is like an asset rental. It allows the lessee to use the leased asset for a specific period of time. The specified period of time usually less compared to the useful life of the asset.
  • IFRS 16 requires an entity to determine whether a contract is a lease or contains a lease at the inception of the contract. The assessment of whether a contract is a lease or contains a lease would be simple in most of the cases. However, for certain other contracts we may have to apply our mind to decide if it is a lease contract or no.
  • Where a contract includes significant services, it may be challenging to determine whether the contract conveys the right to direct the use of an identified asset.
  • Lease liability is initially recognised based on the present value of minimum lease payments during the lease term
  • Right-of-use asset is recognised at cost, based on the initial measurement of lease liability plus any lease payments made to the lessor at or before the commencement date as reduced by any lease incentives received, initial estimate of the restoration costs and any initial direct costs incurred by the lessee.
  • The lease liability is measured in subsequent periods using the interest rate implicit in the lease if that rate can be readily determined.
  • If interest rate implicit in the lease cannot be readily determined, then the lessee’s incremental borrowing cost is considered.
  • The right-of-use asset is depreciated as per the requirements in IAS 16, Property, Plant and equipment & IAS - Standard for Intangible Assets.
  • Recognition exemptions are provided for low-value assets and short- term leases. Assets of low value include IT equipment or office furniture. However, there is no monetary threshold has been defined for low-value assets. Short-term leases are defined as leases with a lease term of 12 months or less.
  • If an entity chooses to apply any one of the exemptions, payments are recognised on a straight-line basis or another systematic basis that is more representative of the pattern of the lessee’s benefit.
  • The effective date of IFRS 16 is 1st Jan 2019

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