IFRS 16 - Leases

• Lease


  A contract, or part of a contract, that conveys the right to use an underlying asset for a period of time in exchange for consideration
• Lessor


  The entity that provides the right-of-use asset and, in exchange, receives consideration
• Lessee


  The entity that obtains use of the right-of-use asset and, in exchange, transfers consideration
• Right-of-use asset


  The lessee's right to use an underlying asset over the lease term
• IFRS 16 Leases


  • Requires lessee to recognise an asset and a liability for all leases, unless they are short-term or of a minimal value
  • It is vital to assess whether a contract contains a lease, or whether it is simply a contract for a service
• Identified asset


  Asset must be specified and identified
• Period of time


  Either years or amount of use
• Right to control


  • Right to obtain substantially all of the economic benefits (control) which can be achieved through holding, using or sub-leasing the asset
  • Right to direct the use of the asset (control) - Lessee can direct how and for what purpose the asset is used throughout the period of use
• IFRS 16 says that a customer does not have the right to use an identified asset if the supplier has the practical ability to substitute the asset for an alternative and if it would be economically beneficial for them to do so
• The right to direct the use of the asset can still exist if the lessor puts restrictions on its use within a contract (such as by capping the maximum mileage of a vehicle, or limiting which countries an asset can be used in). These restrictions define the scope of a lessee's right of use, rather than preventing them from directing use
• Recognition Exemption


  • Short term leases - which are those for less than 12 months that do not contain a purchase option
  • Leases for low value assets (i.e. leases of assets with a value, when new, of $5,000 or less)
  • Can elect to apply the exemption relating to assets with a low value on a lease-by-lease basis
  • If an entity elects to apply the optional recognition exemptions to a lease, then the lease payments are charged to profit or loss on a straight-line (or other systematic) basis over the lease term
• Initial Measurement


  1. Lease liability (Cr) - Present value of the lease payments that have not yet been paid

  2. Right-of-use asset (Dr) - Amount of the initial measurement of the lease liability, lease payments made at or before the commencement date, less any lease incentive granted by lessor, initial direct costs, the estimated costs of removing or dismantling the underlying asset as per the conditions of the lease
• Lease term


  Non-cancellable periods, periods covered by an option to extend the lease if reasonably certain to be exercised, periods covered by an option to terminate the lease if reasonably certain not to be exercised
• Subsequent Measurement


  1. Lease liability - Carrying amount increased by the interest charge (i.e. amortised cost calculation), split between current and non-current portion

  2. Right-of-use asset - Measured at cost less accumulated depreciation and impairment losses in line with IAS 16
• Sale and leaseback


  A sale and leaseback transaction involves the sale of an asset and the subsequent leasing back of the same asset
• Transfer is a sale


  1. Transfer of an asset qualifies as a sale if the customer obtains control of the asset and risks and rewards of ownership has been transferred to the customer

  2. Seller-lessee must measure the right-of-use asset as the proportion of the previous carrying amount that relates to the rights retained

  3. Seller-lessee recognises a lease liability in respect of its obligations under the lease

  4. Seller-lessee will recognise a profit or loss based only on the rights transferred to the buyer-lessor
• If the transfer is not a sale, this is merely a financing arrangement. Seller-lessee continues to recognise the asset in its book, recognises a financial liability measured at transfer proceeds. Buyer-lessor recognises a financial asset measured at transfer proceeds
• UK GAAP