IFRS 16 – LEASES

Nguyễn Đình Hoàng Uyên

Contents

 Introduction of IFRS 16
 Definitions and basic terms
 Separating lease components
 Accounting by lessee
 Complication issues
 Accounting by lessors
INTRODUCTION TO IFRS 16 - LEASES

▪ Development of Leases’ standard

▪ Objective and scope of IFRS 16

 Development of Leases’ standard

Revised IFRS 16
Revised 2018
Reformatted 2009
IAS 17 2003
1997
1982 What new?
• Concept of contracts and right – to – use
• Lessee does not distinguish finance lease
and operating lease
 Objective and scope
Objective To establishes principles for the recognition, measurement, presentation and
disclosure of leases, with the objective of ensuring that lessees and lessors
provide relevant information that faithfully represents those transactions

IFRS 16 applies to all leases, except

 Leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources;
 Leases of biological assets held by a lessee (see IAS 41 Agriculture);
 Service concession arrangements (see IFRIC 12 Service Concession Arrangements);
 Licences of intellectual property granted by a lessor (see IFRS 15 Revenue from Contracts
with Customers);
 And rights held by a lessee under licensing agreements for items such as films, videos, plays,
manuscripts, patents and copyrights within the scope of IAS 38 Intangible Assets

➔ A lessee may, but is not required to, apply this Standard to leases of intangible
assets other than those described above. [IFRS 16:4]
 Lease
Lessee
Operating Leases expense
IAS 16
PPE
Finance leases asset

▪ short-term leases
▪ underlying asset is of low expense
IFRS 16 value

Leases leases asset

IFRS 16. 6
 Leases for which the underlying asset is of
low value
➢ the value of asset when it is new, regardless of
ASSESS the age of the asset being leased. is of low value
➢ absolute basis, regardless material [B4]

(a) the lessee can benefit from use of the

underlying asset on its own or together with
asset is of low value if: other resources that are readily available to
Recognize in expense
the lessee; and
(b) the underlying asset is not highly dependent
on, or highly interrelated with, other assets.

IFRS 16. B3-B8

 DEFINITIONS and BASIC TERMS

✓Lease, control, identified asset

✓Inception and commencement date of a contract
✓Lease term
✓Lease payments
 What
Whatis a
is lease?
a lease?
A contract is a lease if it conveys the right to control the use of an identified
asset for a period of time in exchange for consideration

lease term lease payments Right – to - use

Lessor Lessee
 Control the use (right to use)

[B9] To assess whether a contract conveys the right to control the use
of an identified asset for a period of time, an entity shall assess
whether, throughout the period of use, the customer has both of the
following:

The right to obtain substantially all the The right to direct the use of
and
economic benefits from use of the identified asset. [B24]
identified asset. [B21-23]

IFRS 16. B9
 Example

Classification
(1) Joint Arrangements ➔
(2) if supplier has a substantive right of substitution ➔
(3) If a contract limits the used area, capacity (Ex only one particular territory,
up to a particular number of capacity during the period of use ➔
(4) Contract requires a lessee to pay the lessor or another party a portion of the
cash flows derived from use of an asset as consideration [B23] ➔
 Identified asset

An asset is typically identified by being specified in a contract:

➢ Explicitly; Or
➢ Implicitly

A capacity portion of an asset [B20]

an identified asset not an identified asset

floor of a building a capacity portion of a fibre optic cable
 Separating components of a contract

Lessee

a lease (ex a computer) ➢ Allocate stand-alone asset

observable prices or estimated
additional lease (ex a software)
➢ Or, An underlying asset
non-lease components all components as a lease.
maintenance service

Lessors allocate in accordance with IFRS 15

IFRS 16. 13-15

Ex 1: Separating lease components

On 1 January 20X1, Worker Corp. enters into a lease contract with Rentor, for the
rent of 3 printers, a cutting system and a copy machine for 2 years. It is assumed
that these machines will be returned back to Rentor. The economic life of all
machines is 5 years.
Worker will pay monthly payments of CU 5 000 for the following services:
• CU 4 700 for the rent of all machines,
• CU 200 for the maintenance of all machines,
• CU 100 to reimburse Rentor's admin costs associated with the contract.
Worker could have bought one printer for CU 60 000, a cutting system for CU 40 000
and a copy machine for CU 45 000 when paying cash. The third party company
provides similar maintenance services for CU 30 per machine per month.
Required: Advise Worker and Rentor how to account for the contract under IFRS 16.
Lease term

The non-cancellable period for which a lessee has the right to use an
underlying asset, together with both:
➢ (a) periods covered by an option to extend the lease if the lessee is
reasonably certain to exercise that option; and
➢ (b) periods covered by an option to terminate the lease if the lessee is
reasonably certain not to exercise that option.
 Lease term- Change in exercise option
The non-cancellable period of a lease will change if:

(a) the lessee exercises an option not previously included in

the entity’s determination of the lease term;
(b) the lessee does not exercise an option previously included
in the entity’s determination of the lease term;
revise the
(c) an event occurs that contractually obliges the lessee to lease term
exercise an option not previously included in the entity’s
determination of the lease term; or
(d) an event occurs that contractually prohibits the lessee from
exercising an option previously included in the entity’s
determination of the lease term.
 - Measurement at the commencement date

Lease payments
… are payments made by a lessee to a lessor.

Including
(1) Fixed payments (also in- substance fixed payments) less
any incentives
(2) Variable payments depend on an index or a rate (initially
measured using the index or rate as at the commencement date)
(3) amounts expected to be payable by the lessee under
residual value guarantees
(4) Exercise price of purchase option (if to be exercised)
(5) Penalties for terminating the lease
Note: unguaranteed residual value ➔ not include in lease payment
IFRS 16.27
 Example 2

10 residual value unguaranteed 100 000

Return property
9 residual value guarantees: 20 000

8
7 ➢ Option to extend the lease term : 20 000 (3 years)
➢ Terminating the lease: Penalties : 25 000 CU
6
5 Fixed payments : 20 000 CU per year

4 + 5% fixed payments per year * Fixed payments : 20 000 CU per year

* + 5% fixed payments per year. (➔ Fixed payments,
3 +1% of revenues. no Variable payments)
2 Variable payments: Fixed Payments +1% of revenues. (➔ P/L, no variable payments)
change depend on change of * Variable payments: Fixed Payments change depend
benchmark interest rate on change of benchmark interest rate ➔ remeasure
liability ➔ remeasure asset.
1
 Variable payments

Variable payments Lease payments

Do they depend on the index or rate ?

(have real economic substance)

✓Variable payment included in the lease payments ✓ Variable payments excluded from the lease
✓Measured at the rate prevalent at the payments
measurement date [36-42] ✓ Charge to profit or loss [38]
✓Ex: consumer price index, benchmark interest ✓Ex: + 1% of revenues.
rate, changes in market rental rates [b42].

[27,28]
 Rate implicit in the lease

1 2 8 10
0

FV of asset a a a a+ GRV
Lessor’s initial direct cost =
URV

IRR
✓ FV of underlying asset ✓ PV of lease payments

✓Lessor’s initial direct cost ✓PV of unguaranteed residual value (URV)

The rate of interest that causes the present value of (a) the lease payments and
(b) the unguaranteed residual value to equal the sum of (i) the fair value of the
underlying asset and (ii) any initial direct costs of the lessor.
Appendix A -Defined terms
ACCOUNTING by LESSEE
 Lessee’s accounting
INITIAL RECOGNITION AND MEASUREMENT

AT THE COMMENCEMENT

Right - of – use asset Lease liability

(cost) (present value of the lease payments)

be discounted
the interest rate implicit in the lease
lessee’s incremental borrowing rate.
(a) The amount of the lease liability recognized
(present value of the lease payments) Lease .payments
(b) any lease payments before/on commencement
date less lease incentives
(c) Initial direct costs (Legal fees, Commissions [23,24]
(d) Estimate of dismantling/ remove/ restore costs
 Lessee’s accounting SUBSEQUENT MEASUREMENT

Depreciation
Current amount (CA) of Right - of – use asset Remeasurement of CA of asset

COST MODEL REVALUATION MODEL

CA = cost - accumulated depreciation - accumulated or Remeasurement of CA of asset
impairment

✓ PPE (IAS 16), investment property (IAS 40) ✓ PPE (IAS 16), investment property (IAS 40)
✓ Adjust carrying value based on any remeasurements
✓ Apply IAS 36 Impairment of Assets to measure
as required from reassessment of the lease liability
impairment
✓ Adjust carrying value based on any remeasurements as
required from reassessment of the lease liability

➢ Depreciation: the useful life of the asset; otherwise earlier of the asset’s useful life
and lease term.
 Lessee’s accounting SUBSEQUENT MEASUREMENT

CA of Lease liability

+ - +/-
Interest Payments made Reassessment lease liability
change in the lease term,
Debit: P/L- Interest (P/L) Debit: Lease liability change in option,
Credit: Lease liability Credit: Cash/bank change in lease payments(Variable payments… )

Debit: Asset
Credit: Lease liability

IFRS 16.36
 Re-measurement of a lease
Not below 0,
✓After the commencement date => Lessee remeasures rest in P/L [39]

Lease liability As an adjustment Right – of – use asset

using an unchanged
discount rate (other cases) Using revised discount rate [41]
➔ To remeasure the lease liability
a revised discount
rate (when a Revised in lease term ✓Change in lease term [40]
change in floating ✓Change in option to purchase assessment [40]
interest rates) [43]
Revised lease payments ✓Change in amounts for residual value [42]
✓Change in future payments due to index/rate [42]
Note: revised lease payments or revised discount rate: only for the remainder of the lease term
IFRS 16.36-42
 Ex 3 – Variable consideration and initial direct costs
(1) On 1 Jan 20X1 Worker enters into a 4-year lease of the office space. The
information about the contract is as follows:
(2) Annual payment is CU 24 000 at 31/12 each year.
(3) Every 2 years on 1/1, the annual payments are adjusted for the annual inflation (3) (After each 2
rate prevalent at the time of adjustment. year???)
(4) If Worker installs new window blinds, then the lease payments decrease by CU (4) when it will be
200 per month for the period of 1 year. It will be finished in X3 finished)
(5) Worker incurred the following expenditures related to the contract: Legal fees
associated with the contract: CU 5 000; Salary of an employee who negotiated the
contract: CU 10 000 (allocated based on the hourly wage)
(6) The property owner (lessor) provided a 5-month rent-free period to Worker as
(6) Reduce lease
an initial bonus. Worker took the office space on 1Jan 20X1, but due to unexpected
payments
events, Worker moved in the office space on 1 Mar 20X1.
(7) Inflation rates: in 20X1: +2%, 20X2: +2.3%, 20X3: +2.1%. Incremental borrowing (7) Not adjust
rate is 4% p.a. until 20X3
Required: How would this transaction appear in the financial statements of Worker
at 31 December 20X1, X2, X3, X4?
 Ex 4 – Lessee’s accounting at commencement date

(1) On 1 January 20X1 Stamper Co, producer of metal casts, enters into a
lease contract to lease the stamping machine.
(2) Cash price of machine was 500 000 EUR and Stamper incurred additional
costs of
2 000 EUR for arranging the lease contract.
(3) The lessors initial direct costs were CU 3 000.
(4) Economic life of tamping machine is 6 years.
(5) Lease term is 5 years, annual lease payments are 110 000 EUR payable
31/12
each year.
(6) At the end of the lease term, Stamper has an obligation to purchase the
machine for 1 000 EUR.
(7) There is no unguaranteed residual value of the lessor.
Required: How would this transaction appear in the financial statements of
Stamper Co. at 31 December 20X1?
 Ex 5 – Lessee’s accounting at commencement date
On 1 January 20X1 Worker rents a car under the lease contract.
The lease term is for 1 year, with the option to extend the lease
with the same lease payments for another year. At the lease
commencement date, Worker concludes that the option will
not be exercised, because for the same rentals, the new car
can be leased and also it's been Worker's practice to change
the cars after 1 year.
Monthly lease payments are CU 10000 and Worker incurred the
legal cost of CU 1200 associated with negotiating the lease
contract.
Required: How would this transaction appear in the financial
statements of Worker at 31 December 20X1?
 Ex 6 – Re-measurement (Continue with the previous example)
On 1 February 20X3, Worker completed the installation of new window blinds
and as a result, the lease payments will decrease by CU 200 monthly for the
next 12 months (starting in February 20X3).
Also, the lease payments are adjusted by the inflation rate as agreed in the
contract.
Required: How would these transactions appear in the financial statements of
Worker at 31 December 20X3?
 Ex 7 – Re-measurement of a lease

(1) On 1 January 20X1, Delia enters into a 4-year lease of the office space.
The information about the contract is as follows:
(2) Annual payment is CU 25 000 payable in the beginning of each year;
(3) After 4 years, Delia has an option to extend the lease for another 2 years
for the annual rental payment of CU 25 000 adjusted by the inflation rate
prevalent after 4 years. At the lease commencement, Delia assumes that this
option will NOT be exercised, because of significant increase of new hires and
the need to rent a bigger office space.
(4) Delia paid CU 3 000 to the real estate agent for finding the right property
and arranging the lease contract.
(5) Inflation rate in 20X5: 2.2% p.a., incremental borrowing rate: 4% p.a.
Required: How would this transaction appear in the financial statements of
Delia at 31 December 20X1?
 Ex 8 – Re-measurement (Continue ex7)

On 1 January 20X3, after the third payment was made, Delia's managers
believe that no new employees will be hired due to the economic crisis. As a
result, Delia's management changes its plan to exercise the option to extend
the lease and now they assume that the lease will be extended by another 2
years.
The incremental borrowing rate prevalent in 20X3 is 3.5% p.a.

Required: How should Delia recognize these transactions in its financial

statements?
ACCOUNTING by LESSOR
 Lease classification ➔ Finance lease or
Operating lease
transfers substantially all the risks and rewards incidental to ownership of an underlying asset.

Finance lease Operating lease

➢ Lease classification is made at the inception date

➢ Reassessed only if there is a lease modification.
(Changes in estimates: economic life, residual value
Changes in circumstances: default by the lessee)
IFRS 16. 61,62,63, 66
 Finance lease - Indicators
for judgement
made at the inception date
(a) Ownership transferred to lessee by the end of lease term
(b) Option to purchase the asset at price < fair value at the date the option becomes exercisable
(c) Lease term => major part of economic life of asset
(d) Present value of lease payments close to fair value
(e) the underlying asset is of such a specialised nature that only the lessee can use it without
major modifications.

(f) If the lessee can cancel the lease, lessor’s losses are borne by the lessee
(g) Gains and losses from fluctuation of the fair value of asset residual value accrue to the lessee
(h) The lessee can continue the lease to secondary period at rent substantially lower than market
rent

IFRS 16. 63, 64

 Ex 9 – Lease classification
LorryCars, the leasing company, plans to enter into a lease contract with Lessie and there are 2
options of how the lease contract can be structured:
General information:
1. Lorry would be leased for 4 years under the non-cancellable lease that starts 1 January 20X1.
2. Rentals are paid annually on 31 December starting year 20X1.
3. In these rentals, the insurance fee of 300 CU is included.
4. At the end of lease, lorry would have market value of 12 400 CU.
5. Normal economic life of lorry is 6 years.
6. LorryCars sells this type of lorries for 35 000 CU when paid cash.
7. Lorry Car's incremental borrowing rate is 3% (and it is close to the rate implicit in the lease).
Option 1: Lessie would pay annual rentals amounting to 6 800 CU. At the end of the lease term,
Lessie has an option to buy lorry for its market value or lease it for additional 2 years with the same
rental fees.
Option 2: Lessie would pay annual rentals amounting to 9 500 CU. At the end of the lease term,
Lessie has an option to buy lorry either for 200 CU, or lease it for another 2 years with rental fee of
100 CU per annum.
Advise LorryCars on correct classification of above presented leases.
 Option 1 Optin 2
Lease term 4 years (/6 years) 4 years (/6 years)
lease payments 6800 9500
PV of lease payments 25276 34375
FV at inception day 35000 35000
% 72% 98%

Assessment of leases [IFRS 16.63-64]

Option 1 Option 2
Transfer of ownership at the end of lease term no no
Option to purchase asset for price < fair value no yes
Lease term = major part of economic life yes yes
Present value of LP close to fair value no yes
Leased asset - specialized nature no no
Losses from cancellation borne by lessee ? ?
Gains / losses from fluctuations to the lessee no yes
Option to continue rent for rental under market no yes

Has been restricted to ownership of an underlying asset ➔ Operating lease Finance lease
Note

➢ Indicators (63-64) are not always conclusive

➢ Transfer substantially all the risks and rewards incidental to ownership of an
underlying asset?
 The lease of land and building
Land + Building

If the lease payments cannot be

allocated reliably between these two
Separate classification [B55] elements ➔ classified as a finance
lease, unless it is clear that both
elements are operating leases [B56]

Land Building

Operating lease unless

Operating or finance lease
title passes at the end
of lease term
=> Allocation of lease payments = based on proportion of FV
 Ex 10 – The lease of land and building
1. The lease term is 40 years (= FV: 1.000.000 Annual rentals: 43 750 ➔
remaining economic life of the hall). Hall: 800 000 (80%) Land: 8750
Land 200 000 (20%) Hall: 35000 (80%)
At the end, the hall has no residual
value.
2. No ownership to the hall or land is
FV: 800.000 (80%)
transferred to the lessee after the Payments: 35.000
end of the lease term. PV (40 years, 3.1%) = 796.097
3. Annual rentals are paid on 31 ➔ Percentage of PV/FV: 99.51%
December each year amounting to ➔ No residual value
43,750 CU. ➔ no ownership transferred
4. Belinda's incremental borrowing ➔ all the risks and rewards
rate is 3,1%. ➔ Financial lease
5. At the end of 20X0, the fair value
of the hall and land was 800,000 CU FV: 200.000 (20%)
and 200,000 CU respectively.
Required: Advise Belinda how to (indefinite life, no ownership transferred ➔ operating lease
classify the lease.
 Lessor’s accounting for finance lease The gross investment in the lease
Defined tems

a a a
Net investment = a +GRV
URV

GRV: guaranteed residual value

URV: unguaranteed residual value
lease payments = a + GRV
Lease payments:
The gross investment in the lease = lease payments + URV ✓ Fixed payments
Net investment in the lease: The gross investment in the ✓ Variable payments (index)
lease discounted at the interest rate implicit in the lease. ✓ Residual value guarantees
✓ Exercise price of purchase option
✓ Penalties for terminating
Lessor’s accounting for finance lease – Initial measurement

At the commencement

Debit: Credit:
Lease receivable PPE (cost)
(Net investment in the lease)

Credit:
P/L
(difference between Cost and Net
investment in the lease)

initial direct costs ➔ include in the net investment in the lease

IFRS 16. 68, 70

Lessor’s accounting for finance lease – Initial measurement
Manufacturer or dealer lessors
Manufacturer or dealer lessors

Debit: Credit:
Revenue
the cost of sale
(lower of: fair value and present
(cost, or carrying amount if different, value of the lease payments)
less the present value of the unguaranteed
residual value)

Credit: Debit
Inventory Lease Receivable
(carrying amount) Net investment in the lease (= PV of
gross investment)

initial direct costs ➔ P/L, not include in excluded from the net investment in the lease [74]
IFRS 16.71
 Lessor’s accounting for finance lease –
Subsequent measurement

Credit: lease receivable Reduce the principal

Debit: Cash
(lease payments)
(a) Credit:P/L
Constant periodic rate of return
interest income

➢ The net investment in the lease: impairment or derecognition ➔ apply IFRS 9 [77]
revise the income
➢ Unguaranteed residual values: review regularly. If reduction ➔
allocation over the
lease term [77]
 Ex 11 – Lessor’s accounting for finance lease
On 1 January 20X1 Belinda entered into a finance lease of used stamping machine as a
lessor. The fair value of the machine was CU 500 000 and its carrying amount in Belinda's
financial statements was CU 470 000.
Belinda incurred additional costs of CU 3 000 for arranging the lease contract. Remaining
economic life of the stamping machine is 6 years. Lease term is 5 years, annual lease
payments are CU 110 000 payable 31 December each year. Belinda expects that at the end
on the lease term, the machine can be sold for CU 50 000 and the lessee agrees to protect
Belinda from the first CU 20 000 of loss for a sale at a price below the estimated residual
value (i.e. CU 50 000).
Belinda classifies the lease as finance.
Required: How would this transaction appear in Belinda's financial statements at 31
December 20X1?
 Ex 12 – Manufacturer/dealer lessors
In January 20X1, CarProd, manufacturer of cars, offered the following finance lease related
to the newest model of car produced:
1. The newest model of car has fair value equal to its selling price, that is CU 30000. Cost
of manufacture is CU 27 000.
2. The lease is non-cancellable for 4 years, with annual installments of CU 8 500 paid in
arrears.
3. At the end of the lease term, the ownership of the car automatically passes to the client
at no additional cost.
CarProd incurred further cost of CU 1 000 related to negotiating contract.

Required How would this transaction appear in the financial statements of CarProd at 31
December 20X1?
 Product and lease
unguaranteed residual value: 10%
EX 13 - Manufacturer/dealer lessors

300 Receivalbe (PV of Gross investment) (100%)

+100
Unearned income [IAS 17)

200 FV (normal selling price) ➔ Revenue

(PV of LP 90%)

110 (P/L)
100 Cost of manufacture (100%)

-10
90 Cost of sell (90%)
 Lessor’s accounting for
operating lease

Asset Expenses Revenue

➢ Cost of asset ➢ Depreciation ➢ lease payments

➢ initial direct costs ➢ Other costs incurred in
earning the lease
income

Depreciation and impairment covered by IAS 16, 38 and 36

IFRS 16. 81- 86

 Example – Lessor’s accounting for operating lease
On 1 January 20X1, Lessor Co. made a following offer for operating lease to one of its
biggest clients:
1. Lease relates to machinery in total fair value of CU 1 000 000.
2. Lease is non-cancellable for 6 years, whereas machines have an economic life of 10
years.
3. Annual rentals of CU 170 000 are payable in arrears on 31 December each year.
Lessor paid CU 50 000 of commission to an agent for mediating the lease.
Required: How would this transaction appear in the financial statements of Lessor Co. at
31 December 20X1?
Buy PPE Depreciation
Dr PPE 1 000 000 Dr Expense =1 050 000/10
Dr PPE 50 000 CrAcc Dep
Cr Cash 1 050 000 Revenue
Dr Cash 170 000
Cr Income 170 000
SUBLEASE, SALE & LEASEBACK
 Sublease

Original lessee
Original lessee Lessee
Lessor Head lease Sublease (sublessee)
Intermediatelessor
Intermediate lessor

Type of sublease Accounting by the intermediate lessor

Operating Keeps recognizing the head lease as before

Debit Net investment in the lease / credit

Finance ROU asset (difference in profit or loss)
Head lease = short - term Recognition exemption; sublease = operating
Sales and leaseback
Assessing whether the transfer of the asset is a sale

Sale & leaseback

Did control of an underlying

Is the transfer of asset a sale under IFRS 15 asset passed to the buyer?

✓Seller (lessee):
• Right – of – use asset at proportion of the
previous carrying amount ✓ Seller (lessee):
• Gain/loss related to the transferred right only • Continues to recognize an asset
✓Buyer (Lessor): • Financial liability (IFRS 9)
• Asset under applicable standards (buy) ✓Buyer (lessor):
• Lease under IFRS 16 (lease) • Financial asset (IFRS 9)
✓Leaseback:
• As for any other (adjustment for off – market
Financial Instrument
terms)
 Sales and leaseback - Transfer of the asset is a sale
Seller-lessee
Asset (right of use asset) P/L IFRS 16. 100, 101
Carrying amount
difference

The right of use retained transferred to the transferred to the Consideration (sale price)
(arising from the leaseback) buyer-lessor buyer-lessor (FV of consideration)
<>
proportion of the previous (carrying amount) (Fair value) (2*) (1*)
Carrying amount

Lease Liability
PV of the contractual payments
(2*) <> PV of payments for the
<>
lease at market rates (1*)

➢ below-market terms: as prepayment of lease payments

➢ above-market terms (1* >2*): as additional financing provided by the buyer-lessor to the seller-lessee.
 Sales and leaseback - Transfer of the asset is a sale
Buyer-lessor

account for:
➢ the purchase of the asset applying applicable Standards,
➢ the lease applying the lessor accounting requirements in IFRS 16

FV of the consideration <> FV of the asset

➢ below-market terms: as prepayment of lease payments
➢ above-market terms: as additional financing provided
PV of the contractual payments <> PV of by the buyer-lessor to the seller-lessee.
payments for the lease at market rates

IFRS 16. 100 - 101