IFRS 16 Leases

MS. CLARENCE E. GAMBOA, MBM, CPA

Overview

FRS 16 specifies how an IFRS reporter will recognise, measure,

present and disclose leases. The standard provides a single lessee
accounting model, requiring lessees to recognise assets and liabilities
for all leases unless the lease term is 12 months or less or the
underlying asset has a low value. Lessors continue to classify leases as
operating or finance, with IFRS 16s approach to lessor accounting
substantially unchanged from its predecessor, IAS 17.
IFRS 16 was issued in January 2016 and applies to annual reporting
periods beginning on or after 1 January 2019.
History of IFRS 16
Date Development Comments
July 2006 Added to the IASB's agenda

19 March 2009 Discussion Paper Comment deadline 17 July 2009

DP/2009/1 Leases: Preliminary
Views published

17 August 2010 Exposure Draft Comment deadline 15 December

ED/2010/9 Leases published 2010

21 July 2011 IASB/FASB announce intention ED originally expected in first

to re-expose proposals half of 2012

16 May 2013 Exposure Draft Comment deadline 13

ED/2013/6 Leases published September 2013

13 January 2016 IFRS 16 Leases published Effective for annual periods

beginning on or after 1 January
2019
Superseded Standards

IFRS 16 replaces the following standards and

interpretations:
IAS 17 Leases
IFRIC 4 Determining whether an Arrangement contains a Lease
SIC-15 Operating Leases - Incentives
SIC-27 Evaluating the Substance of Transactions Involving the
Legal Form of a Lease
Objective

IFRS 16 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
16:1]
Scope
IFRS 16 Leases applies to all leases, including subleases, except for:
[IFRS 16:3]
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 can elect to apply IFRS 16 to leases of intangible assets, other

than those items listed above. [IFRS 16:4]
Recognition exemptions
Instead of applying the recognition requirements of IFRS
16 described below, a lessee may elect to account for
lease payments as an expense on a straight-line basis over
the lease term or another systematic basis for the
following two types of leases:
i) leases with a lease term of 12 months or less and containing no
purchase options this election is made by class of underlying
asset; and
ii) leases where the underlying asset has a low value when new
(such as personal computers or small items of office furniture)
this election can be made on a lease-by-lease basis.
[IFRS 16:5, 6 & 8]
Identifying a lease

A contract is, or contains, a lease if it conveys the right to control the

use of an identified asset for a period of time in exchange for
consideration. [IFRS 16:9]
Control is conveyed where the customer has both the right to direct
the identified assets use and to obtain substantially all the economic
benefits from that use. [IFRS 16:B9]
An asset is typically identified by being explicitly specified in a
contract, but an asset can also be identified by being implicitly
specified at the time it is made available for use by the customer.
 However, where a supplier has a substantive right of substitution throughout
the period of use, a customer does not have a right to use an identified asset.
A suppliers right of substitution is only considered substantive if the supplier
has both the practical ability to substitute alternative assets throughout the
period of use and they would economically benefit from substitution. [IFRS
16:B13-14]
A capacity portion of an asset is still an identified asset if it is physically
distinct (e.g. a floor of a building). A capacity or other portion of an asset
that is not physically distinct (e.g. a capacity portion of a fibre optic cable) is
not an identified asset, unless it represents substantially all the capacity such
that the customer obtains substantially all the economic benefits from using
the asset. [IFRS 16:B20]
Separating components of a contract

For a contract that contains a lease component and additional lease and non-
lease components, such as the lease of an asset and the provision of a
maintenance service, lessees shall allocate the consideration payable on the
basis of the relative stand-alone prices, which shall be estimated if
observable prices are not readily available.
As a practical expedient, a lessee may elect, by class of underlying asset, not
to separate non-lease components from lease components and instead
account for all components as a lease. [IFRS 16:13-15]
Lessors shall allocate consideration in accordance with IFRS 15 Revenue from
Contracts with Customers.
Key definitions
[IFRS 16: Appendix A]
Interest rate implicit in the lease
The interest rate that yields a present value of (a) the lease payments and (b) the
unguaranteed residual value equal to the sum of (i) the fair value of the
underlying asset and (ii) any initial direct costs of the lessor.
Lease term
The non-cancellable period for which a lessee has the right to use an underlying
asset, plus:
a) periods covered by an extension option if exercise of that option by the lessee
is reasonably certain; and
b) periods covered by a termination option if the lessee is reasonably certain not
to exercise that option
Lessees incremental borrowing rate
The rate of interest that a lessee would have to pay to borrow over a similar term,
and with a similar security, the funds necessary to obtain an asset of a similar
value to the right-of-use asset in a similar economic environment.
Accounting by lessees
Upon lease commencement a lessee recognises a right-of-use asset and a
lease liability. [IFRS 16:22]
The right-of-use asset is initially measured at the amount of the lease liability
plus any initial direct costs incurred by the lessee. Adjustments may also be
required for lease incentives, payments at or prior to commencement and
restoration obligations or similar. [IFRS 16:24]
After lease commencement, a lessee shall measure the right-of-use asset
using a cost model, unless: [IFRS 16:29, 34, 35]
i) the right-of-use asset is an investment property and the lessee fair values its
investment property under IAS 40; or
ii) the right-of-use asset relates to a class of PPE to which the lessee applies IAS
16s revaluation model, in which case all right-of-use assets relating to that class
of PPE can be revalued.
 Under the cost model a right-of-use asset is measured at cost less
accumulated depreciation and accumulated impairment. [IFRS
16:30(a)]
The lease liability is initially measured at the present value of the
lease payments payable over the lease term, discounted at the rate
implicit in the lease if that can be readily determined. If that rate
cannot be readily determined, the lessee shall use their incremental
borrowing rate. [IFRS 16:26]
Variable lease payments that depend on an index or a rate are
included in the initial measurement of the lease liability and are
initially measured using the index or rate as at the commencement
date. Amounts expected to be payable by the lessee under residual
value guarantees are also included. [IFRS 16:27(b),(c)]
 Variable lease payments that are not included in the measurement of
the lease liability are recognised in profit or loss in the period in
which the event or condition that triggers payment occurs, unless the
costs are included in the carrying amount of another asset under
another Standard. [IFRS 16:38(b)
The lease liability is subsequently remeasured to reflect changes in:
[IFRS 16:36]
the lease term (using a revised discount rate);
the assessment of a purchase option (using a revised discount rate);
the amounts expected to be payable under residual value guarantees (using an
unchanged discount rate); or
future lease payments resulting from a change in an index or a rate used to
determine those payments (using an unchanged discount rate).
 The remeasurements are treated as adjustments to the right-of-use asset.
[IFRS 16:39]
Lease modifications may also prompt remeasurement of the lease liability
unless they are to be treated as separate leases. [IFRS 16:36(c)]
Accounting by lessors
Lessors shall classify each lease as an operating lease or a finance lease. [IFRS
16:61]
A lease is classified as a finance lease if it transfers substantially all the risks
and rewards incidental to ownership of an underlying asset. Otherwise a lease
is classified as an operating lease. [IFRS 16:62]
Examples of situations that individually or in combination would normally lead
to a lease being classified as a finance lease are: [IFRS 16:63]
the lease transfers ownership of the asset to the lessee by the end of the lease
term
the lessee has the option to purchase the asset at a price which is expected to be
sufficiently lower than fair value at the date the option becomes exercisable that,
at the inception of the lease, it is reasonably certain that the option will be
exercised
 the lease term is for the major part of the economic life of the asset,
even if title is not transferred
at the inception of the lease, the present value of the minimum lease
payments amounts to at least substantially all of the fair value of the
leased asset
the leased assets are of a specialised nature such that only the lessee can
use them without major modifications being made
Upon lease commencement, a lessor shall recognise assets held under
a finance lease as a receivable at an amount equal to the net
investment in the lease. [IFRS 16:67]
A lessor recognises finance income over the lease term of a finance
lease, based on a pattern reflecting a constant periodic rate of return
on the net investment. [IFRS 16:75]
 At the commencement date, a manufacturer or dealer lessor recognises
selling profit or loss in accordance with its policy for outright sales to which
IFRS 15 applies. [IFRS 16:71c)]
A lessor recognises operating lease payments as income on a straight-line
basis or, if more representative of the pattern in which benefit from use of
the underlying asset is diminished, another systematic basis. [IFRS 16:81]
Sale and leaseback transactions
To determine whether the transfer of an asset is accounted for as a sale an
entity applies the requirements of IFRS 15 for determining when a
performance obligation is satisfied. [IFRS 16:99]
If an asset transfer satisfies IFRS 15s requirements to be accounted for as a
sale the seller measures the right-of-use asset at the proportion of the
previous carrying amount that relates to the right of use retained.
Accordingly, the seller only recognises the amount of gain or loss that relates
to the rights transferred to the buyer. [IFRS 16:100a)]
If the fair value of the sale consideration does not equal the assets fair
value, or if the lease payments are not market rates, the sales proceeds are
adjusted to fair value, either by accounting for prepayments or additional
financing. [IFRS 16:101]
Disclosure

The objective of IFRS 16s disclosures is for information to be provided in the

notes that, together with information provided in the statement of financial
position, statement of profit or loss and statement of cash flows, gives a basis
for users to assess the effect that leases have. Paragraphs 52 to 60 of IFRS 16
set out detailed requirements for lessees to meet this objective and
paragraphs 90 to 97 set out the detailed requirements for lessors. [IFRS 16:51,
89]
Effective date and transition

An entity applies IFRS 16 for annual reporting periods beginning on or after 1

January 2019. Earlier application is permitted if IFRS 15 Revenue from
Contracts with Customers has also been applied. [IFRS 16:C1]
As a practical expedient, an entity is not required to reassess whether a
contract is, or contains, a lease at the date of initial application. [IFRS 16:C3]
A lessee shall either apply apply IFRS 16 with full retrospective effect or
alternatively not restate comparative information but recognise the
cumulative effect of initially applying IFRS 16 as an adjustment to opening
equity at the date of initial application. [IFRS 16:C5, C7]