1. Objective
IFRS 16 provides a single lease accounting model for lessees and a clearer model for lessors.
It replaces IAS 17.
2. Definition of a Lease
A contract is (or contains) a lease if it provides the customer the right to control the use of an identified asset for a period of time in exchange for consideration.
You control the use if:
-
You get all economic benefits from using the asset, AND
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You can direct how the asset is used.
Example – Identified Asset
A contract to use specific machine #M-200 = lease.
A contract to use “any machine of similar type” = not a lease (supplier can substitute).
3. Lessee Accounting (Major Part)
Under IFRS 16, lessees recognize:
✔ Right-of-use (ROU) asset
✔ Lease liability
(Except for short-term or low-value leases)
4. Initial Measurement (Lessee)
Lease Liability
= Present value of future lease payments
(discount using interest rate implicit in the lease, or the lessee’s incremental borrowing rate)
ROU Asset
=
Lease liability
-
Initial direct costs
-
Prepayments
– Incentives
5. Subsequent Measurement
Lease Liability
Increase: Interest expense
Decrease: Lease payments
ROU Asset
Depreciate over:
✔ Lease term, or
✔ Useful life (if ownership transfers)
6. Lessee Journal Entries
Example 1 – Basic Lease
Entity leases equipment:
• Lease term = 3 years
• Annual payments = $10,000 (end of year)
• Discount rate = 5%
PV of lease payments ≈ $27,230
Initial recognition
Year 1 payments
Interest (5% × 27,230) = 1,362
Lease payment = 10,000
Depreciation (straight-line: 27,230 ÷ 3 = 9,077/yr)
7. Short-term & Low-value Leases
Short-term
Term ≤ 12 months
→ Lessee can expense payments straight to P/L.
Low-value assets
Examples: laptops, small office furniture
Example
Renting a printer for $200/month for 6 months:
8. Lease Modifications (Lessee)
A modification occurs if terms change, e.g.:
✔ extend lease term
✔ add a new asset
✔ reduce space
Often leads to:
→ re-measure lease liability
→ adjust ROU asset
Example – Reduce office space
If lease payments reduce by $2,000 PV = $5,500:
(If reduction > remaining ROU asset, gain to P/L)
9. Lessor Accounting
Two types:
-
Operating lease
-
Finance lease
Operating lease
• Asset remains on lessor’s balance sheet
• Recognize income straight-line
Finance lease
• Derecognize asset and recognize net investment in lease
• Recognize interest income
10. Lessor Examples
Example – Operating lease
Lessor owns a truck, rents for $500 per month.
Truck stays as PPE; depreciate normally.
Example – Finance lease
Car cost = $20,000, fair value = $25,000.
Leased for 3 years.
Lessor entry
11. Variable Lease Payments
Two types:
✔ Included in lease liability:
-
linked to an index (e.g., CPI)
-
linked to a rate
✘ Not included in liability:
-
purely usage-based payments (per km, per unit)
Example:
Pay $100 per machine hour → expense when occurred, not included in PV.
12. Reassessment of Lease Term
If something changes (e.g., business decides to extend lease), lessee must re-measure liability at new PV.
13. Practical Example – Full Scenario
Company leases a car:
• Term = 4 years
• Payment = $12,000/year
• Rate = 6%
• PV ≈ 42,528
• Depreciate over 4 years since ownership not transferred.
Initial entry
Yearly depreciation
= 42,528 / 4 = 10,632
Year 1 interest
= 42,528 × 6% = 2,552
Lease payment = 12,000