This document contains a summary of the key concepts under leases (IFRS 16) with a focus on lessee accounting and provides a comprehensive example with the solution and calculations
IAS 12 Taxation: Various types, current income tax and deferred tax
IAS 37 and IAS 10 Provisions, contingencies and events after the reporting date
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University of KwaZulu-Natal (UKZN)
Accounting (ACCT211)
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LEASES (IFRS16)
A lease is defined as a contract or part of a contract that conveys
the right to use an asset for a period of time in exchange for
consideration.
The asset must be identified and the entity must have the right to
control the use of asset.
Identified
The asset can be explicitly or implicitly identified
The asset is not identified if the supplier has the substantive
right to substitute the asset
The supplier’s right is substantive if:
The supplier has the practical ability to substitute throughout
the lease and
The supplier would benefit economically if it did substitute the
asset
Right to control
This exists if the lessee:
Has the right to obtain substantially all the economic benefits
from the use of the asset and
Can direct the use of the asset
Direct the use of the asset
The lessee can decide how and for what purpose the asset will
be used or
If the ‘how and for what’ is predetermined, the lessee can
operate the asset or
If the ‘how and for what’ is predetermined, the lessee has
designed the asset.
Lease Term
, This is defined as the:
the non-cancellable period for which a lessee has the right to
use an underlying asset,
together with periods covered by:
an option to extend the lease if the lessee is reasonably
certain to exercise that option and
an option to terminate the lease if the lessee is
reasonably certain not to exercise that option
Initial Recognition and Measurement (general approach)
A lease is accounted for at commencement date by recognising a
right of use asset and a lease liability.
Initial Measurement of a lease liability
The present value of lease payments that are still payable at
commencement date discounted using either the implicit interest
rate or the lessee’s incremental borrowing rate
Present value
Fixed payments
Variable lease payments
Amounts expected to be payable by the lessee under residual value
guarantees
The exercise price of a purchase option if the lessee is reasonably
certain to exercise that option
Penalties for terminating the lease
Subsequent measurement of a lease liability:
Takes into account the interest on the liability and the payments
made of the lease liability
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