Flashcards IFRS 16
IFRS 16 : Scope exclusions ?
1) lease to explore natural resources IFRS 6
2) lease of biological asset IAS 41
3) service concession arrangements IFRIC 12
4) license intellectual property granted IFRS 15
5) lessee licensing rights IAS 38 (eg films, vedeo plays, manuscripts, patenst, copyrights)
IFRS 16 : Definition of a lease
contract that conveys the right to use an asset for a period of time in exchange for consideration
IFRS 16 : When + How to identify if contract contains a lease ?
When : at inception
How :
1) Identify asset (explicitly or IMPLICITLY)
a- lessors has NO substantive right to subsititute an asset
i.e. right to substitute asset expected to provide economical benefit to Lessor (benef exceed cost)
b-asset physically distinct —OR—
substantially all of the assets capacity
+2) obtain substantially all economic benefit from the use
direct or indirect economic benefit through use/hold/sublease asset
(exclusive right of use, primary + byproducts)
Scope/scope limitations : ok if protective rights
+ not substantially limit lessee’s use
+3) direct use (HOW + FOR WHAT PURPOSE) :
a) Lessee has right to decide how and what purpose asset is used
b) If neither party has control over use (eg. contractually fixed purpose/use) :
(i) Lessee has the right to operate the asset per his own operating instructions
(ii) Asset is designed per Lessee instructions that pre-determined the how and for what purpose
IFRS 16 : How to identify separate lease/non-lease components :
Identification :
1) right can be used on its own or with readily available ressources
2) is NOT highly interrelated or interdependant with other rights in the contract
IFRS 16 : When do lease contracts need to be combined ?
1) Contracts are negotiated as ONE package
with an overall objective
which cannot be understood w/o other contracts
2) Consideration in one contract depends on price or performance of other contract(s)
3) The rights or some rights form a single lease component (or some rights to use underlying assets conveyed in each of the contracts)
IFRS 16 : How is the consideration allocated to lease and non-lease obligations
1) Based on relative stand-alone prices
IFRS 16 : Do non-lease components included in a lease contract be separated ?
Separation requirement :
1) Lessors are obliged to separate
2) Lessees have as a practical expedient can treat as one lease obligation, except for an embedded derivative that
(i) is not closely related
(ii) qualifies as a derivative if separated
IFRS 16 : How & When is the lease term (period) determined ?
Non-cancellable period :
- termination w/o significant penalty
+ extension options - reasonably certain to exercise
+ early termination options - reasonable certain NOT to exercise
Initial assessment :
upon inception
Re-assessment :
upon occurrence of events that may change Lessee’s intention
IFRS 16 : What is included and excluded in the lease asset or liability ?
A-Included Lesse/Lessor:
1) Fixed lease pmts
2) Variable lease pmts based on index or rate
3) In-substance fixed lease payments
4) Exercise price of an option reasonably expected to be exercised
5) Penalties expected for terminating lease
6) Initial direct cost - except for dealer-manufacturers
7) Pmts made before commencement date (eg design, construction)
8) Incentives received/paid
B-Included Lessee only:
1) dismantling/restoring cost
2) Expected pmts from residual value guarantee
C-Included Lessor only:
1) unguaranteed residual value
2) Residual value guarantee amt
D-excluded :
1) Variable lease pmts not based on index or rates
(eg. discount based on nbr of vehicles leased, sale amount, etc)
IFRS 16 : What are in-substance fixed lease payments ?
Payments that may, in form, contain variability but
that, in substance (so-to-speak/essentially), are unavoidable.
Eg. Pmts once asset is proven to be operational,
Pmts when they become fixed (variable before)
Alternative set of pmts that lessee can choose
IFRS 16 : For LESSEEs -> Which discount rate is used and When is it determined ?
Which :
- Internal interest rate in the lease, or if not possible
- Incremental borrowing rate
When :
1 - at commencement of the lease agreement
2 - revised only when :
a-price or scope are modified, or
b-assumption in purchase option is changed
IFRS 16 : How does a LESSEE account for leases ?
- Finance lease/balance sheet approach
- Practical expedient :
Operating > directly expensed if
> Lease term =< 12 months
+ withOUT purchase option
(applies to all in same category)
> Lease is of low value
(individual application)
IFRS 16 : How are variable lease pmts accounted for ?
- *In lease asset/liab** :
1) dependant on an index or rate that reflect change in market rental rates
2) variable pmts that contain no genuine variability, variability with no economic substance
3) Variable pmts as + when they become fixed - *In P&L as+when occurs :**
1) all other variable pmts
IRRS 16 : How are contingent lease pmts accounted for ?
In entity’s control :
Most likely / most realistic outcome should be applied
Out of entitie’s control :
As and when occured - as NON lease pmts
IFRS 16 : What entries affect the right-of-use asset after initial recognition ?
- *Cost model (IAS 16) :**
1) Amortised over lease period or useful life if transfer of ownership at end of lease
2) +/- Impairment adj per IAS 36
3) +/- Adjs from adjs to lease liability
Revaluation model :
FV + Impairment adjs if entity opted for
- IAS 40 investment properties
- IAS 16 for an entire class of PPE
